The FreeAgent Blog
Check the timing of planned asset purchases
Are you planning to buy a new large piece of equipment for your business, such as a computer?
Check how much you’ve already spent on large items of equipment thus far in the tax year, assuming you prepare your accounts to 5th April each year. The annual investment allowance, which lets you claim tax relief of 100% of the cost of qualifying assets is currently £200,000. However, you may have to pro-rata the annual investment allowance depending on what date you use for your accounting year end.
The annual investment allowance is not an allowance you can carry forward, so you either use it or lose it! Remember, too, that not all assets qualify for the annual investment allowance. Cars don’t qualify, for example.
Plan your disposals, too
Conversely though, if you're planning to sell an asset that would give rise to capital gains tax, you could be advised to wait until after the end of the tax year (i.e. 5th April 2017) or later, if you can. Then you'll pay the capital gains tax a year later!
But it might not be the best idea to wait if you're planning to sell a lot more assets next year. This is because each year, every individual gets an annual exemption that we can set against capital gains. This was £11,100 for 2016/17. The figure for the tax year to 5th April 2018 hasn’t been announced yet, but it’s likely to be that or higher.
This exemption can't be carried forward to the next tax year if you don't use it. It’s another case of use it or lose it!
So if you're going to be selling a lot of assets that give rise to capital gains tax in the near future, you may opt to spread the sales between two tax years instead (for example, sell some in March and some in May), to make best use of your annual exemptions.
Although you may pay tax sooner, you'll pay less tax overall if you do that.
Time your costs...
You might also be able to bring forward tax relief if you have genuine business costs coming up soon. Incur them in March rather than in April, and you could get the tax relief on those costs a year earlier.
If, for example, you've been thinking, "I really must get some new business cards printed", and your business's accounting year end coincides with the tax year - then grab your logo file and get down to the printer's before 5th April!
Remember, unless you’re using the cash basis of accounting, expenses go into your business accounts when they're incurred, not when you pay for them - so even if you don't pay the printer till 6th April, so long as (s)he did the work before 5th April and you have an invoice, you should be OK to put that expense into your accounts.
...and your income
It's tempting to wait until 6th April to invoice your customer for some work done, so that this income goes into your next tax year and you pay tax on it a year later. HMRC knows that trick, though!
If you do the work before the end of the tax year, you need to accrue that income, i.e. count it as income of the tax year in which you did the work.
The exception is if you’re preparing your accounts on the cash basis, when you count the income when your customers pay you, instead.
Make use of government-backed schemes
The Chancellor does (sometimes) make tax relief available. Here are some schemes that you might find helpful:
- If you're looking to put some money aside, consider investing what you can of this year's allowance in an ISA, because this year's allowance will be lost on 5th April*.
- Consider putting money into a pension, to get tax relief. Speak to your accountant and your financial adviser if you want to do this, because there are rules around tax avoidance in this area.
- If you want to invest in someone else's business, consider investing in shares under the Seed Enterprise Investment Scheme.
* That's £15,240 in 2016/17.
Tax is never simple at the best of times, but by timing your sales and purchases carefully you can stay within the rules and yet make sure that you don’t pay too much tax.
Following last week’s Budget announcement, in which the Chancellor revealed that Class 4 National Insurance Contributions (NICs) were set to rise to 10%, we’ve since learned that, thankfully, these plans have now been scrapped.
The proposed increase to class 4 NICs could have had serious ramifications for the UK’s freelancers and contractors. These types of businesses are the backbone of the UK economy and need to be supported - not viewed as an easy target by the government.
It is very unfair to position freelancers and contractors as not being on a level playing field with those who are employed. These business owners have none of the employment rights or the security that employed workers do and there must be some recognition for that, unless the government wants to cripple this very important and growing part of the UK economy.
While I’m delighted that the proposed class 4 NIC increase is no longer going ahead, I’m disappointed to see that there has been no similar U-turn over the other contentious issue in last week’s Budget: the decision to cut the dividend allowance. This has the potential to be equally damaging to the economy, as it will not only deter business owners from investing and growing, it will also disproportionately affect Britain's smallest businesses.
When there are many well-publicised cases of big businesses avoiding paying their fair share of tax in the UK, it seems unjust for the government to be doggedly pursuing the smaller ones instead.
Larry Page, co-founder of Google, makes a point of attending meetings only with his smartphone and encourages his staff to spend at least one day a week every week only on their mobile devices: “I can do most things I need to do to run the company from my phone,” he says.
More and more business owners around the world are using smartphones for the majority of their work. Here at FreeAgent, we recently surveyed more than 700 freelancers and micro-business owners and 22% of respondents said that they relied mostly on their smartphone to run their businesses day-to-day. They’re not alone: the GM of Coca-Cola and the VP of Salesforce are also reported to favour their smartphones for running their business on the go.
You already know that you don’t need to be tied to an office to run a business, but here’s how the smartphone in your pocket might have even more power than you thought.
FreeAgent: FreeAgent’s easy to use cloud-based accounting software is specifically designed for the needs of both freelancers and small businesses, and is available as a mobile app. Whether it’s sending and chasing invoices on the go, tracking your time using FreeAgent’s new mobile stopwatch timer, capturing receipts and claiming expenses, or loads more, you can use FreeAgent on your phone to keep control of your business finances wherever you are.
Evernote: You might already be using Evernote for making notes, lists and reminders across your devices, but its uses for business stretch far wider. Use your phone’s camera to scan and capture any business cards; if you are logged into LinkedIn and the email from the card matches a LinkedIn profile, Evernote pulls in additional information about the contact. You can record business meetings using Evernote and use the built in voice recognition available on both iOS and Android if you want the meeting transcribed afterwards. No need to scribble notes!
Wunderlist: Already popular because of how easy it makes ticking off personal and professional to-dos, Wunderlist has a ton of other functionality that helps freelancers day to day. You can give each client their own folder so that your to-dos for each project don’t get muddled, and even forward emails to Wunderlist and automatically turn them into tasks - perfect for when a client emails to ask for revisions.
Video and conference calls
Skype: Did you know you can present content to others using your mobile device through Skype for Business (so long as you have a wifi connection)? Offering a consultation via Skype before you take on a job can also be a good test of whether you want to accept a job offer, as nothing beats a ‘face-to-face’ chat to get a vibe about a prospective employer.
Social media management
Hootsuite: If social media is an essential part of how you promote your small business then you can schedule, publish, and monitor conversations from anywhere using the mobile app. Using Hootsuite’s geolocation features at live events or local promotions can also help you locate and target customers in your neighbourhood.
Keeping work and life separate - there’s even an app for that
Being able to be productive wherever you are is brilliant, but as with many things, there’s some potential downsides. If your business is always at your fingertips it can be difficult to resist the urge to work, even when you should be taking a well-earned break. If you want to keep the golden freelance work/life balance then an app blocker such as Freedom for iPhone or Focus Lock for Android can help - you can choose which apps to block and schedule times to block them.
Smartphones already have the power to let you run your small business on the go and this is only set to grow. Location and equipment no longer define what is a ‘business’ is and what isn’t, and the growing digital nature of the workplace means the traditional office environment is no longer the norm. With a new tax year beginning in April, now is also a great time to switch to a new accounting system, as you won’t need to import every transaction from the previous year. Try using FreeAgent for the freedom to take care of business finances wherever you are - giving you more time to focus on the work that you love.
Today’s Budget announcement by the Chancellor, Philip Hammond, may have included one or two attempts at humour, but there was sadly little for freelancers and contractors to laugh about in what was ultimately a pretty gloomy announcement for them. Here are the key changes that will affect freelancers and small business owners:
Sole traders and partners: increase in Class 4 NICs
Update: the government announced on 15th March 2017 that they will not proceed with the National Insurance increases outlined in this section.
When Class 2 National Insurance is abolished in April 2018, Class 4 National Insurance Contributions (or NICs) will increase from 9% to 10%, with a further 1% increase planned in April 2019. As a result of these changes, sole traders and partners whose profit (or profit share) exceeds £16,250 a year will see their NIC bills increase overall.
As Class 2 NICs - which will be abolished next year - currently entitle individuals to State Pension and other benefits, it remains to be seen how their entitlement will be affected by the new arrangements.
Limited company directors/shareholders: reduction in dividend allowance
At the moment, any individual may receive up to £5,000 in tax-free dividend income each year; however, the Chancellor announced today that this allowance will fall to £2,000 from April 2018. As a result, company directors/shareholders who take a low salary from their company and make up the rest of their income with dividends will pay more tax on that income.
Making Tax Digital: a one-year delay for smaller businesses
For sole traders and partnerships with annual sales that are above £10,000 but below the VAT registration threshold, the timeline for Making Tax Digital (MTD) implementation has been pushed back from April 2018 to April 2019. This will give these businesses more time to prepare for the forthcoming changes.
The fact that the £10,000 threshold has been left unaltered means that a number of businesses whose profits fall under the personal allowance, and who therefore pay no tax, will have to make quarterly reports under MTD.
Increase of cash basis availability
The full Budget report also confirmed that more unincorporated businesses will be able to prepare their businesses’ accounts on the cash basis. The thresholds will increase from 6th April 2017, so that businesses can start using the cash basis if their sales are under £150,000 a year, and if they are already using it, continue to do so until their sales reach £300,000 a year.
VAT threshold increase
We also learned today that the VAT registration threshold will increase from £83,000 to £85,000 on 1st April 2017. The threshold for de-registering for VAT will see a corresponding increase from £81,000 to £83,000 at the same time.
Hints towards the future?
As he announced support for business rates, the Chancellor made a remark about “making tax fairer for businesses that don’t use bricks and mortar”. Whether this was a reference to the reduction in the dividend tax allowance or, given that freelancers typically don’t have a business base other than their home, to a future tax break for working from home, we do not yet know.
The Employment Allowance, according to the full Budget report, is currently being monitored following reports of some businesses “using avoidance schemes to avoid paying the correct amount of NICs”. Entitlement to the Employment Allowance has already been removed from solo companies and this news could mean that we may yet see further restrictions in the future.
On the whole, this has been a disappointing Budget for the UK’s freelancers and self-employed, who contribute significantly to the the UK economy and to the flexibility of the UK labour market. It is unfortunate that the government is determined to label genuine freelancers and contractors as tax-avoiders, and is attempting to tax them at the same level as employees.
In doing so, the government conveniently overlooks the additional risks and reduced entitlements associated with running your own business, which we at FreeAgent think is unfair and wrong.
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- Last-minute tax saving tips
- Budget 2017 update: some good news for freelancers
- Could you run your small business from your smartphone?
- Budget 2017: another rough ride for freelancers
- Budget 2017 - what can we expect?