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In last months Budget, the Chancellor George Osborne announced that during a 5 year period starting in 2016 we will see the end of tax returns and the introduction of Digital Tax Accounts.
According to Citywire
By the end of 2016, five million small businesses and the first 10 million individuals would use the new ‘digital tax account’.
‘Millions of individuals will have the information the Revenue needs automatically uploaded into new digital accounts,’ said Osborne. ‘Tax really doesn’t have to be taxing, and this spells the death of the annual tax return.’
Around 85% of those who complete self-assessment forms already do them online. But HMRC said the new accounts, unlike the current system, would be pre-populated with data HMRC already holds and that from third parties.
Those who pay tax using the pay-as-you-earn system will have their income tax, national insurance contributions and pension position already shown in their accounts, alongside any interest from banks and building societies.
HMRC said that small businesses using the system should also be able to use accounting software to feed data straight into their account.
In order for this to work, small businesses will need to keep their accounts up to date.
The top 5 common accounting problems accountants deal with are:
1. Not doing any accounts – the shoe box approach to business
This is the most common mistake, book keeping is best done as you go along, putting all the paperwork in a shoe box or carrier bag is a really bad idea as you have no idea how your business is performing.
2. Not keeping receipts. Often small business miss out on claiming all their expenses because they fail to keep receipts and lose track of their spending
3. Not reconciling. Reconciling your bank statements to your cash book is vital to make sure that all of your income and expenses have been recorded in your accounts.
4. Using the wrong accounting system. For some businesses a manual cash book and records are fine but for many accounting software such as Debitoor will be needed to keep track of debtors, creditors and VAT. Make sure you understand your accounting system and operate it correctly.
5. Mixing business and personal expenses. Some sole traders even mix up business and personal bank accounts and in extreme cases don’t even have a business bank account. This can cause errors and often means that a sole trader will either claim to many expenses or to few.
Will small businesses be able to overcome these problems or will they end up in a tax mess with Digital Tax Accounts?
HMRC have been doing lots of research on SME businesses, the most interesting areas of research are:
Understanding Small and Medium Enterprise (SME) business life events – SME Customer Journey Mapping
Research was carried out to understand:
- the key life events and activities that SMEs experience
- how these relate to tax
- what opportunities there are for the improvement of HM Revenue and Customs (HMRC) services by more closely aligning them to business lifecycles
The Transparent Benchmarking Team Statement (November 2014)
HMRC is conducting a number of pilots, focussed on SME customers, designed to explore the effectiveness of publishing benchmarks on aiding greater voluntary compliance.
Following the first pilot (benchmark net profit ratios for Painters and Decorators, and Driving Instructors) in March 2014, HMRC will run two more in the autumn. One of these will focus on self-employed taxi drivers and pharmacists, where HMRC will be writing to around 2,500 agents that have a number of clients in the target sectors. The idea is to test whether publishing benchmarks through an agent is more effective than writing to a customer directly. Letters will also be sent to a sample of represented and unrepresented customers within the selected sectors to form control groups for evaluation purposes. All represented individuals and businesses written to directly will be informed that their agent has not received a copy of the letter.
The benchmark for both sectors is the net profit ratio. Because this is a controlled pilot exercise, not all agents or businesses within the relevant sectors will be receiving a letter. (source CIOT)
The Benchmarks we know so far are:
- Painters & Decorators range from 59% to 79%
- Driving Instructors 31% to 67%
So the range of profits are big!
We await the ranges for Taxi Drivers and Pharmacists.
If your profit doesn’t fit then you need to know why.
Do not ignore the letter because HMRC are likely to follow it up and assume you are deliberately trying to avoid tax!
You may have some valid reasons for not fitting the benchmark and you must explain those reasons to HMRC.
A deliberate error will results in a higher penalty (up 100% of the tax) but can also open the door to HMRC going back over up to 20 years of your accounts!
The letters refer to common mistakes in:
- Travel Expenses
- Telephone Costs
- Utility and insurance charges
- Professional Fees
- Capital Expenditure
You may find these blogs helpful
HMRC also have some useful toolkits/checklists…..
11.2 million people will be required to complete a Self Assessment Return for 2013/14 and the deadline is the 31st January 2015.
The most common things you will need to know are:
- Employment Income – P60 and P11D
- Pension Contributions – statement from provider
- Donations to Charity
- Bank and Building Society Interest
- Buy to Let Investments, Holiday Lets and Second Homes
- Other Income
- Employment Expenses not paid by your employer including mileage to approved rates and clothing
- Professional Memberships related to your job and on HMRC List 3
- Home Office Expenses
What can you do if despite your best efforts you can’t find or get hold of the information you need?
Returns which include provisional or estimated figures should be accepted provided they can be regarded as satisfying the filing requirement.
- A provisional figure is one which the taxpayer / agent has supplied pending the submission of the final / accurate figure
- An estimated figure is one which the taxpayer / agent wishes to be accepted as the final figure because it is not possible to provide an accurate figure for example where the records have been lost. The taxpayer is not required to tick box 20 of the Finishing your Tax Return section of the return page TR 6 (or equivalent in a return for an earlier year) where estimated figures have been used
If you make a mistake on your tax return, you’ve normally got 12 months from 31 January after the end of the tax year to correct or amend it. For example, if you send your 2013-14 online tax return by 31 January 2015, you have until 31 January 2016 to amendment it.
If you sent your tax return online by 31 January, it’s easy to amend it online too. You just need to log into your Self Assessment online account, go to the ‘at a glance’ page and choose the option to amend your tax return.
All Foster Carers are classed as Self Employed and can choose whether to be taxed using one of two methods – the Simplified or Profit methods.
This is the most common method.
Your ‘qualifying amount’ for a tax year consists of two parts:
- Your Annual Fixed Amount per household of £10,000
- Plus your Weekly/Part Week Amount of £200 (under 11 years old) or £250 (over 11 years old)
If your income exceeds this level under the Simplified Method your are taxed on the difference.
This method works best if you have high expenses, to use this method you need to keep detailed records of all your expenses including capital expenditure.
Using the Profit Method you don’t use the allowances but prepare detailed accounts on which you are taxed.
Foster Carers are subject to Class 2 and Class 4 National Insurance.
Further details are in HMRC Helpsheet 236
Let’s say your current business has been having a tough time and you want to change it to something new, can you carry forward the trading losses.
Probably not look at this example from BIM85050
For example, a publican who had owned a pub in Leeds for many years sold it and bought another in York. Although in the everyday sense the trader remains a publican throughout, the York pub is not the same trade as the Leeds pub.
Tax law requires any losses (including Corporation Tax Losses) carried forward to be offset against future trading profits from the same trade.
One solution to this may be Group Relief, companies which are part of the same Group can surrender losses within the Group.
The rules about which trading losses and other amounts may be surrendered are described at CTM80110. The company that transfers the losses, etc, is called the ‘surrendering company’. The company that claims the losses, etc, is called the ‘claimant company’.
Trading losses, excess capital allowances and non-trading deficits on loan relationships may be surrendered in full. This is irrespective of whether the surrendering company has other profits against which the loss etc might have been, but has not been, set off.
Alternatively it may be possible for the loss making business to sell services to the new business and in doing so reduce its loss.
I read about Simple Tax in an article in the Express…
Backed by venture capital investors including EC1 Capital, Seedcamp and Charlotte Street Capital, SimpleTax was set up to help customers find ways to save money on their tax bills and file returns online with HMRC in minutes.
SimpleTax’s users have so far cut a total of £2.5 million from their tax bills
So I tried it out, it’s great and it’s free.
You will need your HMRC Online filing details if you want to file your return alternatively you can just print out the return.
For taxpayers who have very straightforward returns Simple Tax should make it quicker and easier to complete and file online.
As you prepare the return Simple Tax gives you tips on things you can claim and ways to save tax.
Take a look and see what you think https://www.gosimpletax.com/
For those with more complicated tax returns get advice from a CIMA Accountant.
The 31 July 2014 is the date that you should make your second payment on account to HMRC.
For example on 31 July 2014, you’d make your second payment on account for the 2013-14 tax year.
From the 31 July you will have to pay interest on anything you owe and haven’t paid, including any unpaid penalties, until HMRC receives your payment.
As well as the 4.54 million self-employed people in the UK, higher rate taxpayers, company directors and anyone with more than one income are required to make a payment on account – part of their annual tax payment.
Don’t forget to pay!