Unfortunately, tax returns are a necessary part of any business and most people find them extremely stressful. All of this is about to change as now tax returns are about to become digitised from 1st April 2022. This means that all businesses that are vat registered and charge vat with a taxable turnover below the £85k threshold will be required to submit their vat returns to HMRC using new digital software. This is the government’s way of bringing tax accounting and collection into the 21st century, by using new compatible software that will hold accounting records relating to tax in a new digital format. Businesses are now required by law to keep digital records at a transaction level so when VAT returns are produced there will be a clear link between digital records and final vat returns submitted to HMRC.
Ahead of the April 2022 deadline, Making Tax Digital will also affect Sole Traders, landlords and those that use the Income Tax System Self-Assessment system (ITSA). It is now a legal requirement that all registered businesses with a taxable turnover of more than £10,000 and below £85,000 will have to change to this new digital system. However, if an individual or sole trader does not cross the threshold of £10,000, they can continue to submit a Self Assessment tax return and are exempt from changing over to MTD. If an individual is both a sole trader and a landlord receiving rental income then the combined income from these two businesses are used to determine if that person crosses the £10,000 threshold.
Similarly, if an individual owns several sole trader businesses, then the income from each should be added up and this total figure is calculated as a taxable turnover. Agents can be used to sign up on behalf of a business; however, businesses remain 100% responsible for meeting their tax obligation. Making Tax Digital ITSA comes into effect from 1st April 2023.
From 6th April 2023, all affected business owners and landlords with a combined income of above £10,000 will need to
· Register for MTD for ITSA
· Keep digital business records
· Use MTD compatabile software
· Return quarterly business income and expenses update to HMRC via the compatible software
· Submit a final declaration to HMRC to confirm that the quarterly submissions are correct.
All of this will replace the traditional annual self-assessment return.
The aim of Making Tax Digital is to simplify the process for sole traders and businesses. Now tax returns will be more efficient and effective and it makes it possible for sole traders and businesses to get their tax, right reducing errors. It also saves a lot of time enabling them to focus on other aspects of their business. MTD will make it possible to see throughout the year how much tax is owed before payment is due allowing businesses to be more ready, calculating how much money to put away making it easier to pay the dreaded year-end tax bill!
The rules are simple. During the tax year, you are required to submit reports every 3 months to HMRC using new digital software. It is emphasised that 4 reports are the minimum requirement but you can submit more if you feel it will assist your accounting.
1. The first report – To be submitted by 5th Aug (this covers April to July)
2. The second report – To be submitted by 5th Nov (this covers July to Oct)
3. The third report – To be submitted by 5th Feb (this covers Oct to Jan)
4. The fourth report – To be submitted by 5th May (this covers Jan to April)
These 4 reports along with the end-of-year period statement must be submitted and should contain information about your income, expenses and any adjustments or reliefs. These 4 reports must be submitted for each business that you own and for each property income, so this could mean submitting several reports across the year.
The end-of-year statement or final declaration is required to be submitted no later than 31st Jan. This final declaration means bringing together all the data from your businesses and or rental property or properties to finalise your tax position reaching a final tax liability. This final declaration applies to you as an individual so this means you only submit one regardless if you have multiple businesses or rental properties.
Most experts would agree that it’s simpler, easier and more effective by using the correct software. Digital/cloud accounting software is proven to be revolutionary in reducing a lot of the financial administration burden of business owners, freeing up time for other things. However, some people may not have the skills to transform digitally themselves so it is advisable to speak to your accountant or bookkeeper who will be up to speed with this, who should be able to help you both prepare and navigate through these changes.
While changes are mandatory this shouldn’t be looked upon as a burden but as an opportunity for companies and individual sole traders to become much more efficient business owners
Next steps
Given the number of challenges facing business owners at the moment, it would be easy to push these imminent changes to the bottom of the pile. Change isn’t easy, and whilst it may feel daunting particularly when it is a mandatory requirement it should be viewed as a positive step. Digital transformation has been proven to reduce workload. Compatible software such as Xero is readily available with packages at different levels of functionality at a range of prices payable through a subscription model.
If you would like to understand more, and get help to prepare for these changes please contact us at Ekstra Accounting Solutions. We will help you plan and organise your financial administration that will ensure you are compliant and ready to embrace the making tax digital transition in a pain-free and timely way.
I recently was asked by a client about a married couple’s tax allowance as they had heard that it can reduce your tax bill each year if you are married or in a civil partnership. So, I did some research and thought I would spread the word by sharing this information with you.
The marriage tax allowance is contained within your personal tax allowance (the amount you can earn tax-free each tax year). It allows you to transfer £1,250 of your personal allowance to your spouse or civil partner if they earn more than you.
Well, it stands to reason firstly that you are married or in a civil partnership. One of you needs to be a non-taxpayer; meaning that you are earning below the current tax-free allowance threshold (for 2020/21 this is £12,500). The other partner needs to be a taxpayer and earn less than £50,000. You both need to have been born on or after 6 April 1935.
To make it easy to follow, I am going to use an example to illustrate it
Peter and Linda are a married couple. Linda is an IT software developer and earns £45,000 per year. She is a basic taxpayer. Peter works part-time and earns £10,000 at a local bistro as a waiter. His personal allowance is the same as Linda’s except he is not using all of his allowances, in fact, he has £2,500 spare (being the difference between £12,500 and £10,000).
Peter is, therefore, able to elect to transfer his marriage allowance of £1,250 from the spare £2,500 that he is not using and transfer it to his wife Linda. This means that Linda’s tax-free allowance limit increases from £12,500 to £13,750. Linda, therefore, has an extra £1,250 that she otherwise would have paid tax on, which gives her an additional £250 per year (20% of £1,250)
It is actually very simple to do and will only take a few minutes using the online application at HMRC https://www.gov.uk/apply-marriage-allowance
You will both need your national insurance numbers and will need to be able to prove your identity. If you think you would qualify for this, go to the above link and apply.
The key to really understanding your business lies in being able to make sense of the numbers. They will tell a story all on their very own. If you can make sense of this story you will most definitely be better informed and consequently, be able to make better decisions moving forward. This could be the thing that helps you achieve great success or simply avoid failure. It is that powerful.
In a nutshell, if you don’t know where your money is either coming from or going then there is a good chance you will lose control of your business. When you can manage this even in the simplest of terms there is a stronger potential for growth and improved profitability.
Well, accounting is all about keeping financial records. The simplest and easiest way is to use some form of accounting software. At Ekstra Accounting Solutions we partner with Xero the cloud accounting software provider. At the simplest level, you can keep track of your income and your expenses using mobile applications to capture your financial documents as you go, save and store your documents electronically as well as being able to attach them to your transactions. All with the use of the camera on your phone!
Well once you have captured the actuals you can then get access to some simple reports that will tell you how much you have made in income and how much expenditure you have also incurred leaving you with either a profit or a loss. Now with this information to hand, you have a clearer picture of your cashflow and as we all know “cash is king”.
In my opinion, there are 5 main reasons for keeping financial records in any business.
Accounting is therefore like the language of your business and it is also the way we accountants determine the “health” of your business.
Not to avoid answering this question but I saw this picture on a recent LinkedIn post that was all about that specific question. A picture says more than 1000 words. I think you know what I mean. Clearly, these guys can build a wall!!!!
In our experience, there are five stages to a business Lifecycle that ranges from business start-up through to fully established and in growth mode.
At Ekstra Accounting Solutions we cater for each stage of that journey offering services tailored to your specific situation. Go along to our website to find out more about what these are.
I see the role of the modern accountant as one who asks the challenging questions, resolves issues, provides solutions, and offers an objective independent view. In my view, it is not someone who just does the adding up or even checking that you have done your sums correctly. After all, you can get software that is so simple and easy to use in today’s era of modern technology that will capture and record all the information for you. What you really need is someone to help you to understand and make sense of it all. To find out the “story” of your business and then help you to make the improvements and changes that you desire.
Well, we see ourselves as that valuable asset providing guidance, advice, and help in businesses to reduce cost, improve the top and bottom lines, and mitigate risks. Our focus is on “engaging, educating, and empowering” you the business owner to help you create and drive the strategic direction of the business as and when you need it. Included in our fees are unlimited advice and support to all our clients. Our motto is “Your success is our goal”
If you would like to find out more about us why not contact us today to discuss your needs and requirements
A recent report that I read stated that one of the biggest challenges facing small business owners is the mountains of administration required including financial administration.
It stated that on average small business owners spend on average 71 days and approximately £35k per year on admin tasks alone.
While dealing with the business’s administration burden can be onerous, it is not an insurmountable challenge.
Changes in the way that you approach it, the way you think about it, and technology can tackle admin and will make a real difference to your or your teams’ productivity and efficiency, freeing up time and energy to focus on improving and growing your business. This article is going to explore 5 ways that you can beat the administration burden.
Administration falls into two distinct types, operational and compliance. Operational tasks are those which are key to the smooth running of a business-like managing invoicing, payments coming in and out of the business, or recruitment. Compliance administration involves tasks that are mandatory in nature like preparing and filing tax returns. They don’t contribute to the success of the business but do have consequences if not completed.
By understanding the difference between the two types of administration it can be a useful framework for prioritising the financial administration load and avoid unnecessary fines or penalties for noncompliance.
Many of you will have heard of prioritising tasks into four groups (a) Urgent and important (b) Urgent but not important (c) Non-urgent but important and (d) Non-urgent and non-important. Important tasks are those that have a tangible impact on the business. Urgent are those that have an impending deadline. Ideally, you should plan in advance so that your important tasks do not become urgent e.g. filing your company returns. You know in advance when the deadline is and therefore you should build this into your plan to ensure that it is completed and submitted on time. Of course, life does not always go according to well-laid plans and something urgent will come along that needs to be dealt with immediately, like replacing a member of staff who has decided to leave or has gone on long-term sick.
One of the ways in which growing businesses can beat the financial burden is to outsource their financial administration. The core principle behind outsourcing is simple. You take a task that you don’t want to do, don’t have time to do, and pay an expert to do it for you. This allows you to offload some of the financial admin burdens and in most cases allows the work to be carried out by a specialist more experienced and more efficient than if it was handled in-house. Financial tasks such as bookkeeping, payroll, sales invoicing, credit control amongst many more can be outsourced. Indeed, the whole accounting and finance function can be fully outsourced. Of course, other functions like HR, IT, and marketing can also be outsourced.
In the era of today’s technology, taking advantage of digital tools to streamline or automate your workflow is another obvious way to reduce your business’s financial administration burden. You don’t actually need to spend large sums of money to start automating some of your financial admin. The introduction of cloud accounting and a range of integrated applications is a great first step towards managing the inflow of financial administration making it more efficient, simple, effective, and stress-free. Such software is available through a low-cost monthly subscription that can scale as your business requirements demand or grows.
One of the key benefits of digitisation is integration, meaning that the data or paperwork is touched only once but can be populated in several ways across different functions. Integration between different administrative software opens up numerous possibilities. In the case of cloud accounting, you can sync your accounting software with your bank, your payments solution so that your customer payments can instantly appear in your account rather than needing to be input manually. You can also use the software to create and send invoices automatically, manage your vat returns online as well as capturing all the relevant data to manage your business. This significantly reduces the need for considerable data input, duplication, the element of human error saving the business both time and money.
Cloud technology and the use of APIs have opened up some may possibilities for time-saving, cost-saving ways that once explored, you’ll wonder why you didn’t do it sooner.
If you are interested in exploring cloud accounting technology for your business or indeed outsourcing, Ekstra Accounting Solutions has two separate articles on these two topics. Go along to www.ekstraas.co.uk our website and find these to either read online or download.
If you wish to explore even further then you can get in touch in the following ways
Email: janet.jensen@ekstraas.co.uk or Tel: 07458 302 512.
We would love to help you achieve this challenge, remove the strain, save you time and money and let you get on with what you do best …. Running your business.
This is yet another common question that we accountants get asked a lot, “What is the most tax-efficient way for me the owner to take money out of my business?”
In simple terms, there are 3 different ways that you can choose to remunerate yourself from your own business.
Most directors of limited companies will pay themselves in a combination of salary and dividends for tax efficiency reasons. The best way to illustrate this is in the form of an example.
John wants to be able to take £39,500 as his earnings from his business as the owner and director.
If he was to take it all in salary, he would be required to pay income tax (at 20%) and national insurance (12%) on that amount. £39,600 less personal allowance of £12,500 which is £27,100 by 20% amounts to £5,420. In addition, he would also be required to pay national insurance. That works out at a further £3,598, so all in all a total payment to HMRC of £9,018.
If he chooses to take £9,500 (keeping his earnings below the threshold where he would be required to pay income tax and national insurance) and £30,000 in a dividend that would work out very differently. Let’s take a look.
He has a tax-free allowance of £12,500 so that means his salaried amount falls below the threshold of income tax and national insurance, therefore nothing is due.
There is a dividend allowance of £2,000, meaning that the first £2,000 of dividends are tax-free. So that means £28,000 of the dividend is taxable. The tax rate for dividends is 7.5% so that means a tax bill of £2,100. By taking a combination of a salary and dividends John has saved £6,918 in that year.
Although taking the income mostly in the form of dividends may seem like a no brainer there are certain limitations and pitfalls to be aware of
We mentioned above that there was a third way to take income out of your business in a tax-efficient manner i.e., Pension contributions. This is different from contributing to your pension yourself as it counts as an employer pension contribution
The benefits of taking employer pension contributions are
However, there are limitations also with this method
At Ekstra Accounting Solutions we want to help business owners find the most tax-efficient way to take income out of their business that also works best for their particular circumstances. We work alongside some associates who can provide expert pension advice.
If this is something that is of interest to you, please get in touch in the following ways:
Email: janet.jensen@ekstraas.co.uk Tel: 07458 302 512 Website: www.ekstraas.co.uk
If you found this article useful please let us know and please share with others whom you believe would benefit from this information.
Corporation tax is one the most important taxes a small business will pay.
This article provides a brief guide on corporation tax, how to calculate it and when to pay.
What is Corporation tax?
It is the tax that all limited companies must pay against the profits that the company makes. Profits are surplus income after deductible costs and expenses, overheads, salaries, and any other costs incurred in operating the business.
Who pays Corporation tax?
All limited companies are liable for corporation tax which is aligned to the financial year of the business and not the tax year. There are some exceptions such as when starting a new business. Along with being payable on the profit of the business, corporation tax is also payable on any money the business makes from investments or the sale of capital assets for more than they cost- known as chargeable gains.
Corporation tax is paid on the profits made in the UK and abroad if the company is based in the UK, or just its UK profits if the headquarters of the organisation is based in a different country.
How much is Corporation tax?
Corporation tax is currently set at 19% on all profits for the 2019/2020 and 2020/2021 tax years. To calculate your business's corporation tax, simply multiply your business profit for the year by 19%.
Corporation tax rates can change each year which is important if your company tax year is different and runs over the end of the year tax year. If the financial year-end of the business differs from April, you'll need to pay corporation tax for the period up to the date that the corporation tax rate changed, then calculate the corporation tax due at the new rate for the remainder of the company's financial year.
It is extremely important that you keep accurate records of all your business income, expenses, and deductible costs. This is a legal requirement for all directors of limited companies. It is recommended that you engage a professional accountant to assist you with this legal obligation.
How do you pay Corporation Tax?
Once your register your company as a limited company you must also register for corporation tax with HMRC. You are required to do this within 3 months of the date of incorporation of the company unless the company is deemed to be dormant.
The company will be issued with a unique taxpayer reference (UTR). Once registered you will then be able to sign in and report your corporation tax. Corporation tax is payable within 9 months of the end of its financial year-end.
If your business earns over a certain threshold you'll be required to pay in instalments. The actual filing of the corporation tax return needs to be filed with HMRC within 12 months of the year even though the amount due is payable within 9 months of the year-end.
If you should require help with registering, preparing, calculating, and submitting your corporation tax return, please get in touch with Ekstra Accounting Solutions via email
Email: contactus@ekstraas.co.uk Tel: Janet Jensen 07458 302 512
Website: www.ekstraas.co.uk
This article aims to provide a high-level overview of the variety of taxes that exist for both companies and individuals.
A limited company has to account for and pay a range of taxes to HMRC. These often include VAT (Value Added Tax), PAYE (Employers income tax and national insurance), and Corporation Tax.
An individual whether self-employed or employed, director, or shareholder must be aware of their income tax and national insurance responsibilities.
The first key difference to understand is that a company’s tax year is not necessarily always the same as the traditional tax year. A tax year runs from the 6th April to the 5th April of the following year. As an employer or an employee PAYE (Pay as You Earn) or income tax and national insurance contributions are always all aligned to the tax year. For those of us who are self-employed and are eligible for a self-assessment, this tax is also aligned to the tax year.
A company’s financial year is a 12-month period that can start and end in any month of the year. The initial start date is the date of incorporation. Think of the incorporation certificate of the company as being its birth certificate. On the anniversary/birthday, the year-end date falls. Corporation tax is payable based on the company’s financial year.
Corporation Tax
Corporation tax is a tax for businesses and is calculated based on the taxable profits achieved during the financial year. The calculations are completed and reported to HMRC on a Corporation tax return called a CT600 once a year. Payment of corporation tax must be made to HMRC within 9 months of the company’s financial year-end. While you are allowed 12 months to file the CT600 form, this form must be completed to calculate the amount payable. It's prudent to file it within the 9 months deadline.
Value Added Tax (VAT)
Value Added Tax is a tax that is calculated on taxable supplies it makes and receives. If a business is registered for VAT it will be required to charge vat on any supplies or services that are vatable. Likewise, the business is also likely to pay other businesses goods and services that are vatable when it purchases such goods or services. This tax is collected and paid by each vat registered business during its trading activities. Vat charged out on services and goods is known as vat chargeable. Vat paid on goods or services purchased is known as vat claimable. The net of these two amounts results in either a vat claim or reclaim.
Every 3 months (a VAT quarter) a VAT registered business must submit to HMRC a vat return. VAT returns must be filed and payments made to HMRC with 1 month and 5 working days after the quarter-end for which the vat return is being prepared.
Not all businesses are required to be VAT registered. The mandatory registration threshold is income or revenue in a financial year that exceeds £85,000. The business is required to register by the end of the following month where it is determined that the threshold has been met.
Alternatively, you can register for VAT even if the business income does not meet the threshold where it is beneficial to the organisation to do so e.g., the purchase of vatable goods or services exceeds the vatable sales thus resulting in a vat reclaim.
PAYE (Pay as you Earn)
Any company that has employees (persons that are paid for their services by the company and are employed directly by the company) must be registered at HMRC as an employer. Once registered the business will receive details of their PAYE scheme from HMRC. As mentioned previously, PAYE is aligned with the tax year. A business with a PAYE scheme collects income tax and national insurance contributions from its employees. In addition to these amounts collected from employees, the business as an employer must itself pay Employer National Insurance. All the contributions are combined and paid across to HMRC by the 19th day of the month for which they relate.
Information about employees’ tax and National Insurance is reported to HMRC each time a payslip is issued to an employee using the HRMC automated system called RTI (Real Time Information). This must be done before the employee can be paid.
Self-Assessment Taxes
Self-assessment of income tax is related to an individual and not a business and is aligned to the tax year. This is where an individual has perhaps several sources of personal income for any given tax year. The aim is to determine if any additional tax is due to HMRC or if there have been any overpayments in which case a refund may be due.
The self-assessment tax return and the tax payable must be submitted to HMRC by the 31st of January following the end of the tax year being reported. i.e. a tax return for the tax year 2019/2020 reports on income for the period 6th April 2019 to 5th April 2020. The deadline for filing and payment, in this case, is 31st January 2021.
Class 2 National insurance contributions are also payable and are based on the number of weeks of self-employment in the tax year. Currently, in 2020/2021 the rate per week is £3.05.
Class 4 National insurance contributions are due only when the profits are over a certain level. In 2020/21 the profit level is £9,500 per year and is chargeable at 9% on profits up to £50k in which case the rate drops to 2%.
P11D – Benefits in Kind.
If someone in a business enjoys a benefit personally of something the business provides them e.g., company car, interest-free loan, gym membership, personal health insurance, etc then it must be reported to HMRC using a form called a P11D. This form reports the benefits and the facilities provided to the individual by the business. The company must then pay Class 1A National Insurance on the cash equivalent of the benefit. In addition, the employee's tax code will be adjusted and additional income tax will be deducted from the employee’s salary going forward. The deadline for submission of the P11D to HMRC is the 6th July following the tax year it relates to. Payment of any amount due must reach HMRC by 19th July
If you require help with any of these taxes, you can get in touch in the following ways:
Email: janet.jensen@ekstraas.co.uk
Tel: 07458 302 512
Website: www.ekstraas.co.uk
Outsourcing your accounting function is a fast-growing trend, and maybe your company has considered the strategy of outsourcing all, or a portion of this function. There are certainly benefits to moving this type of function out of your business such as, employer cost savings, freeing up your staff for other pursuits, taking advantage of the expertise of an outside organisation that is solely focused on accounting services, to mention just a few.
So, what factors should you consider when considering outsourcing your accounting function
It is important to understand exactly what you are getting for the amount that you pay. There is a huge difference between basic bookkeeping services, and true outsourced accounting. The level of expertise of the person assigned to your account can make all the difference in the level of service, and also the price. The capabilities of outsourced services can vary so it is important to do your research. Cheaper is not always better.
If you don’t take the time to define the scope of what services you wish to outsource you will likely end up with partial solutions that take time to integrate and complete. Make sure that you outsource a complete process. For example, for accounts payable management, you may feel that you just need invoice scanning and data entry with software for routing. However, it pays to think through how your team’s time is included in this process.
A true outsourced accounting provider should offer to take a look at your processes first, and re-engineer them to help you use your team's time efficiently, removing repetitive and mundane tasks that take up valuable time. Moving bad accounting practices from one place to another doesn’t help anyone, and certainly won’t help you maintain a cost-efficient outsourced function. The inefficiencies could likely cost you more.
Many small bookkeeping firms can handle basic transactions but aren’t going to be able to revamp your processes, give you financial insights, and help advise you in your business decisions. If this higher level of support is what you need, be sure to explore the experience levels of the organisation you are hiring.
You should choose a provider that you believe you can build a relationship with, more importantly, you feel comfortable dealing with, that speaks the same language so that both parties can understand each other. Regular scheduled meetings with your outsourced finance and accounting service provider should form part of the package with some provision for emergencies.
If you are contemplating outsourcing your accounting function, then we can certainly help.
We offer a virtual accounting function for small businesses with unlimited support and advice. We can provide all or part of the functions that you may be considering outsourcing at affordable rates.
Get in touch by emailing janet.jensen@ekstraas.co.uk or telephone 07458 302 512 to see how we can help you find the right solution for you and your business.
Accounting with foresight
You will often hear accountants talk about getting your books in order as well as understanding your business's financial strength. What does that really mean in practical terms and how can a business owner quickly determine his/her business financial strength?
This short article aims to set out some of the practical ways it can be assessed by finding out the answers to five simple questions.
1.Are the business bank accounts reconciliations fully up to date?
If the answer is yes then this in effect means you have the most up to date cash position available. If the answer is no, there may be unposted income and/or costs which will distort your overall financial picture. It is critically important that your accounts are real-time so you know what cash is available, what is owing, and what is owed.
2.What help do you have in place at present in the form of government assistance, grants, loans, or any other support packages?
Do you know the extent your business is currently relying on this type of support, when does it run out or when is it due to be repaid?
3.What bank credit facilities do you have available that you may not as yet availed of?
If you have a business loan in place already when it is due to be repaid? Such loan repayments need to be factored into your financial position for the term they are due.
4.If vat registered, have you taken advantage of vat deferral?
If you have availed of this what is the amount of your vat liability and when do you expect to have to pay this to HMRC?
5.Do you currently prepare a cashflow forecast?
If so, how often do you review it and can you increase the frequency of preparation to give you more insight and reaction time.
Just by thinking about these five points, can help determine your overall financial strength at a time when there is overall uncertainty about future revenue streams and costs.
There may well be weeks or months in the near distant future where there is insufficient cashflow in which case it would be prudent to devise a rescue or survival plan in advance. This might take the form of deferring costs, innovating new revenue streams, or seeking additional borrowing.
At Ekstra Accounting Solutions we can help you with getting your accounts up to date, determining your overall financial strength, and forecasting your cashflow using real time cash management tools.
By taking action now will place you in a stronger financial position than if you do not. It could be actions that ensure overall survival.
If you are struggling with this particular issue, please reach out and contact me at the following email address janet.jensen@ekstraas.co.uk or better still telephone me to see how we can help you. My number is 07458 302 512
To find out more about our other services visit our website www.ekstraas.co.uk
Accounting with Foresight