Should I be registered for VAT?

Transcription

1 one Should I be registered for VAT? If your turnover (not profit, note) is more than 77,000 a year, you have no choice. You must register for VAT. But if your turnover is less than 77,000 a year, you may register. This has advantages and disadvantages set out below. Advantages disadvantages of voluntary registration of voluntary registration 1 You can claim back the VAT you have paid on all your supplies and overheads (with a few exceptions). This means that if you buy 120 worth of stationery, you can claim back 20 and so the net cost to you is only 100. You may be able to join the flat-rate scheme which means that you can make a small profit from being registered honest! In some circumstances you really can make more profit by agreeing to pay a tax. This can be as much as 3% of your turnover. If most of your customers or clients are VAT-registered businesses, adding 20% to your charges will not affect them. They will simply claim back the 20% VAT that you have added. If you mainly supply zero-rated items, being registered will not increase your prices as your supplies will not bear VAT. Zero-rated items include children s clothing, books, newspapers and food (but not liquor, sweets or catering). Your customers do not know that your annual turnover is less than 77,000 a year. You must submit returns every three months and can be liable to fines if you fail, even if you just forget. If your customers are private individuals or non-registered businesses, registering for VAT will simply increase your prices by 20%. You will lose competitive advantage for no benefit as that extra 20% goes to the government. You have to charge VAT on all your supplies as it is you who is registered, not your business. If you register as an individual, you must charge VAT on all your business activities even if they have nothing to do with your main business. We can tell you how to get round this rule. The decision therefore depends on your circumstances. We are happy to discuss these with you, and advise you whether to register or not. The 77,000 limit will probably increase in April 2013.

2 two 1 Should I run My business as a limited company? A business does not have to be run as a limited company. It can be run as a sole trader, partnership, limited liability partnership or unlimited company. You always have the choice. Advantages of a limited company You can only be sued for what the company is worth. Your home, savings and other assets cannot be touched. Profits are taxed at a lower rate, provided you don t spend them. They are subject to corporation tax at 20% as against income tax rates of 20%, 40% or even 50%. (45% from You can take out profits as dividends, and avoid paying national insurance. There can be a significant timing advantage in that you can claim tax relief for salaries before you pay tax on the salary. It can avoid losing your personal allowances if you have little income from other sources. There are some tax reliefs that can only be claimed by companies, such as for research and development and environmental capital allowances. It makes it simpler to bring in investors. The company lives on even when you retire or die. Some businesses (such as in IT) can be reluctant to use businesses that are not companies. disadvantages of a limited company You must register and file annual accounts and returns. This involves extra work and fees, with harsh penalties if you forget. There are IR35 regulations that can take away the tax advantages if you are the company s only employee. If you pay yourself remuneration, you pay much more class 1 national insurance. Work-in-progress must be added in to your profits, increasing the taxable amount. There can be a double liable to capital gains tax if a company acquires an asset and is then wound up. There are some restrictions for business property relief for inheritance tax purposes if you are a non-majority shareholder. We are always happy to discuss your circumstances with you to advise you on how best to proceed. There are many choices, and many ways of structuring your business.

3 three Should I be an employee or self-employed? Or should I take on someone as an employee or as self-employed? You must understand that you usually do not have a choice in this matter. If the arrangement has the hallmarks of employment, that is how you and the employer will be treated, whatever you may agree between you. If deciding to be self-employed, you must be sure that you meet the strict HMRC rules. Advantages disadvantages of being self-employed of being self-employed You pay less national insurance. The selfemployed pay class 2 and class 4 national insurance. An employee pays class 1 national insurance of 12% and the employer pays 13.8% giving a total of 25.8%. You pay tax later. A self-employed person pays tax in two installments after earning several months profits. This is later than for an employee who has tax deducted on every payslip under the PAYE system. You should note that the amount of income tax is the same whether you are employed or self-employed; the advantage is one of timing only. You can claim more expenses. An employee can only claim for necessary expenses; a self-employed person does not have to show that an expense is necessary. You have none of the rights given under employment law. These include sick pay, maternity and paternity leave, protection against unlawful and unfair dismissal, paid holiday and redundancy pay. You do not build up any entitlement to state benefits. e.g you cannot claim jobseeker s allowance. You are responsible for filling in your own tax returns, and can be liable for penalties and interest if you get it wrong. There is no simple test on whether someone can be treated as self-employed. The issue depends on various indicators published by HMRC. We can advise on whether these indicators are likely to be met. We can also indicate whether it is advisable to be self-employed, if that choice is available.

4 FOUR Rates and allowances - Income Tax Income Tax allowances Personal Allowance 1 6,475 7,475 8,105 Income limit for Personal Allowance 100, , ,000 Personal Allowance for people 9,490 9,490 10,500 aged , 2 Personal Allowance for people aged 75 9,640 10,090 10,660 and over 1, 2 Married Couple s Allowance N/A N/A N/A (born before 6th April 1935 but aged under 75) 2, 3, 4 Married Couple s Allowance 6,965 7,295 7,705 - aged 75 and over 2, 3 Income limit for age-related allowances 22,900 24,000 25,400 Minimum amount of Married 2,670 2,800 2,960 Couple s Allowance Blind Person s Allowance 1,890 1,980 2,100 1 From the tax year the Personal Allowance reduces where the income is above 100, by 1 for every 2 of income above the 100,000 limit. This reduction applies irrespective of age. 2 These allowances reduce where the income is above the income limit - by 1 for every 2 of income above the limit. For the they will never be less than the basic Personal Allowance or minimum amount of Married Couple s Allowance. However, from the tax year the Personal Allowance for people aged 65 to 74 and 75 and over can be reduced below the basic Personal Allowance where the income is above 100, Tax relief for the Married Couple s Allowance is given at the rate of 10 per cent. Income Tax rates and taxable bands Starting rate for savings: 10%* 0-2, , ,710 Basic rate: 20% 0-37, , ,370 Higher rate: 40% 37,401 to 35,001 to 35,001 to 150, , ,000 Additional rate: 50% Over 150,000 Over 150,000 Over 150,000 * The 10 per cent starting rate applies to savings income only. If, after deducting your Personal Allowance from your total income liable to Income Tax, your non-savings income is above this limit then the 10 per cent starting rate for savings will not apply. Non-savings income includes income from employment, profits from selfemployment, pensions, income from property and taxable benefits. The rates available for dividends are the 10 per cent ordinary rate, the 32.5 per cent dividend upper rate and the dividend additional rate of 42.5 per cent.

5 Five Rates and allowances - national insurance National Insurance rates and allowances Lower earnings limit, primary Class Upper earnings limit, primary Class Upper accruals point Primary threshold Secondary threshold Employees primary Class 1 rate between 11% 12% 12% primary threshold and upper earnings limit Employees primary Class 1 rate 1% 2% 2% above upper earnings limit Class 1A rate on employer provided benefits * 12.8% 13.8% 13.8% Employees contracted-out rebate 1.6% 1.6% 1.4% Married women s reduced rate between 4.85% 5.85% 5.85% primary threshold and upper earnings limit Married women s rate 1% 2% 2% above upper earnings limit Employers secondary Class 1 rate 12.8% 13.8% 13.8% above secondary threshold Employers contracted-out rebate, 3.7% 3.7% 3.4% salary-related schemes Employers contracted-out rebate, 1.4% 1.4% - money-purchase schemes Class 2 rate Class 2 small earnings exception 5,075 per year 5,315 per year 5,595 per year Special Class 2 rate for share fishermen Special Class 2 rate for volunteer development workers Class 3 rate Class 4 lower profits limit 5,715 per year 7,225 per year 7,605 per year Class 4 upper profits limit 43,875 per year 42,475 per year 42,475 per year Class 4 rate between lower profits limit and 8% 9% 9% upper profits limit Class 4 rate above upper profits limit 1% 2% 2% * Class 1A NICs are calculated using the previous year s benefit figure and the rate appropriate at the due date July.

6 Rates for financial years starting on 1 April Small Profits Rate* 21%* 20%* 20%* Small Profits Rate can be claimed by 300, , ,000 qualifying companies with profits at a rate not exceeding Marginal Relief Lower Limit 300, , ,000 Marginal Relief Upper Limit 1,500,000 1,500,000 1,500,000 Standard fraction 7/400 3/200 1/100 Main rate of Corporation Tax 28%* 26%* 24%* 23%* Special rate for unit trusts and 20% 20% 20% open-ended investment companies Marginal Relief changes from 1 April 2010 From 1 April 2010 onwards, the terminology used to describe some Corporation Tax rates and reliefs changed. This table reflects the new terminology but for ease the changes are shown below: Small Profits Rate - previously Small Companies Rate Marginal Relief - previously Marginal Small Companies Relief Standard fraction - previously Marginal Small Companies Relief fraction Ring fence fraction - previously Marginal Small Companies Relief fraction (ring fence profits) The main rate of Corporation Tax applies when profits (including ring fence profits) are at a rate exceeding 1,500,000, or where there is no claim to another rate, or where another rate does not apply. Ring fence companies six Corporation Tax rates * For companies with ring fence profits (income and gains from oil extraction activities or oil rights in the UK and UK Continental Shelf) these rates differ. The Small Profits Rate of tax on those profits is 19 per cent and the ring fence fraction is 11/400 for financial years starting 1 April 2010, 2011 and The main rate is 30 per cent for financial years starting on 1 April 2010, 2011 and 2012.

7 There are many things to consider when thinking about the employment status for yourself or your employees. The status is a matter of fact and all the circumstances must be considered before concluding. The points to consider are: financial risk and reward does the worker quote a price for the job? If the worker gets the job done quicker, do they get the extra profit? If they do a bad job or make a mistake, do they have to put it right at their own time and cost? whether the worker is part and parcel of an organisation who provides the tools and equipment can the worker substitute someone else to do the work, etc Multiple jobs It is possible to be an employee for one job (e.g., a part time job in a shop) and self-employed for other work (e.g., as an actor). Each occupation must be considered separately. The Overall result There is greater flexibility for tax relief on expenses incurred in your work where you are self employed. But employees normally have better rights at work, such as holiday pay, pensions, redundancy and other employment and benefit rights. There can be a large tax bill if your classification is wrong. Employers are particularly at risk if they treat a worker as self employed when HM Revenue and Customs would view the individual as an employee. Employees can also be at risk, so it is important to be clear about your employment status and who is paying the tax. If you have any doubts it is best to take advice. HM Revenue and Customs Guidance HMRC provides the following guidance on employment status: Employment status indicator tool seven Am I employed or self employed? Are your workers employed or self-employed? Advice for contractors (cis349) You may also ask HMRC for an opinion on an existing work contract or arrangements. An Employment Status Inspector will review the information and give a ruling although you may not like the answer you get!

8 eight What are business expenses? It is important to keep all invoices, bills and other documents in connection with business expenses incurred. They are evidence that you have spent this money, as well as showing VAT paid. A self-employed business person can claim for tax all expenses wholly and exclusively incurred for the business. Obvious business expenses: Purchase of stock and materials Rent for business premises Advertising Stationery and postage Business insurance etc. Partly business expenses where a proportion of the expense could be claimed against business income: Home telephone which is used partly for business purposes, you can claim the business proportion of the annual cost Motor vehicle with some private use and so only the business proportion is allowable. The proportion of deduction would be for the annual running costs as well as capital allowances (which are a depreciation allowance for tax on the original cost). Dual purpose expenses are where the business and private element cannot be separated. In this case none of the expense can be claimed as business. Examples are clothing and meals. Home based businesses: Claim for using a room/rooms at home for business purposes may be pertinent Costs might include part of the bills for heating, light, water, and mortgage interest Be aware that if you use one room exclusively for business purposes, you might have to pay some Capital Gains Tax when you move house. It is also possible to claim a reasonable salary for a spouse or partner who helps in the business, even if this only means answering the phone, going to the bank and other admin duties. The salary must be actually paid, and also be justified on the basis of number of hours worked and level of responsibility. Remember that if you employ someone in the business you are bound by law to operate PAYE and pay them after taking off tax and national insurance if they earn over a certain figure. Operating PAYE can be quite a complicated business in itself.

9 nine What records do I need to keep for my business? A business must keep accurate books and records. This means setting up a system to record what information is needed, and to keep the required documents. The system does not need to be complicated - the simpler the better as long as it provides the information you need. There is a legal requirement by HM Revenue and Customs to keep: Records of all income and expenditure Copies of invoices sent to customers Bills for expenses and purchases Record of stock Bank statements The information and documents must normally be kept for nearly 6 years (5 years after the deadline for filing your tax return for the period). HM Revenue and Customs can fine you if you do not keep proper books. The books, records and bank statements are used to prepare annual accounts. The information on these accounts is needed to fill in your annual tax return. (Most small businesses will not send the actual accounts to HM Revenue and Customs). Your bank manager may also want to see the accounts, particularly if your bank account is overdrawn. Your accounts will normally be made up of two sheets: Profit and loss account Shows the income and expenses for the year Balance sheet shows a snap shot of your business at the last day of you accounting period Why else may you need good records: If HM Revenue and Customs decide to make enquiries into your tax return, they will wish to see the books and records which back up your tax return entries. If you are registered for VAT, HM Revenue and Customs have the right to visit your business and examine your books of account. If you have employees, HM Revenue and Customs have the right to visit and look at your payroll records. Records for personal affairs: Even with good business records, you still need separate records for your own personal tax affairs. Your personal tax records would include non-business details like savings income, gift aid donations, and income from rents.

10 ten Why is HM Revenue and Customs... asking questions about my tax return? An enquiry is when HM Revenue and Customs asks questions about your tax return, to check that the information is correct and complete. Any return can be selected for an enquiry, so all the documents and information used to prepare your tax return must be kept. HM Revenue and Customs can seek a penalty for not keeping records, though this is not applied automatically. Why have they picked my return? HMRC may pick return at random or as a part of their risk assessments. What are they trying to find out? The enquiry may be a full enquiry, which checks the return as a whole; or an aspect enquiry. An aspect enquiry checks the information on one or more specific points. For instance, HM Revenue and Customs may have information perhaps about interest from a building society which is not consistent with the information on your return. It will ask for more information or explanations specifically about this. What happens in an enquiry? The enquiry is likely to involve asking for information, documents and explanations in relation to the information given in your tax return. You may also be asked to attend a meeting, as HM Revenue and Customs is likely to say that this offers a good way for you to explain anything that is unclear. How does an enquiry end? At the end of an enquiry HM Revenue and Customs will write to tell you the enquiry is finished. They will tell you if they can accept the return you made.