The FreeAgent Blog
It’s been just over a week since the Self Assessment deadline - and unless you were one of those super-organised people who got their tax return completed months in advance, chances are that you found it stressful trying to get all of your financial information correct and submitted to HMRC on time.
So how can you avoid this hassle next time your tax return is due?
Here’s our top tips for getting your books in order now, so you can avoid a Self Assessment headache next year:
Collect and file everything as it arrives
It’s not uncommon for small business owners to find themselves searching desperately for a vital receipt or bank statement to include in their tax return. So if you had that problem, you can prevent it from happening next time by setting up a file to keep your paperwork in for your tax return.
If you only have a little paperwork, for example interest on one bank account and two dividends each year, then you could use a simple box file. However, if you have more paperwork to deal with, you may want to consider using a lever-arch file with dividers so that you keep different documents separate from each other. Then, as each different piece of important paperwork arrives, put it in your file ready for when you come to prepare your tax return.
Get into good habits - manage your books regularly
If you run your own business, don’t leave the bookkeeping till the last minute! Otherwise you’ll be frantically looking through all of your expense receipts and bank statements next January, trying desperately to work out how much money you’ve made and how much tax you owe.
An effective bookkeeping system can take as little as an hour a week to maintain. Just make every simple task like invoicing, managing expenses and forecasting your tax an integral, but manageable, part of your working life. You might find it’s easier to create a routine by keeping the same time every week - for example an hour on a Monday morning - to look at your current financial position, create, send and chase invoices and log your most recent expenses.
Don’t wait to file your next tax return
You can’t file your tax return for 2015/16 until after 5th April 2017 (the end of the tax year) - but it’s a good idea to file it as soon as you can after that date, once all your paperwork has arrived. This means you’ll have one less job to worry about and can concentrate on running your business.
It’s also potentially good news from a tax point of view, because if your tax and class 4 NI liability for 2016/17 is less than your liability for 2015/16 was, then you may be able to reduce your 31st July 2017 payment on account. Also, if you’re due money back from HMRC, the sooner you file your tax return, the sooner they will repay that to you!
Use the right tools for the job
Spreadsheets are great for some simple tasks, but if you’re using them for small business accounting you’re actually creating more work for yourself. Spreadsheets are limited in functionality, time consuming and insecure, not to mention prone to human error. A new year is a great time to improve your processes and you can trial FreeAgent’s accounting software free for 30 days to see the difference it makes.
When you use FreeAgent you’ll be saving yourself time and effort. You can feed bank transactions into your accounts automatically, track expenses on the go using your smartphone, send your invoices by email and automatically chase up late payments. This will mean your data is always up to date, so you can see a real-time forecast of how much tax you owe and when it’s due (no nasty surprises next deadline!). You can even file your Self Assessment tax return through FreeAgent, so you can look forward to a whole lot less hassle next January!
It’s been quite a day - not only is it the Self Assessment tax deadline but HMRC has today published the eagerly anticipated response to the Making Tax Digital (MTD) consultations.
The consultations, which ran from 15th August to 7th November last year, asked for feedback from interested parties on the government’s plan for ‘a transformed tax system and the end of the tax return’ by 2020. The consultation looked at how digital record keeping and quarterly updates would work in practice.
HMRC received 618 responses from a broad spectrum of stakeholders, especially businesses, including the self-employed and landlords, as well as agents, trade and professional (tax/accountancy) representative bodies, software developers and insolvency practitioners.
Now that the response to the consultation is out, here’s an update on what we know:
More clarity on software and reporting
Sole traders and partnerships will need to send summary data about their business on a quarterly basis through digital means. Taxpayers who are currently using ‘three line accounts’ (where they report only income, expenses and profit) to HMRC will be able to continue submitting only three lines of data under MTD.
The consultation response says that while spreadsheets will be acceptable under MTD, they must meet the following requirements:
- they must include digital record-keeping functionality
- they must provide quarterly information updates
- they must support end-of-year activity
HMRC says that it is likely that spreadsheets will need to be combined with software in some way in order to meet these requirements. The question of how this could work will be explored in more detail during the initial pilot scheme, which begins in April this year.
HMRC has also said it is working closely with the software industry (we are part of this work), to ensure secure and effective MTD-compatible software is available.
Update on timeline for smallest businesses
In FreeAgent’s official response to the consultation we said we’d like to see the smallest businesses given a bit of additional time to prepare for MTD, rather than facing the same deadline as larger companies who will be better equipped to make the changeover.
We recommended that all unincorporated businesses making less than £83,000 - the VAT threshold - should have an additional year to prepare before they have to adhere to the new digital tax regime.
The consultation response has confirmed that MTD is still planned to be rolled out in April 2018. However, the consultation response also announces that the number of businesses and individuals affected, and the impact on them, will be reviewed throughout 2017, as large scale piloting takes place before the mandatory introduction of MTD.
Threshold decision yet to be made
HMRC had previously proposed a £10,000 threshold for exempting businesses from MTD. This was viewed by most respondents to the consultation as too low, suggesting that the imposition of the MTD obligations on businesses with such a low income would be unreasonable.
As there were a wide range of views about the threshold, the government has said that it is going to take more time to consider these issues. According to the documentation, we should expect a final decision on these points later this year.
Stay up to date on Making Tax Digital
You can read the consultation response yourself for more information on the proposals. We’re keeping a close eye on the progress of the Making Tax Digital plans and will be keeping you up to date!
We’ve got some exciting news to share with you here at FreeAgent Towers. Earlier today, we announced a brand new partnership with Royal Bank of Scotland and NatWest - which will see them offer FreeAgent to their small business customers across the whole of the UK throughout 2017.
FreeAgent will be linked with businesses’ bank accounts, offering Royal Bank of Scotland and NatWest customers all the benefits of our software as well as a unique integration between their banking platform and FreeAgent which will enhance the services we both offer.
Our partnership was announced at an event at the Bank’s global HQ here in Edinburgh this morning, and we’re absolutely thrilled to have been chosen from over 30 vendors to help and support Royal Bank of Scotland and NatWest’s business customers. By moving onto the FreeAgent platform, we hope life will become easier for these small business owners (who in many cases have to do their accounting themselves) by allowing them to concentrate on running their businesses.
This is a really exciting partnership for us and we look forward to developing our relationship with Royal Bank of Scotland and NatWest throughout the rest of 2017 and beyond.
Watch this space for more information.
From the moment the Chancellor mentioned “rising incorporation and self-employment eroding tax collection” in the early part of his debut Autumn Statement speech, we suspected that there may be some bad news for small businesses lurking in the full report - and it appears we were not wrong.
A new high VAT flat rate for service-based businesses
From 1st April 2017, “businesses with limited costs, such as many labour-only businesses” will have their VAT flat rate percentage increased to 16.5%.
A technical note published today by HMRC indicates that this will not be as simple as an increase in rate to trades that currently use the 14.5% rate. Instead, businesses will need to check how much they have spent on goods, compared to how much they make in sales, to see whether they have bought enough goods not to have to use the 16.5% rate.
Unfortunately, this feels like a very real complication to a scheme that was originally designed to simplify VAT for small businesses.
IR35 reform for the public sector confirmed
The Chancellor did not mention IR35 in his speech, and searching the full documentation for the term told us nothing, as “IR35” was not explicitly mentioned. However, we were very interested to read this highly relevant announcement about “off-payroll working rules”:
“Following consultation, the government will reform the off-payroll working rules in the public sector from April 2017 by moving responsibility for operating them, and paying the correct tax, to the body paying the worker’s company.” … “In response to feedback during the consultation, the 5% tax-free allowance will be removed for those working in the public sector, reflecting the fact that workers no longer bear the administrative burden of deciding whether the rules apply.”*
This raises the question of whether a public sector client will simply pay all of its contractors as employees in order to avoid any penalties for non-compliance. In that scenario, contractors would be taxed as employees but would not be entitled to employment rights, such as paid holidays and pension - the worst of both worlds.
The one positive point to note is that the government is not yet extending these “off-payroll working rules” to contractors who work in the private sector - but who knows whether that is yet to come?
Making Tax Digital: the elephant in the room?
The public consultation on the government’s Making Tax Digital initiative only closed a few weeks ago, so we were unsure whether there’d be any news on it today. In the end, the only mention of Making Tax Digital in the full Treasury report was:
“In January 2017, the government will publish its response to the Making Tax Digital consultations and provisions to implement the previously announced changes.”*
It will be interesting to see what changes, if any, are made to the original plans for Making Tax Digital, based on the responses to the consultations.
Small business opportunities missed
Disappointingly, the Autumn Statement made no mention of increased legal powers, as we had hoped it would, for the Small Business Commissioner to help small businesses collect what they are owed.
Nor was any kind of relief introduced for home working, which is a pity, given that home-based businesses are much less reliant on the road and rail infrastructure that the Chancellor had to promise a great deal of money to help prop up.
Better news: Class 2 NICs to be abolished
It was confirmed that from April 2018, Class 2 NICs will be abolished altogether, with self-employed individuals qualifying for entitlement to State Pensions through Class 4 and voluntary Class 3 NICs.
Since it represents a simplification, this is potentially positive news, though it remains to be seen whether it will ultimately cost more in the form of an increased rate of Class 4 NICs.
Looking ahead: government vs contractors?
Reflecting on today’s Autumn Statement, there were a few pieces of good news for small businesses. Increased finance is being made available for exporting, additional funds are being made available to borrow through the Small Business Bank, and Corporation Tax remains on track to fall to 17% by 2020.
However, when it comes to its latest set of announcements for contractors, we cannot help but wonder if this Autumn Statement shows that the current government simply does not support contracting as a way of working.
*The emphasis here belongs to FreeAgent.
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- You deserve better: why you need to break up with your spreadsheet
- Simple ways to save yourself future Self Assessment stress
- Making Tax Digital consultation response published
- Not feeling (a) fine? You might have a ‘reasonable excuse’ for not completing your tax return
- Don’t be caught out by the Self Assessment deadline!