The FreeAgent Blog

Pre-election Finance Bill adds to MTD uncertainty

Posted on 25 April 2017 by - Jump to comments

The snap general election has resulted in a bump in the road for Making Tax Digital (MTD). MTD, along with a number of other tax measures, has been dropped from the government’s Finance Bill 2017, although it could reappear in the Autumn Finance Bill.

What’s changed?

The clause to introduce digital reporting for Income Tax has not been included in the final Finance Bill. Under current proposals, unincorporated businesses above the VAT threshold were due to start reporting their business’s financial data digitally to HMRC in April 2018. It’s not yet clear whether this date has been, or will be, pushed back following MTD’s removal from the Finance Bill.

With the UK’s small businesses, freelancers and their accountants eagerly awaiting more information about MTD in draft legislation which was planned for later this year, it’s now likely that they will have to wait a little bit longer.

Will Making Tax Digital be scrapped?

The next Finance Bill is scheduled for the Autumn so this could well be no more than a short delay in setting the proposed MTD timeline in stone - though this will of course depend on which party wins the general election. Just 63 out of 135 clauses in the Bill survived the amendments, with MTD among the 72 clauses scrapped. The amendments are likely due to the government’s preparations for the general election.

Download our free guide to Making Tax Digital to find out how the initiative will impact your business.

How MTD will work for businesses with an accounting year that doesn't match the tax year

Posted on 7 April 2017 by - Jump to comments

As an accounting software developer actively working with HMRC to implement Making Tax Digital, we’re always keeping up to date with the impact the initiative will have on our customers. We recently found out more information of particular interest to sole traders whose accounting year does not match the tax year.

Sole traders whose accounting year end is just after the end of the tax year will have to comply with MTD in 2018

Assuming a sole trader has sales over the VAT threshold, they will be required to file quarterly submissions to HMRC in 2018, even if their accounting year end is just after the end of the tax year. For example, a business with a year end of 30th April 2018 will have their first quarterly filing deadline on 31st July 2018 and a business with a year end of 31st May will have a deadline of 31st August 2018.

Download your free guide to find out how Making Tax Digital will affect you!

This means that businesses with an accounting year end just after the tax year end will be filing quarterly reports under MTD about one year before they’ve filed the return for the previous year.

Sole traders whose accounting year end is just before the end of the tax year will have extra year to comply

If a business makes sales over the VAT threshold and has an accounting year end just before the end of the tax year – for example, 28th February 2018 – their next accounting period will begin on, for example, 1st March 2018. Since the accounting year that starts on 1st March 2018 falls before the mandated roll out of MTD, this business would not have to comply until the start of their next accounting year on 1st March 2019.

This means that a business with a year end just before the tax year end would actually get a whole extra year before MTD compliance becomes mandatory for them.

No penalties in the first 12 months

The good news is that HMRC have also said they won’t be charging penalties for a business’s first 12 months of compulsory MTD, so if you get confused and miss your first filing deadline, it’s not the end of the world.

Also, if your business’s sales are under the VAT threshold, you’ll get an extra year to comply because MTD will start for you in April 2019, not April 2018.

If you are at all unsure of when your business will need to start using MTD, please ask your accountant for help.

Co-authored by FreeAgent's compliance product manager, George Grigolava.

Important news for contractors - changes to IR35

Posted on 6 April 2017 by - Jump to comments

Starting from 6th April 2017 there have been some changes to the way that IR35 is determined for contractors working in the public sector.

What is IR35?

IR35 (also known as ‘intermediaries legislation’) is a piece of legislation that allows HMRC to collect additional payment where a contractor is an employee in all but name.

The aim of IR35 is to determine if a contractor is a ‘disguised employee’. This means a contractor who takes a position with a customer, but doesn't pay the corresponding income tax and National Insurance contributions (NIC) that a normal employee would.

What has changed?

Previously, it was up to the contractor to determine if they fell under IR35. This has changed for contractors working in the public sector, for example, locum doctors attached to NHS hospitals. As of 6th April 2017, the entity that pays the contractor (which could be an agency) is now responsible for determining whether IR35 applies, rather than the individual contractors who carry out the work.

How to check if IR35 applies to you

If you are a contractor, you and your client can check if IR35 applies to you using HMRC’s online service. This service doesn’t store any of the information that you enter, so you can check your IR35 status anonymously. Remember though, if you are working in the public sector it is now your client who will officially decide your IR35 status.

What will happen if your client decides that IR35 does apply to you?

If a client decides that IR35 does apply to you, then they will have to deduct income tax and National Insurance from your invoices before paying the difference over to you.

Although you will be taxed the same as an employee, you will not be automatically eligible for the benefits and rights that actual employees receive, such as sick and holiday pay.

There are penalties for a client not following IR35 rules, including interest and penalties on any extra tax and National Insurance contributions that are owed. Penalties can be more severe if it is proved that IR35 rules or legislation have been deliberately ignored. HMRC has more information online about what to do if IR35 applies.

New tax year: what has changed?

Posted on 6 April 2017 by - Jump to comments

A new tax year has begun and as usual, there are changes to rules and regulations that will affect freelancers, contractors and small business owners. Here’s what you need to know.

New VAT flat rate scheme rate for certain businesses


The VAT flat rate scheme is an alternative way for small businesses to work out how much VAT to pay to HMRC each quarter. When you are using the flat rate scheme, you still charge VAT to your customers in the normal way, but you pay a percentage of your total sales to HMRC as VAT. This percentage depends on what your business's trade is.

What’s changed?

Since 1st April 2017 businesses with a low cost base (e.g. who don’t buy many goods) are now known as ‘limited cost traders’. A limited cost trader is defined as one that:

  • spends less than 2% of its sales on goods (not services) in an accounting period, or
  • spends less than £1,000 a year on certain goods.

How could it affect you?

If you’re a limited cost trader then you can still use the flat rate VAT scheme, but your percentage will be 16.5% (which is currently higher than any other rate). You may want to reconsider if the VAT flat rate scheme is the best scheme for you - use our VAT FRS calculator to determine if you would pay more on the flat rate scheme.

For more information check out our handy blog post about changes to the VAT flat rate scheme.

VAT thresholds going up


VATable sales are sales that your business will have to charge VAT on if it is registered for VAT. There are different rates of VAT in operation in the UK.

What’s changed?

If you’re not yet registered for VAT, from 1st April 2017 you won’t have to do so until your VATable sales go past £85,000 a year (or within the next 30 days). This is an increase from £83,000 the previous year.

How could it affect you?

If you’re already registered but want to de-register for VAT, which you may decide to do based on the changes to the flat rate scheme, then you’ll be able to do that if your VATable sales are below £83,000 a year from 1st April 2017 (before that date the threshold was £81,000).

Responsibility for determining IR35 falls to public sector organisations


IR35 is a piece of legislation that allows HMRC to collect additional payment where a contractor in the public sector is an employee in all but name. IR35 was introduced to stop people taking advantage of reduced tax bills by working through intermediary companies specifically to avoid paying taxes.

What’s changed?

As of 6th April 2017, public sector bodies, rather than individual contractors, are now responsible for determining whether IR35 applies. Whereas previously you could have decided that you didn’t fall under IR35, now, if you work in the public sector, it will be for the public sector body engaging you to decide if you fall within IR35.

How could it affect you?

If you supply services via your business to any public sector bodies, then you and your engager should take steps to find out if you fall under IR35. Criteria for IR35 is quite vague and complicated. You can use HMRC’s new tool to determine if your contract is within IR35.

If it turns out that you do fall under IR35 then you will have to pay significantly more tax. You can read more information on the IR35 changes on our blog.

Income Tax band changes


Income Tax is tax that's payable on your earnings. It's charged at different rates depending on what kind of income it relates to.

What’s changed?

From 6th April there are changes to the Personal Allowance, the Basic Rate Limit and the Higher Rate Threshold for employees in England and Wales. The Scottish Income Tax rate will be applied separately, see below.

How could it affect you?

You’ll pay a new rate of Income Tax on your earnings. Here are the new Income Tax bands, alongside last tax year’s:

  2016 to 2017 2017 to 2018
Personal allowance £11,000 £11,500
Basic Rate Limit £32,000 £33,500
Higher Rate Threshold £43,000 £45,000

Changes to Scottish rate of Income Tax


For the first time, from 6th April the Scottish Parliament sets all Income Tax rates and bands (except the personal allowance) for employees resident in Scotland.

What’s changed?

The higher tax rate of 40% will now apply to those in Scotland who earn over £43K, whereas in the rest of the UK the higher rate will start after income of £45K.

How could it affect you?

If you’re a sole trader living in Scotland then you will have to indicate this on your self assessment tax form.

If you're an employer, expect to receive Scottish tax codes for any of your employees who are living in Scotland, and use these when you're running your payroll. You can keep up to date with current Income Tax rates here.

Corporation Tax reduced


Corporation Tax is the tax that limited companies, and some other organisations like clubs and societies, pay to HMRC on their profits.

What’s changed?

Starting on 1st April, Corporation Tax has reduced from 20% to 19% for financial year 2017/18. This means that Britain will have the lowest Corporation Tax rate of the world’s 20 biggest economies.

How could it affect you?

If your business is registered as a limited company, you’ll pay Corporation Tax at a lower rate than you did last year.

National Living Wage rising


The National Living Wage is an obligatory minimum wage payable to workers in the UK aged 25 and over.

What’s changed?

The National Living Wage was raised from £7.20 to £7.50 on 1st April. For anyone under 25, the National Minimum Wage still applies.

How could it affect you?

If you’re an employer, you are legally obliged to pay wages that meet the National Living Wage to any employees aged 25 and over.

National Insurance rates for employers and employees aligned


National Insurance is the money paid to HMRC by employees, employers, and the self-employed.

What’s changed?

As of April 6th 2017, HMRC has aligned the National Insurance threshold for employers and their employees to earnings of £157 per week, or £680 per month.

How could it affect you?

If you have employees, you’ll no longer have to be mindful of two separate thresholds when looking at how much National Insurance you have to deduct and pay. Keep up to date with current National Insurance rates here.

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