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tax inspection

VAT for Small Businesses - It's not as boring as you think!

November 5, 2019

Okay, so VAT is boring. And it's complicated. But, it's a fact of life for businesses, and in some cases, it can prove to be quite useful. So it's well worth understanding it and how it might benefit your small business.

What is VAT? Well, it's short for Value Added Tax for a start. VAT is a sales tax charged by all VAT registered companies on the value of products or services they supply. There are three rates of VAT:

  • Standard Rate 20% - Most goods and services
  • Reduced Rate 5% - Domestic fuel, child car seats
  • Zero Rate - Books, children's clothes

Some goods and services are VAT exempt — items such as training, fundraising for charities, postage stamps and postage for example.

Zero-rated supplies are not charged VAT in the usual sense but at a rate of 0%. This means you can claim the VAT back on your overheads and costs.

For a definitive list of items that are subject to VAT and their rates, call HMRC (and be prepared to wait a long time!) or speak to your accountant.

If you're registered for VAT, it's essential you understand what records you need to keep, how to compile and submit a return, and how often you need to pay. Filing your return or making your payment late, or making mistakes on your return can be costly. Details of the potential surcharges and fines can be found here ( link).

When do you have to register for VAT?

There are a couple of scenarios where you have to register for VAT:

  • You expect your VAT taxable turnover to be more than £85,000 in the next 30-day period. You must register for VAT immediately.
  • Your business had a VAT taxable turnover of more than £85,000 over the last 12 months. Remember, this is any consecutive 12 month period, not just your usual accounting period. If you've exceeded the VAT threshold, you must have registered for VAT by the end of the following month.

However, if your business only sells VAT exempt items, you don't need to register for VAT.

You can typically complete your VAT registration online; this is probably the best way as you'll need an online account to be able to submit your VAT returns. If you cannot register online, or you want to apply for an exception (maybe exceeding the VAT threshold was a one-off and it's not going to happen again in the next 12 months) you can contact HMRC by post using form VAT1.

Once you're registered for VAT, you must print your VAT number on all your sales invoices and complete your VAT returns. A VAT return is typically submitted, and payments made every quarter.

VAT Schemes for Small Business

Three schemes can help small businesses ease the burden of dealing with VAT.

  • Flat rate - If your VAT taxable turnover is less than £150k per year, you can pay a percentage of your total turnover. It's typically somewhere between 9% and 14% and is dependent on your industry. With the Flat Rate scheme, you still charge 20% VAT to your customers, but you can't reclaim the VAT portion of any purchases you make (except for certain capital purchases over £2,000). The difference between what you can charge and what you have to pay makes up for not being able to claim the majority of VAT back.
  • Cash Accounting - The benefit of the Cash Accounting scheme is you only include the transaction on your VAT return after your client has paid you. The alternative Invoice Accounting scheme requires you to include any VAT on any invoices you have sent, regardless of whether you have been paid or not. If your payment terms are 30, 60 or even 90 days, this could mean you have a rather large VAT payment to make based on the income you're yet to receive. As cash flow is key to the success of small businesses, being able to make payments only when you've got the money is a significant plus. The Cash Accounting scheme is only available to companies whose turnover is expected to be less than £1.35 Million per year.
  • Annual Accounting - The Annual Accounting system allows you to make either nine monthly or three quarterly VAT payments based on your previous years' VAT return (or an estimate if you're newly registered). At the end of the year, you complete a VAT return and either make a payment for the remaining sum owed or get a refund if you've overpaid. This scheme is useful in that you know what your regular payments will be, allowing you to keep that all-important cash flow under control. It also reduces the paperwork burden as you only need to complete a single VAT return. But, you need to keep careful track of your invoices, so you're not left with a nasty (expensive) surprise when you complete your return. This scheme is only available if your annual turnover is expected to be less than £1.35 Million.

What records do you need to keep?

It's essential that you retain all the records of your business transactions. Documents such as bank statements, bills, receipts, records of all supplies and a summary of your VAT for each tax period covered by your tax returns. HMRC take VAT fraud (or any tax evasion really) very seriously. So having the evidence to support the figures on your returns is essential should there ever be a query or audit from HMRC. 

Your records must be kept for at least six years, so make sure you have a sound, secure storage system. In the past, record keeping has been one of the most complained about aspects of the VAT system as it's such an onerous task. In an attempt to make the whole VAT process easier, HMRC has introduced Making Tax Digital (MTD).

Making Tax Digital

The UK Government's Making Tax Digital scheme is designed to reduce the burden of the VAT return. By using approved accounting software, you can maintain your records and submit your VAT return digitally. You need to be compliant with Making Tax Digital now, so if you're not, or you have any questions about it, contact your accountant straight away.

Pros of registering for VAT

There are several benefits to a small business registering for VAT. To being with you can claim back the VAT on any equipment you purchase when setting your business up. Getting started can be an expensive time, so being able to claim some of that money back will help that all-important cash flow.

If you expect most of your trade to be with big businesses, they typically expect you to be able to provide them with a VAT number. It's something that's expected in the business-to-business environment, and it makes you look more professional. 

Being VAT registered also has the added benefit of masking the turnover level of your business. If you're not VAT registered, then you're telling the world your business turnover is less than the VAT threshold. Some business, rightly or wrongly, feel more comfortable dealing with more significant partners.

Cons of registering for VAT

I've already mentioned the biggest downside of being registered for VAT, keeping all the records associated with your business activities. This problem is closely followed by completing and submitting your returns on such a regular basis. 

Another downside is you have to charge more to non-VAT registered customers, potentially making you a more expensive option compared to your competitors who are not VAT registered.

I no longer want to be VAT registered, can I deregister?

If your annual turnover drops below the VAT threshold, you might consider deregistering for VAT. Before you do this, consider these points:

  • Do you generally get repayments from HMRC when you file your tax returns?
  • Is your drop in taxable sales going to be temporary?
  • Are most of your customers' VAT registered?

If you've answered yes to any of these questions, it might make sense to keep your VAT registration.

Before you do anything regarding your VAT registration, please consult your accountant as they can give you the best advice and prevent you from making a costly mistake.

tax inspection

Should You Outsource Your Company Accounts?

October 14, 2019

The are many frustrations when running a small business. So many people want a piece of your time, and often they want some of your money too. And when time is short, it's often the tasks you're not so keen on that get neglected. Outsourcing jobs is an ideal way of making sure they get done and claw back some of your precious time.

Keeping track of your business accounts requires a unique skill set that not many people have. One of the wisest decisions small business owners can make is to hire an accountant to manage their finances, and it should be seen as an investment in the successful future of your company. Choosing the right accountant can help you and your business in many ways, here are just a few.

Reduce your tax bill

Accountants are always looking to save you money, legally. They know what expenses can and can't be claimed for and so prevent you from over-paying. They're also keeping track of any regulation changes so you can be sure your company will not miss out on any potential benefits.

Avoid fines

HMRC seem to have penalties for everything! Filing your tax return late, providing incorrect details or not knowing the current rules and regulations are all ways for you to be landed with a hefty fine. A lot of times though these fines can be easily avoided, and your accountant will help you with this. They'll make sure your returns are filed on time, and the correct information is provided to HMRC.

Run your business more effectively

Do you know where all your company's money is being spent? Do you know if you've got a healthy cash flow or if there are going to be problems ahead? Your accountant lets you be more efficient in running your business by creating reports that help you understand your current financial position. Having this information updated every month enables you to take action before small issues become huge problems. Your reports can also help identify areas where you can cut costs, or need to invest more time and/or money.

Get expert advice

A good accountant will be able to provide sound advice on the best financial practices for your business and how best to manage your finances so you can plan for the future. Whether you want to grow your business, deal with an upcoming tricky period or are looking to sell, your accountant can help define your targets and track your progress towards achieving them.

Focus on growing your business

How much time do you spend on working out your finances? Keeping your books up to date? Trying to understand the latest piece of tax legislation? Hire an accountant, and the stress of managing your finances melts away, you've got an expert to do it now. This means your time can be spent doing what you do best, building your business for the future. And, the increased revenue you can get from being able to focus will more than cover the cost of hiring an accountant.

As you can see, there are many ways for an accountant to make your business life more straightforward, saving you both money and time. At LSC Accounting, we provide friendly, efficient and cost effective accountancy services to businesses in the Sunderland area. You can contact us through our website or call us on 0191 447 9119.

tax inspection

All You Need to Know About Tax Investigation Triggers and How to Avoid Them

May 15, 2019

It often seems to be the case that no one likes, or wants, to deal with HMRC. But when it comes to a tax investigation, peoples enthusiasm drops even further. An HMRC tax investigation could be completed with a simple reply to a letter, then that’s it, done and dusted. On the other hand, it could take months to complete and end  up costing you thousands of pounds in time and accountancy fees!

If you’re being investigated, then it could be you’re simply one of the lucky companies that have been chosen at random for a more in-depth look. But there may also have been a trigger that’s caused them to come knocking at your door. There are a few issues that can pull that trigger, here are some of the most common ones.

The Disgruntled Ex or Lavish Lifestyle

Have you annoyed an ex-worker or partner and they’re aware of some less than above board practices in your business? It’s easy for a whistle-blower to alert HMRC to what’s going on. It’s also an easy one to avoid. Follow best accounting practice and keep full traceability of your transactions.

A tip-off may also come from people observing your lifestyle. If you appear to be living a lifestyle way beyond what your income realistically allows, this can get the alarm bells ringing. There might be a perfectly legitimate reason why you can afford the luxuries you have, but at least be prepared to answer some probing questions.

Late Tax Returns or Regular Mistakes

Everyone makes mistakes on forms now and again. Or you forget to file your return on time. It happens, and HMRC is generally understanding. But, if you’re making the same kind of mistakes regularly or you’re consistently late in filing your returns, then it will be seen as suspicious activity, and HMRC will want to know why. If this seems familiar to you then maybe you need to employ the services of an accountant, or need to look at getting a better one!

Not recording All Your Income

There could be a temptation not to record all your business dealings. A little bit left out here and there could soon add up to a large amount of undeclared earnings. And this unreported amount may be missed in an audit of your accounts. But every company you deal with has the potential to be investigated as well. What are the chances of the transactions you’ve had with them being left out of their accounts as well? If the dealings you’ve reported don’t match with the other companies, this will be flagged up as suspicious.

Salary Discrepancies

You might be a particularly generous company owner looking to support your workers and ensure they get a decent salary. If it turns out your salary is less than your employees though, in the eyes of HMRC this could be a sign of undeclared benefits being claimed in another way. In business, there’s an expectation that the higher up you are in the company, the more you should earn. Unless you have a good explanation as to why this isn’t the case, then an investigation is likely.

Big Swings in Profit, or No Profit

Every year is different, some are good, some are bad. If you’re reporting substantially different profits from the previous year(s), then it’s probably best if you explain why. On your tax return form is a section where you can provide details of anything that might appear a little, well, odd. Like why last year you made £500,000 and this year only £50,000. It’s also worth remembering if you have a cash-only policy, you’re more likely to get the attention of the HMRC Inspectors.

Unless you have a very generous soul backing your business and you’re able to do it for fun, you’re not likely to last long if you don’t make a profit. It’s simply not sustainable. If your reporting no profit, or a loss, year on year, it isn't going to make much sense to HMRC.

Your Business Earnings Are A Lot Different To The Industry Average

HMRC have been collecting taxes from businesses for quite a long time now. And with those taxes, they also collect a lot of information about the businesses they’re collecting taxes from. This means they have a pretty good idea what a company of your size, in your industry, should be earning. So if you’re reporting numbers significantly different, then you’re going to have to be able to explain why.

Coupled with this is making sure your business type is correct for its size. If, for example, you’re only turning over £10,000 a year, setting up as a Limited company is likely to flag up something odd.

You Haven’t Got An Accountant

Your accountant can do many things for you. Apart from keeping your finances in order, paying your staff on time, keeping your creditors happy, chasing your debtors and providing cash flow forecasts (to name a few), they also add a certain level of creditability to your business. Quite simply, it looks good to have one. And why wouldn’t you want one? Well, there’s a couple of immediately obvious reasons. One, your business is so small you don’t need one. Two, you don’t want a qualified, professional person looking at your books. In the eyes of HMRC, this is more than a little suspicious.

As ever when it comes to your business accounts and running your business effectively if in doubt seek the help of a professional accountant. By doing things the proper way, and keeping your business practices above board, you’re far less likely to attract the attention of HMRC’s Tax Inspectors. If you do happen to be one of the lucky ones chosen at random, then at least by having your taxes looked after by an accountant you should have nothing to worry about when the inspection happens.

With many years of experience and hundreds of happy customers, LSC Accounting Ltd. can help with all your accountancy needs. We provide a friendly, efficient and cost-effective approach to accountancy. To discuss your requirements, you can either contact us through our website or call 0191 447 9119.

Builders working on a construction site

5 reasons why outsourcing your payroll could really pay off for you and your business!

February 27, 2019

Running your company’s payroll can be a complex and expensive process, especially for a small company. Why do it yourself when you can take the hassle free approach? Outsourcing your payroll has many benefits, here are 5 of the best.

1. Tax and payroll requirements are taken care of for you.

There are various regulations when it comes to the payroll. For example, HMRC requires Real Time Information (RTI) to be sent to them before, or on the day, the payroll is run. If you’re late in getting this information to HMRC then you can be fined and charged interest on the late payments!

2. Take away the worry of new regulations.

New regulations and laws are a fact of life. And being aware of them, understanding them, and implementing them correctly can create a lot of worry. By letting a specialist take care of this, it’s one less thing for you to have to think about every month.

3. Save time (and money).

Everyone likes to save time and money. It has a direct effect on your bottom line. Outsourcing your payroll can seem expensive at first, but when you look a little deeper for many companies it’s cost-effective:

- You don’t need to hire specialist payroll staff, pay for their training or buy the computer for them to work on

- You don’t need to buy or subscribe to expensive software (or take the time to learn how to use it properly yourself)

- You don’t need to buy any special stationery or dedicated printer for printing out your payslips

- If you’re not having to deal with the payroll you can actually get on with running and developing your business

4. Not having to deal with Auto Enrolment

Every company now has to provide a workplace pension should their employees meet certain criteria. For some employees, meeting these criteria can change on a monthly basis. And you as the employer are responsible for keeping track of this and making the right deductions against their pay. As Auto Enrolment is a legal requirement you must make sure you comply with it. Failing to get it right can lead to fines of up to £50,000!

5. Continuity of payroll processing

In smaller companies, the payroll is either run by you or another member of staff. What happens if that person is ill when the payroll is due? By far the quickest way to upset your employees is to pay them late. This can cause all sorts of problems, from mildly disgruntled workers to demands for compensation if mortgage payments are missed.

There are many benefits to outsourcing your payroll processing. We’ve listed a few of the big ones. If you could save yourself some stress, time and money, why wouldn’t you?

LSC Accounting Ltd. is an expert in the area of Payroll. As a certified Quickbooks ProAdviser, with many years of experience and hundreds of happy customers, we can simplify your payroll process. We provide a friendly, efficient and cost-effective approach to accountancy. To discuss your requirements you can either contact us through our website [ link] or call 0191 447 9119.

Builders working on a construction site

The Construction Industry Scheme - A Brief Guide for Contractors

December 18, 2018

What is the Construction Industry Scheme?

In our last blog, we chatted a bit about the Construction Industry Scheme (CIS for short) and how it relates to Subcontractors. In this blog, we’ll deal with the scheme from the Contractors point of view.

Just to recap, the CIS is a system where Contractors make tax deductions from Subcontractors pay. The deducted money is then passed onto HMRC. Basically, it’s a form of advance tax and National Insurance contributions.

From the HMRC website,

“For this scheme, you count as a contractor if you either:

- pay subcontractors for construction work

- your business doesn’t do construction work but you spend an average of more than £1 million a year on construction in any 3-year period”

If you’re still not sure if you’re a contractor you can check out the HMRC website [ link] or give them a call. HMRC have a dedicated CIS helpline, details are on their website.

So as a contractor, what are my responsibilities when it comes to the CIS?

First off you must register with HMRC, whether you’re a sole trader, partnership or limited company. You have to do this before you start employing any Subcontractors.

When you’re registered and you’re preparing to take on a Subcontractor you have to check if maybe you should be employing them instead. If you get this wrong you could be fined so it’s best to make sure you’ve sufficiently covered this.

Once you’re satisfied that subcontracting is the path to follow you’ll need to check if the Subcontractor is registered with HMRC. They don’t have to be registered, but if they have the amount of tax you deduct will be different. It's typically 20% compared to 30% if they haven’t registered but HMRC will tell you the exact amount to deduct.

If you’ve used a Subcontractor before, but not in the last two years, you need to re-verify them.

There are a couple of ways to verify your potential Subcontractor. You can use the free HMRC CIS online service or you can buy commercially available CIS software. The HMRC free service is limited to 50 Subcontractors, so if you’re looking to register more than that you’ll have to go down the software route.

You’ll need some details to hand when you’re ready to start the registration process:

  • your Unique Taxpayer Reference (UTR)
  • the reference number for your HMRC accounts office
  • your HMRC employer reference

You’ll also need your subcontractor’s:

  • UTR
  • National Insurance number if they’re a sole trader (make sure it’s not a temporary number!)
  • Company name, company UTR and registration number if they’re a limited company
  • Nominated partner details, trading name, and partnership UTR if they’re a partnership

What about when it comes to paying my Subcontractor?

When it’s time to pay your Subcontractor there are a few things you need to take into account before you’re left with the net pay. Starting with the gross pay, you need to take away the sums they paid for:

  • VAT
  • materials used to complete the job
  • consumables
  • fuel (except for what’s used to travel)
  • any hired equipment

After all that has been accounted for you then take away the percentage given to you by HMRC. What's left is the amount you pay the Subcontractor.

If any deductions have been made you must provide the Subcontractor with a statement of ‘pay and deductions’ within 14 days of the end of the tax month. This is for their records and allows them to complete their tax assessment forms.

When all the deductions have been calculated, you must make sure you pay HMRC the amount due by the 22nd of the following month. This is another area that is subject to a fine plus interest on monies owed if you’re late.

Along with the monthly payments you also need to file a monthly return, either using the HMRC online service or the software you’ve purchased. An important point, highlighted on the HMRC website, is the declaration of the Subcontractors employment status. You must get this right and declare they aren’t employees. Getting this wrong can land you with a fine of up £3,000!

Your monthly return must be in by the 19th of the month. There are more potential fines if you’re late. A full breakdown of the fines is available on the HMRC website.

Okay, we’re nearly there with your Contractors CIS responsibilities. It’s a time consuming and sometimes-complicated process, but it has to be done.

What else do I need to do?

You need to keep records of the deductions made for at least 3 years after the end of the tax year the deductions were made in. As well as the amount of the deductions, you need to keep a record of the gross amount invoiced by the Subcontractor, excluding VAT. You also need to record the cost of materials the Subcontractor invoiced you for, excluding VAT.

If you can’t show these records on request, there’s another potential fine of £3,000.

Finally, you need to tell HMRC about changes to you, either as an individual or as a business. Changes such as:

  • your address
  • your business structure
  • a contractor dies
  • you’re a multiple contractor and you take on another contractors business

You must also tell HMRC if you stop trading or stop using Subcontractors. You need to stop filing your monthly reports too.

There’s a fair bit to take in when it comes to a Contractors responsibilities with the CIS. But by taking a little time and care in getting your processes set up you should be able to reduce the time burden on your accounts department. As always though, if you have any doubts about whether you are doing things correctly, contact HMRC or your financial professional.

LSC Accounting Ltd. is an expert in the area of CIS, with many years of experience and hundreds of happy customers. We provide a friendly, efficient and cost-effective approach to accountancy. To discuss your requirements you can either contact us through our website [ link] or call 0191 447 9119.

Builders working on a construction site

The Construction Industry Scheme - A Brief Guide for Subcontractors

November 25, 2018

What is the Co nstr uction Industry Scheme?

The Construction Industry Scheme (CIS for short) is a system where Contractors ma ke tax deductions from Subcontractors pay. The deducted money is then passed onto HMRC. Basically, it’s a form of advance tax and National Insurance contributions.

From the HMRC website,

“For this scheme, you count as a contractor if you either:

  • pay subcontractors for construction work
  • your business doesn’t do construction work but you spend an average of more than £1 million a year on construction in any 3-year period”

If you’re working for a Contractor as defined above, and you’re not an employee of the contractor, then you are a Subcontractor. As a Subcontractor, you don’t have to register for the scheme. The tax will still be deducted from your pay, but at the higher rate of 30% compared to just 20% if you had registered.

Some types of work are not part of the CIS so no money will be deducted from your pay. You can find a list of what work is and isn’t included in the CIS on the HMRC website [ link].

You may be able to avoid having any tax deductions from your pay by the Contractor (this is known as having ‘gross pay status’). You have to be part of the scheme to apply for this though.

How do I register?

Registering with CIS is straightforward if you’re a sole trader. You can do it online via the HMRC website where you can set up a Government Gateway account if you haven’t got one already.

If you’re a limited company or partnership, you can still register but will need to complete a different form. These are also on the HMRC website. Just search for “What you must do as a Construction Industry Scheme (CIS) subcontractor”.

Who’s responsible for making sure my tax payments are correct?

Although the Contractor is making deductions from your payments and paying it to HMRC, it is still your responsibility to make sure you pay the correct amount of tax and National Insurance contributions.

Every month the Contractor will give you a statement of what you’ve been paid and what deductions have been made. It’s important you keep these statements as they’ll help with your Self Assessment tax return if you’re a Sole Trader or Partner.

At the end of the tax year if you’ve overpaid tax then HMRC will reimburse you the overpaid amount. If you’ve underpaid then you will need to make up the difference.

If you’re a Limited Company with gross payment status you’ll complete your Corporation Tax return as normal. If CIS deductions are made then they can be claimed back through the company’s payroll system. The HMRC website advises you to not try to claim the deductions back via your Corporation Tax return. If you do you may get a penalty!

If you’re at all unsure about any aspect of the financial side of the Construction Industry Scheme then you should seek the expertise of an accountant.

Next time: If you're a contractor under CIS, what are your tax responsibilities?

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LSC Accounting Ltd. is an expert in the area of CIS, with many years of experience and hundreds of happy customers. We provide a friendly, efficient and cost-effective approach to accountancy. To discuss your requirements you can either contact us through our website [ link] or call 0191 447 9119. 

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