Debt recovery costs small businesses an average of £9,000

The cash flow difficulties that late payments cause small businesses are well known. However, the cost of recovering late payments is less well publicised, despite being a major and growing expense – coming in at around £9,000 last year for an average business.

Research by Bacs Payment Schemes found that the cost of recovering late payments has increased considerably in recent months. Collecting money owed to them collectively cost small businesses £6.7 billion in 2018, having risen from £2.6 billion in 2017. The figures comprise costs such as staff time and interest on borrowing taken out to make up for the shortfall caused by late payments.

Small businesses’ efforts to tackle the problem could be beginning to pay off – with the total value of late payments falling from £14 billion in 2017 to £13 billion in 2018.

Paul Horlock, Chief Executive of Pay.UK of which Bacs is a part, said: “When smaller companies do well, so does UK plc; as the backbone of the whole economy, the significance of SMEs cannot be overstated.”

Link: UK small businesses face average £9,000 bill to recover late payments

Brexit uncertainty sends small business confidence to a seven-year low

Confidence amongst small businesses has tumbled to a seven-year low – in part due to the uncertainty of Brexit.

A survey carried out by the Federation of Small Businesses (FSB) has found that nearly one in three small exporters think that sales to overseas customers will fall during the early part of this year.

Meanwhile, one in seven of the more than 1,000 small businesses questioned for the survey said that they plan to cut investment, a figure that was last this low two years ago.

Mike Cherry, Chairman of the FSB, said: “We’ve not seen political uncertainty weighing on small business confidence like this for many years.

“Planning ahead has now become impossible for a lot of firms, as we simply don’t know what environment we’ll be faced with in little more than 100 days’ time.

“A pro-business Brexit is one that ensures we can trade easily with the EU and have access to the skills we need.

“The latter is already proving a challenge and if we crash out of the EU on 29 March without a deal, the former will go out the window.”

Link: Small business confidence hits seven-year low

An end to the Entrepreneurs’ Relief ‘dilutions dilemma’?

As a business takes off, the level of investment it needs in order to expand can significantly outpace growth in revenues and profits.

One of the options open to entrepreneurs at this stage in the development of a business is to issue new shares that secure new investment, without the financial pressures that come with loans.

However, until now, this has created the potential for a dilemma to arise over Entrepreneurs’ Relief, which significantly reduces Capital Gains Tax liabilities when selling or otherwise disposing of a business.

Business owners can only claim Entrepreneurs’ Relief if they own five per cent or more of the business, subject to several caveats.

When the issuing of new shares has reduced a business owner’s interest in a business to less than five per cent, that business owner has, until now, been unable to claim Entrepreneurs’ Relief.

This could equate to tens of thousands of pounds or more in additional tax. This has created a strong disincentive, in some circumstances, to businesses seeking investment by issuing new shares.

Under new rules included in the Finance (no.3) Bill, entrepreneurs will be able to make an election to HM Revenue & Customs (HMRC) when a share issue takes their interest below five per cent. When the entrepreneur disposes of the interest in the business later, they will be able to claim Entrepreneurs’ Relief on a pro-rata basis up to that date.

Shareholders should also be aware that the qualification conditions for shares in a ‘Personal Company’ have been widened. This means that where a company has multiple classes of shares all its existing shareholders may have lost ER if the shares do not rank on an equal footing (pari passu).

For ‘alphabet shares’, whether a particular class of shares receives a dividend is usually at the discretion of the directors, which means that unless agreements give a particular class of shares a right to dividends, nothing prevents the directors from distributing all the profits to one class of share. In this case, no share class carries an entitlement over the distributable profits, resulting in all of a company’s shares failing the new ER test.

The Government estimates that these changes will generate an additional £5 million in tax revenue from 2019/20 rising to £90 million by 2023/24.

The draft legislation in relation to alphabet shares has not yet been finalised and the accountancy profession is hoping that the final wording will avoid the apparently unintended consequences in relation to alphabet shares that were not reflected in the proposals which formed part of the government’s consultation. 

Link: Entrepreneurs’ Relief where shareholding ‘diluted’ below the 5% threshold

Tax rates rise twice as fast in the UK than the international average

According to the Organisation for Economic Co-operation and Development (OECD), UK tax revenue as a percentage of GDP rose to 33.3 per cent in 2017.

This was up from 32.7 per cent in the previous year and was more than double the average rate of increase for nations covered by the OECD’s research.

Of the 36 nations included in its study, 34 provided data, with the UK ranking top among the 19 countries that saw a rise in the tax-to-GDP ratio.

According to the OECD, tax revenues in these advanced nations increased due to taxes on companies and personal consumption increasing total tax revenues as a proportion of GDP. In fact, VAT revenues are the largest source of consumption taxes recorded across the OECD.

France recorded the highest tax-to-GDP ratio during this period at 46.2 per cent, with Denmark coming in second at 46 per cent, and Belgium third at 44.6 per cent.

Tax-to-GDP is now higher than pre-crisis levels in 21 countries. However, eight nations – Canada, Estonia, Hungary, Ireland, Lithuania, Norway, Slovenia and Sweden – have not seen a rise since 2009.

While the UK doesn’t have the highest ratio, it does have the fastest growing tax revenue and therefore businesses and individuals need to plan carefully in future to reduce their liabilities.

Link: The Global Revenue Statistics Database

Taxpayers offered online tool to assess their self-assessment requirement

It should seem obvious whether an individual must submit a self-assessment tax return annually. Yet, each year, thousands of people find themselves brought into the regime unwittingly.

To help taxpayers prepare their affairs accordingly, HM Revenue & Customs (HMRC) is offering a free online tool to help people find out whether they need to submit a return.

Typically, an individual must submit a tax return if, in the last tax year, they were self-employed as a ‘sole trader’ and earned more than £1,000, or a partner in a business partnership.

Most taxpayers will not need to send a return if their only income is from their wages or pensions, which are recorded by employers via PAYE.

However, some individuals may need to submit one if they have any other untaxed income, such as:

  • money from renting out a property
  • tips and commission
  • income from savings, investments and dividends
  • foreign income

Taxpayers should be aware that if they use the tool their details will not be sent to HMRC. If you are unsure whether you need to submit a tax return, please click here to use the tool.

Taxpayers treated unfairly by HMRC, says House of Lords report

The House of Lords Economic Affairs Committee has criticised some of the powers granted to HM Revenue & Customs (HMRC), describing them as disproportionate and lacking effective taxpayer safeguards.

The committee’s latest report says that HMRC’s powers are now too broad and the penalties too high, deterring taxpayers from appealing and creating injustice within the system. It has demanded that the Government reviews the current arrangements.

Lord Forsyth of Drumlean, the committee’s chairman, said that, while the tax authority was right to challenge tax evasion and aggressive tax avoidance, “a careful balance must be struck between clamping down and treating taxpayers fairly.”

The committee believes that the evidence it uncovered suggests that “this balance has tipped too far in favour of HMRC and against the fundamental protections every taxpayer should expect.”

Although the report covers a number of areas of taxation, the committee gave special consideration to “disturbing evidence” on the approach to the loan charge.

This new fee is intended to prevent disguised remuneration schemes, where workers have been paid via a loan with the intention of avoiding tax and national insurance contributions.

However, the committee is concerned that the retrospective nature of the charge could affect those that were unaware of the risks or forced to use this arrangement by their employer.

It has recommended that HMRC urgently reviews these cases where the only remaining consideration is the individual’s ability to pay and establishes a dedicated helpline to support those adversely affected by the loan charge.

The committee has also called on Parliament to consider how it scrutinises the powers it gives to HMRC.

Link: Taxpayers treated unfairly by HMRC, peers find

10 Tax Tips for the New Year

With all the white noise of Christmas, it is easy to forget the financial fundamentals of financial planning but all these realities will be with us again for the New Year. With that in mind it is worthwhile reviewing where you are financially when the excitement and joy of Christmas and New Year celebrations are concluded.  

As with most things in life having a plan is essential, being prepared and along with thinking of others, will ensure that you have an excellent start to the New Year.

Charitable Gifts

Keeping with the theme of giving, charitable gifts offer tax benefits.

Gift aid relief means that the charity benefits from a tax reclaim but higher rate taxpayers can obtain a reduction of tax. In certain cases the making of a charitable gift can bring even more dramatic tax savings (for instance if you have made a chargeable event gain which is subject to higher rate tax).

Inheritance Tax (IHT) Gifts out of Income

One of the reliefs that is often forgotten is that regular gifts out of surplus income are totally exempt from IHT. If you have surplus income, which you wish to gift, making a gift to someone at Christmas or New Year or on a regular basis is a good way to set up a pattern.

It is always a good idea to keep very good records of such gifts (including proof that they came out of surplus income) so that the relief can be claimed on death.

The kids could do with a spot of cash and you’re pretty certain that you could help them out a bit. How much can you give them and get an annual exemption for Inheritance tax? It’s £3,000 for each of you and your spouse.

Gift peace of mind to your loved ones

There is no point in putting in place great plans for the future if you’re not going to get there. Life insurance is generally inexpensive and gives you and your family peace of mind that liabilities are going to be met. Also don’t forget critical illness cover – people in the UK are five times more likely to suffer a critical illness like a heart attack, cancer or stroke before 65 than they are to die. Critical illnesses cover pays out money on diagnosis of one of a list of serious illness, money that can be used to repay a mortgage, fund needed private medical treatment, or just tide you and your loved ones over during recuperation.

Plan your Retirement  

You put your feet up and enjoyed relaxing in front of the fire without the pressures of work and wonder if it might be the time to step down from your business. Planning your retirement and the tax consequences thereof is vital; do you have enough to live on, would your pension be big enough, could you top up your contributions to boost this and get tax relief?  We can advise you on all aspects of retirement planning.

ISA’s

Take advantage of available tax reliefs – examples are ISAs which grow free of personal taxation. Have you utilised your full ISA allowance for 2017/18? For 2017/18 you can save a maximum of £20,000 and this can be in a cash ISA, a stock and shares ISA, a Help to Buy ISA, an Innovative Finance ISA, Lifetime ISA or any combination of each of them.

Get on the property ladder  

Help to Buy ISA comes out this December, which is great news for first time buyers. Help to Buy ISAs are a no-brainer if you’re saving for a deposit for an eligible home. It’s a tax-free savings product in which the Government adds 25% on top of whatever you’ve saved.

Wills

Making a will is a job that many people put off and as a consequence approximately one third of us die without having written a will. If you have children under 18 it is very important to have a will to name a legal guardian.

Even if your assets are not substantial and your wishes are straightforward it is still advisable to make a will, as the practicalities of dealing with the Estate are much easier if there is a valid will. Do not put it off any longer!

Complete your Tax Return

Christmas is the time to get your tax return completed so your accountant has a fighting chance of getting it to HMRC within the deadline, with that you will benefit from the reliefs you will have planned for over the last tax year.

Review your Credit Card bills 

Often we forget with the excesses of Christmas and then into New Year to review debt.  Best plan is to clear off expensive debt before saving – you will certainly not get as much interest from a bank account as you will be paying on your debt. There is a possibility you might get a better return on a different sort of investment but you would have to take more risk and there would be no guarantee; and all the while you’ll be sure to be paying the interest on the debt.

Unwrapping Christmas tax gifts

Christmas is a time for giving, but many businesses may not be aware that their gifts can be made in a tax-efficient manner, which could make raising festive spirits that little bit cheaper.

While Christmas parties may not be for everyone, HM Revenue & Customs (HMRC) does provide an allowable tax deduction of up to £150 per head per year for events.

This means companies could hold one big Christmas blow out or spread their allowance over the year to improve staff engagement.

Of course, there are restrictions to this allowance. Under the rules, you must invite all employees to the event for it to qualify for the exemption and the cost per head must include VAT and take into consideration the cost of the entire event, including food, drinks and a venue.

If you are feeling generous this year, you could also give gifts to your employees at Christmas or any other special occasions. Thanks to the relief on offer, there will be no taxable employment benefit, providing the gift is trivial, such as a box of chocolates or a bottle of bubbly. However, the costs must not exceed £50 and must not be in the form of cash or a cash voucher.

Finally, you can spread the Christmas cheer even further by providing gifts to your clients. As long as the gift is less than £50 and includes a “prominent” advertisement for your business, then you can receive a tax deduction.

Gifts of food, drink, tobacco or vouchers are unfortunately not allowable, but items such as stationary would fall within the rules.

UK takes second spot for tax compliance in G20

New research from the World Bank has revealed that the UK has the second most effective tax system amongst the G20 nations for tax compliance and ease of paying corporate taxes.

According to the survey, companies take an average of 105 hours per year to prepare and file their taxes in the UK, which equates to around three hours per week.

The report looks at the overall tax rate and time spent preparing, filing and paying the three main forms of taxation – corporation tax, labour tax and VAT – and has ranked 190 global economies based upon these factors.

When looking at the wider global picture, the UK falls just outside the top 20 rankings for tax compliance, coming in at 23, but still managed to beat most other developed G20 nations, bar Canada which is rated as best for tax compliance amongst the G20 nations.

In comparison, the US ranked in 37, while Brazil is the lowest ranked member of the G20 at 184.

The average UK business takes almost half the time to complete their tax compliance tasks as the global average, which is currently 237 hours per year.

According to the report, global tax authorities need to do more to realise the full potential of new technologies to reduce the tax compliance burden on taxpayers. It also says that some advanced economies are already in the process of improving their systems to the benefit of both taxpayers and tax authorities.

However, it does recognise that digitisation is not a cure-all and points to Poland where the implementation of new technology for VAT compliance has increased the administrative burden in the short-term.

Looking further ahead, however, the report says technology can be effective as proven by the digitisation of VAT in Spain, which has slightly reduced the time taken to achieve compliance.

The World Bank said that the impact of HMRC’s own Making Tax Digital programme, which comes into force in April 2019, will be assessed in future editions of the report.

Link: Time to prepare and pay taxes

House of Lords calls for a delay to Making Tax Digital

The House of Lords Economic Affairs Committee has criticised HM Revenue & Customs (HMRC) for its handling of Making Tax Digital (MTD) and called for a delay to some of the regime’s mandatory requirements.

The majority of VAT-registered businesses with taxable turnover above the VAT registration threshold of £85,000 will need to keep digital records and file their VAT returns using HMRC-compliant software or methods on a quarterly basis from April 2019.

However, having reviewed the requirements for MTD and its promotion by HMRC to businesses, the committee has recommended that the new rules for VAT should not be made mandatory next year and should instead allow businesses to ‘go digital’ at their own pace.

The Lords also recommended that the Government wait until April 2022 to apply MTD to other taxes to give HMRC time to learn lessons from the implementation of digital taxation on VAT.

Within its report, Making Tax Digital for VAT: Treating Small Businesses Fairly, the committee was also highly critical of HMRC’s public promotion of the new regime, which only began in any significant way several months ago.

Lord Forsyth of Drumlean, Chairman of the House of Lords’ Economic Affairs Committee that authored the report, said: “HMRC has neglected its responsibility to support small businesses with MTD for VAT.

“Small businesses will not be ready for this significant change to their practices, especially with Brexit taking place three days earlier,” he added.

The committee’s report has already gained the backing of a number of leading accountancy organisations, including the Institute of Chartered Accountants in England and Wales (ICAEW), the Chartered Institute of Taxation (CIOT) and the Association of Tax Technicians (ATT).

Link: Making Tax Digital for VAT: Treating Small Businesses Fairly