Budget 2012 – Cash Accounting Proposal

March 30th, 2012

In last week’s Budget one of the points mentioned which caught my attention was the proposal of allowing certain tax payers to use a cash accounting method when preparing accounts.  We now know a little more about this, so what does it mean for your business? 

What do we mean by cash accounting?

If you prepare a set of accounts using this basis, you will only account for income once it is received and you only account for purchases once you have paid for them.

A few simple examples

Example 1

  • A trader buys £6,000 of stock and pays for it on the same day.  He then sells it for £12,000 and is paid in time for his year end. 
  • The result is income of £12,000 less costs of £6,000 = profit of £6,000.
  • He would pay tax on the £6,000 profit.

Example 2

  • Our same trader only pays for the half of his stock by his year end and he needed his customer to pay in full to afford the balance.   
  • His customer pays in full just before his year end. 
  • This scenario still gives £6,000 profit, as before.

However, under the proposed new system, he would be taxed on the following

  • Sales received of £12,000. Although £6,000 of stock was used to create the sales at his year end he had only paid £3,000 for it.  On a cash basis his profits would be
  • £12,000 less £3,000 = £9,000.
  • £3,000 additional profit to be taxed in this year.

Of course next year, he would have a further £3,000 of costs to take off his profit, but is having to wait until a later date to get this tax relief.

Example 3

  • Our same trader pays £6000 for stock, but does not make a sale before his year end. 
  • He will get tax relief on this stock even though he has not made a sale.

This example shows how the new proposal could help cash flow.  Under the current rules, he would carry this stock forward and use it against future sales.  In this case, the tax payer benefits for the year in which he purchases the stock.

So who can use the scheme?

Initial press suggests that this new scheme will be available to sole traders with sales of less than £77,000.  It does not appear to be available to Limited Companies but we will know more later this year.   

When will the scheme be available for use?

The Government is planning to introduce the scheme from April 2013, so it will affect tax payers on their 2013/14 tax returns.

Summary

This proposed scheme is certainly of some interest and we will need to see what anti-avoidance legislation might be put into place when it is introduced.  The scheme’s intention to help smaller businesses is great; as it appears very simple to apply and should help cash flow. 

However, from experience I know that the scheme could encourage some traders to delay billing until after the year end, if there is any chance of creating a lower tax bill.  This will simply shift tax liability from one year to the next and is likely to create its own problems.  Anti-avoidance legislation may clarify rules, if it doesn’t; the scheme may have limited use.

Emma Thomas

EJBC Chartered Accountants

01635 46174

www.ejbc.co.uk

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Budget 2012 Review

March 23rd, 2012

  

 
Individuals

Personal Allowances
The big news for individuals is that the personal allowance will increase to £9,205 from 6 April 2013, so you have to wait another year for that extra tax-free income. The personal allowance has already been increased by £630 from 6 April 2012 to £8,105, and the other allowances are increased as indicated below.

A source of complexity for older taxpayers is the application and withdrawal of age-related allowances, which are currently given when the taxpayer reaches age 65. These age-related allowances are withdrawn when the taxpayer’s total income exceeds £25,400 (for 2012/13).

From 6 April 2013 those who reach age 65 on or after that date will not receive an age-related allowance, but will instead be entitled to the standard personal allowance of £9,205. This allowance is expected to rise to £10,000 in April 2014 or 2015. The existing age allowances given to people born before 6 April 1948 will be frozen at current rates as shown below.

Personal allowances for 2012/13…

Under 65 (standard allowance): £8,105 (2013/14 – £9,205)
65-74: £10,500 (2013/14 – £10,500)
75 and over: £10,660 (2013/14 – £10,660)
Minimum married couples allowance*: £2,960 (2013/14 – TBA)
Maximum married couples allowance*: £7,705 (2013/14 – TBA)
Blind person’s allowance: £2,100 (2013/14 – TBA)
Income limit for allowances for age related allowances: £25,400 (2013/14 – TBA)
Income limit for standard allowances: £100,000 (2013/14 – £100,000)

* tax relief given at 10% where one partner was born before 6/4/1935.

Income Tax Rates
The tax rates for 2012/13 have not been changed from those applicable in 2011/12 (see below), but the threshold at which the 40% tax rate is applied is reduced to £34,370.

The reduction in the 40% threshold is balanced by the increase in personal allowance by £630. This means that in 2011/12 you start to pay 40% tax when your total income before allowances exceeds £42,475. In 2012/13 the 40% tax threshold is set at exactly the same amount: £42,475, before deduction of personal allowances. You can increase your own personal 40% threshold, by making donations under Gift Aid or paying personal pension contributions in the tax year.

Rates for 2012/13
Savings rate* (10%) – 0 to £2,710
Basic rate (20%) – 0 to £34,370
Higher rate (40%) – £34,371 to £150,000
Additional rate (50%) – over £150,000

* Only applies if non savings income is below this amount.

The rate on dividends remains at 10% for basic rate taxpayers, 32.5% for higher rate and 42.5% for additional rate. All come with a 10% tax credit.

Rates for 2013/14
There was much speculation before the Budget about the removal of the 50% rate that applies to taxable income above £150,000. This 50% additional rate remains in place for 2012/13, but will be reduced to 45% from 6 April 2013. The Government has also published most of the other tax rates and thresholds for 2013/14 as follows:

Savings rate* (10%) – 0 to £2,770 (estimate)
Basic rate (20%) – 0 to £32,245
Higher rate (40%) – £32,246 to £150,000
Additional rate (45%) – over £150,000

* Only applies if non savings income is below this amount

The rate on dividends will be 10% for basic rate taxpayers, 32.5% for higher rate and 37.5% for additional rate. All come with a 10% tax credit.

Child Benefit
Another area of speculation was the withdrawal of child benefit from families where at least one parent pays tax at 40% or higher.

The Chancellor listened to reason and has decided to taper the withdrawal of child benefit where the higher earner’s net income (after losses but before allowances), exceeds £50,000. For every £100 of income over £50,000, a tax charge will apply equivalent to 1% of the child benefit received by the family. This will lead to the complete withdrawal of child benefit at £60,000 of net income. This tax charge is to apply from 1 January 2013, and will be collected through PAYE and self-assessment from the higher earning partner in the family.

If you, or your partner, are currently in receipt of child benefit you don’t have to do anything now. HMRC will be writing to all those affected by this change later in 2012. However, please discuss with us how you could re-arrange the distribution of income within your family, to reduce the affect of the withdrawal of child benefit. Any action in this area should be taken as soon as possible to ensure the new arrangements are in place for the full tax year 2012/13.

Tax Credits
The following summarises the rates and thresholds that will be cut or frozen in 2012/13 compared to 2011/12.

Child Tax Credit
Family element – £545 (2011/12 – £545)
First income threshold – £15,860 (2011/12 – £15,860)
Second income threshold – withdrawn (2011/12 – £40,000)

Working Tax Credit
Basic element – £1,920 (2011/12 – £1,920)
Couple and lone parent £1,950 (2011/12 – £1,950)
30 hour element – £790 (2011/12 – £790)
Childcare element:
Maximum costs for one child – £175 per week (2011/12 – £175 per week)
Maximum cost for all children – £300 per week (2011/12 – £300 per week)
Percentage of costs covered – 70% (2011/12 – 70%)
First income threshold – £6,420 (2011/12 – £6,420)
Withdrawal rate – 41% (2011/12 – 41%)
Income rise disregard – £10,000 (2011/12 – £10,000)
Income fall disregard – £2,500 (2011/12 – N/A)

The income disregard provides a buffer for changes in income, so overpayments of tax credits do not arise where income varies within this threshold year on year. This affects families with fluctuating incomes, such as the self-employed. If you are in this position you need to finalise your profit figures as close to the tax year end as possible and provide those figures to the Tax Credits office without delay.

There are also changes to the tax credit rules from April 2012, which affect the number of hours the adults in the family must work to qualify for working tax credits. Lone parents are not affected by these changes.

Cap on Tax Reliefs
The Chancellor wants to deal with wealthy individuals who take advantage of tax reliefs that have no annual limits, such as relief for trading losses, charitable donations, and capital allowances. He is proposing that from April 2013 all such tax reliefs will be capped at the greater of £50,000 per year or 25% of the taxpayer’s gross income. If this idea becomes law it could significantly affect loss-making businesses that are not conducted through a company.
 
Savings and Investments
Enterprise Investment Schemes
From 6 April 2012 there are two schemes which you can use to achieve tax relief for investing in small unquoted companies: the seed enterprise investment scheme (SEIS) and the enterprise investment scheme (EIS). The tax relief given under each scheme is shown below for 2012/13:Rate of income tax relief: SEIS – 50%, EIS – 30%
Annual maximum investment qualifying for income tax relief: SEIS – £100,000, EIS – £1,000,000
Capital gains tax relief on investment: SEIS – 18% or 28%, EIS – deferred reliefBoth the company and the investor have to qualify in order to receive tax relief under SEIS or EIS. The rules for both schemes are very complicated, so please talk to us before deciding to use either scheme.

Pension Contributions
In spite of much speculation about a reduction in tax relief for contributions to registered pension schemes, there has been no change in the tax relief rates or annual allowance for 2012/13. The annual allowance is the limit on pension contributions that attract tax relief, whether those contributions are paid by the individual, his employer, or calculated as a deemed rise in the value of a final salary scheme.

Each individual has a personal annual allowance of £50,000, plus unused annual allowance brought forward from the previous three tax years. If the value of the contributions made to the pension scheme exceed the taxpayer’s annual allowance, an annual allowance tax charge applies on the excess contributions, set at the taxpayer’s highest rate of income tax.

Annual allowance: 2012/13 – £50,000 (2011/12 – £50,000)
Lifetime Allowance: 2012/13 – £1,500,000 (2011/12 – £1,800,000)

Independent Savings Accounts (ISAs)
The ISA savings limits applicable in 2012/13 for those over 18 are:
Overall limit – £11,280
Cash up to – £5,640
Balance in stocks and shares up to – £11,280

For those aged 16 & 17:
Overall limit – £5,640
Cash up to – £5,640
Balance in stocks and shares up to – nil

For Junior ISA:
Overall limit – £3,600
Cash up to – £3,600
Balance in stocks and shares up to – £3,600
 
Capital Taxes
CGT
There has been no change in the rates or thresholds for capital gains tax (CGT):The rates for 2012/13 are…Annual exemption – £10,600
Annual exemption for most trustees – £5,300
Rate for gains in basic rate band – 18%
Rate for gains above basic rate band – 28%
Rate for gains subject to entrepreneurs’ relief – 10%
Lifetime limit for entrepreneurs’ relief – £10,000,000

Overseas Owners
Currently only UK resident individuals pay CGT on gains, even when the property is located in the UK. The Government is considering how CGT can be applied to gains made on residential property in the UK, when the owner is resident in another country. Any changes will apply from April 2013 at the earliest.

Employee Shares
If you acquire shares through an approved share option scheme run by your employer, you must pay CGT on gains made when you sell those shares, after deduction of your annual exemption. The CGT will be charged at 18% or 28%, as the conditions for the entrepreneurs’ relief rate of 10% are unlikely to be met. The Government is considering changing the rules for approved share option schemes so the 10% rate can apply to shares acquired by employees. Any changes will apply from 6 April 2013 or later.

Inheritance Tax
The inheritance tax (IHT) nil rate band remains frozen until 2014/15. This is the amount of a person’s estate that is free of inheritance tax. However, for deaths occurring on and after 6 April 2012, when at least 10% of their estate has been left to charity, a reduced rate of IHT applies to the chargeable estate. Gifts made to charities are exempt from IHT.

The limits and rates for 2012/13 are…

Nil rate band: £325,000 (2011/12 – £325,000)
Rate payable on death: 40% (2011/12 – 40%)
Rate payable when 10% of estate left to charity: 36% (2011/12 – 40%)
Rate payable on lifetime gifts to certain trusts: 20% (2011/12 – 20%)

Stamp Duty
You pay stamp duty when you purchase a property in the UK. There has been a lot of talk about how some people have avoided paying SDLT on high value homes. The tax avoidance scheme usually involves an off-shore company.

To deal with such schemes the Government has introduced new rates of SDLT on purchases of residential property valued at over £2 million:

- 7% charge on purchases by individuals from 22 March 2012; and
- 15% charge on purchases made on or after 21 March 2012, by companies, collective investment schemes, or partnerships where a member is a company or a collective investment scheme

An annual tax charge may also be applied to the value of residential property held by certain companies, where each property is worth over £2 million. Any such charge will apply from April 2013.
 
Business Tax
Simplification
The Government wants to simplify the accounts small businesses (partnerships and sole-traders) have to prepare for tax purposes. It is consulting on whether preparing accounts on a cash basis would be easier, and standard allowances could be used for the business use of vehicles and the proprietor’s home. Any changes are likely to apply from April 2013 or later.Corporation Tax
The small profits corporation tax rate remains the same at 20% for the year from 1 April 2012.However the main rate for large companies is reducing from 26% to 24% and will be 22% by the year from 1 April 2014.

Capital Allowances
The rates and thresholds of the main capital allowances will apply as follows for 2012/13…

Main pool: writing down allowance: 18% (2011/12 – 20%)
Special rate pool: writing down allowance: 8% (2011/12 – 10%)
Annual Investment Allowance (AIA) cap: £25,000 (2011/12 – £100,000)
 
Employers
NI
For 2012/13 the main rates and thresholds for NI contributions are:Lower Earnings Limit (LEL) for Class 1 NICs – £107/week
Employer’s class 1 above £144/week not contracted out – 13.8%
Employee’s class 1 not contracted out from £146 to £817/week – 12%
Employee’s additional class 1 above £817/week – 2%
Self-employed class 4 from £7,605 to £42,475 per annum – 9%
Self-employed class 4 additional rate above £42,475 per annum – 2%
Self-employed class 2 – £2.65 per week
Voluntary contributions class 3 – £13.25 per weekThe Government is consulting on how to integrate the administration of income tax and NI for employers and the self-employed. Any changes are unlikely to take effect until 2014 or later.

Share Schemes
The Government wants to encourage more employees to acquire shares in the companies that employ them. Small and medium sized companies can use the Enterprise Management Incentive share option scheme (EMI) to grant share options to employees, but there is a £120,000 cap on the value of share options each employee can acquire. The Government plans to raise this cap to £250,000 as soon as possible.

Cars and Car Fuel
Car Benefit

The tax charge for the private use of a company car is based on a percentage of the list price of that car when new, the percentage being based on the vehicle’s CO2 emissions.

From 6 April 2012 cars with CO2 emissions in the band 76-99g/km will be taxed at 10% of list price. Those with CO2 emissions of 100g/km will be taxed at 11% of list price, with the percentage increasing in 1% steps for each additional 5g/km. From 6 April 2013 the 10% list price band will reduce again to 76-94g/km. A car with CO2 emissions of just 115g/km will then be taxed at 15% of list price.

From 6 April 2014 the 11% of list price will apply to cars with CO2 emissions in the band 76-94g/km, with a 1% step up for every addition 5g/km of CO2. From 6 April 2015 the minimum percentage of list price will be 13%, and from 2016 the minimum percentage of list price increases to 15%.

Fuel Benefit

Where a company car driver receives free fuel, the taxable benefit is calculated as the percentage of the list price for the car applied to a set value, currently £18,800. This will rise to £20,200 from 6 April 2012. The maximum taxable benefit of receiving free road fuel for private use will increase from £6,580 (for 2011/12) to £7,070.

The taxable benefit when fuel is provided for private use in a company van is frozen at £550 for 2012/13.
 
VAT
The VAT rates remain unchanged at…Lower rate: 0%
Reduced rate: 5%
Standard rate: 20%The registration and deregistration limits from 1 April 2012 are…

Registration turnover: £77,000 (1 April 2011 – £73,000)
Deregistration turnover: £75,000 (1 April 2011 – £71,000)

Changes from 2013
The following changes to the VAT rules will be made in 2013…

- The standard rate of VAT will apply to the supply and installation of energy saving materials in non-residential buildings used for non-business purposes by charities. Currently the lower rate of VAT applies
- The invoicing rules will be simplified
- Exemptions will be introduced for commercial Universities
- Cable-car rides will attract the reduced rate of VAT, where each cable car holds fewer than 10 passengers.

Proposals
The Government is consulting on the existing VAT law in the following areas, so expect changes in the future…

- Hot take-away food
- Sports nutrition drinks
- Self storage
- Hair-dressers’ chair-rental and
- Alterations to listed buildings.

Emma Thomas

EJBC Chartered Accountants

Tel:01635 46174

www.ejbc.co.uk

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iPad 2 winner announced

December 20th, 2011

Christmas comes early for one lucky EJBC client.

 Emma Thomas was delighted to present Alison Buchanan with an iPad 2 (pictured) as the winner of our very succesful testimonial & referral promotion that ran until 30th November 2011.

The handover of the prize was delayed slightly due to Alison’s travels in the far east,  making her return to the UK that much sweeter!

Due to its popularity, we will be running another promotion throughout 2012.

With the ongoing challenging economic conditions, it is important that all businesses have access to quality advice and support, so please do remember us to any friends, colleagues or aquaintances who you think may benefit from EJBC’s professional tax, accounting and advisory services.

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Ebaying and Car Booting

November 7th, 2011

Do you sell lots of items through EBay or car boot sales? If so, this may be of interest.

More and more households are looking for extra ways to raise some extra tax in time for Christmas – EBay and car boot sales can be a good way to do this, but are there any tax implications?

The simple answer is, if you are only selling your unwanted possessions, you are unlikely to face a tax bill. If your pattern of selling suggests you are trading, or you are selling items which may attract capital gains, there may be some tax to pay.

So how do you know when you are trading?

You are trading if you:

  • Sell goods you have bought for resale.
  • Make items yourself and sell them to make profit.
  • Sell or buy items on behalf of others for financial gain (e.g. for a commission).
  • Provide a service and receive payment (whether in cash or kind).

If any of these statements are applicable to you, you should seek professional advice. If you are trading, you may have to pay income tax and National Insurance Contributions (NICs). You may also need to register for value added tax (VAT). Failure to comply on a timely basis can lead so some hefty fines.

You are not trading if you:

  • Sell occasionally, unwanted personal items through internet auctions or classified advertisements.
  • Attend a car boot sale once or twice a year to sell unwanted household items.

If you feel you are affected by this topic and would like to talk it through with a professional, please contact us for a free initial consultation.

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31st October deadline for filing paper returns

September 28th, 2011

 

From this year, the rule which reduced the tax return late filing penalty from £100 to nil provided that the individual had paid all their tax before 31 January, has gone. In the light of this, it is important for those with paper tax returns to meet the 31 October 2011 deadline.

These new penalties will apply to all self assessment tax returns from 2010/11 onwards. The fixed £100 penalty for failing to file a tax return on or before the filing date will therefore apply to:

  • Paper returns received on or after 1 November 2011.
  •  Online returns received on or after 1 February 2012.

Daily penalties of £10 per day will also take effect if the tax return is still outstanding three months after the filing date. So if your client files a paper return after 31 October 2011, they will be liable to a daily penalty on 1 February 2012, three months earlier than late online filers.

If you have a paper return to be completed and would like some assistance, please feel free to give us a call on 01635 46174 or 0300 303 8180

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HMRC announces crackdown on VAT rule breakers

May 25th, 2011

HMRC issued a news release on Friday 20 May 2011 announcing that it is to introduce a campaign targeted at VAT rule breakers.
The aim is to focus on individuals and businesses who are trading above the VAT threshold (currently £73,000), but who have not yet registered for VAT. It is not clear at the moment how HMRC will implement the scheme or how they will chose to investigate those individuals and businesses.
There are late filing penalties for not registering your business on time for vat, and there are also circumstances where individuals can exceed the vat threshold for a short period of time and avoid registration.

If you are at all concerned that this may affect you, please let us know and we can talk you through the process.

Emma Thomas
emma@ejbc.co.uk

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How to keep up to date with Payroll legislation

May 16th, 2011

HMRC are no longer sending out a paper Budget Pack, so as an employer, if you wish to keep informed of changes to payroll legislation, we recommend that you subscribe to the ‘employer email alert’. Details of how to register for this service can be found at:

http://www.hmrc.gov.uk/paye/forms-publications/register.htm

Emma Thomas emma@ejbc.co.uk

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Plumber Tax Safe Plan

May 13th, 2011

Earlier this year, HMRC launched what it has named the Plumbers Tax Safe Plan, full details of which can be found at http://www.hmrc.gov.uk/trades-disclosure/index.htm

Reports are suggesting that up to 50,000 plumbers, gas fitters and heating engineers will be receiving a letter from HMRC, giving them to the opportunity to declare untaxed income, which would incur a reduced rate penalty.

HMRC has stated that not everyone who receives a letter actually owes tax and they that they will not be in a position to send these letters to everyone who could be affected by the scheme.

Under the plan, plumbers, gas fitters, heating engineers and members of associated trades who owe tax, which they have not yet declared, can come forward anytime up to 31 May to tell HMRC they want to take part. If they make a full disclosure, most face a low penalty rate of 10%, with a maximum of 20%. Once they come forward, they have until 31 August to make their disclosure and arrange for payment.

After that date, using information pulled together from different sources, HMRC will investigate those who have failed to come forward. Substantial penalties or even criminal prosecution could follow.

If you receive one of these letters, or would like to take part in the plan we would be interested in hearing from you.

Emma Thomas emma@ejbc.co.uk

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A reminder to report scams to HMRC immediately

May 13th, 2011

As with every new tax year, we are once again receiving reports of new repayment scams, so we are taking this opportunity to remind clients that HMRC will never send notifications of a tax rebate by email, nor ask them to disclose personal or payment information.

If you do receive one of these emails, please report the scam to HMRC at: phishing@hmrc.gsi.gov.uk as soon as possible to help identify fraudsters.

Further HMRC guidance is accessible at HM Revenue & Customs Security advice: http://www.hmrc.gov.uk/security/index.htm

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New features available in Sage Instant Accounts 2011

March 8th, 2011

The recently launched latest version of Sage Instant Accounts,  is even more straightforward and easy to use, so users can spend more time focusing on their customers.

Here are some of the new features, and the benefits they can bring to users:

  • NEW Flat Rate VAT tools
    Helping customers set up and manage finances on both invoice and cash-based flat-rate VAT schemes. Customers can calculate the savings or losses of flat-rate compared to standard VAT to see what’s the best scheme for them. It’s simple to set up, easy to use and will save customers much-needed time.

 

  • Improved Bank Reconciliation
    With a more flexible and efficient system, so customers can make adjustments without having to skip between different screens. Plus, a new report function will help save time reconciling accounts.

 

  • NEW Web Store Integration
    Using Sage Pay*, our secure online payment service. Not only does this save money, as there’s no need for a third party, but invoices can now be automatically created from the information received from Sage Pay, saving time as well.

 

  • NEW SageCover Services Toolbar
    This dynamically links to a customer’s SageCover account and displays available features of their SageCover contract. It’s simple, quick and very easy to use.

If you would like to purchase discounted Sage Instant Accounts, please visit our web shop: http://www.ejbc.co.uk/shop/sage-software-from-ejbc/instant-accounting

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