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May 2022

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To May’s Business Companion News 

Get your Personal Tax Return in Early
If you’d like us to do your Personal Tax Return quickly just send us your income details by email.  We will need details of any self-employment and property rentals for 2021/22.  Have you made any capital gains or received other sources of income?  We already know about director fees and wages that you pay through our payroll arrangements and your company dividends.  But we will need P60s or statements for any second employment/ pension received. You can send us the information as soon as you like for an early tax return.

If you are not already our client, just about the service we can provide you.
May 2022
· Beware: errors in VAT filing directly from accounting software
· PAYE Tax Coding – is your Code right?
· Reform of R&D Tax Credits
· Use your Employment Allowance!
· May Questions and Answers
· May Key tax dates
Beware: errors in VAT filing directly from accounting software
There are a number of reasons why we advise against ever submitting a VAT return direct from bookkeeping software.  These are grouped around:
  1. Missing common coding errors that create an extra liability
  2. Missing the Mandatory adjustments that have to be made to the raw figures
  3. Missing the complex adjustments the HMRC require us to make to VAT returns
Common coding errors that will create an extra VAT charge:
  • Booking a loan to the firm as though it was a sale.  
  • Booking bank transfers with output vat.
  • Mixing Exempt and No tax transactions with sales.
Mandatory Adjustments have to be made to the raw figures for the following:
  • 50% disallowed input tax on rental of cars
  • 100% disallowed input tax on car purchase (but not vans and operational vehicles)
  • Reverse charge on Building Services
  • Altering VAT recorded during rate changes (eg Hospitality VAT increases from 12.5% to 20% from 1/4/22).    
  • VAT Group member additions
  • Addition of Fuel Scalar Charge
  • VAT disallowed for items/services bought for private use
  • Corrections for errors in a prior VAT accounting period
  • Coding errors in your books for items changed in the current VAT accounting period AFTER the VAT return is submitted
  • Bad debt relief
  • Changes between schemes within a period
  • Cash accounting adjustments
  • Reverse charge additions to both sales and purchases for untaxed imports
Some of the complex adjustments that the HMRC currently require us to make to VAT returns include:
  • Partial Exemption – based on different sectors of income/ expenditure, on % allocation or a mixture.
  • Second hand margin scheme
  • Flat Rate Scheme (FRS) %ge calculation
  • FRS Extra Capital equipment input tax recovery
  • Altering FRS VAT recorded during rate changes (eg FRS VAT increase on pubs from 4% to 6.5% from 1/4/22).
  • Reduction in VAT reclaimed on goods under the Capital Goods Scheme
  • Turnover – based Retail Schemes
  • Note place of supply rules to declare imports (eg Google adwords, software from abroad)

We recently prepared a VAT return in Freeagent which created one of these errors without any intervention from us.  As a result the books created a draft VAT return had a £2,000 error, against the client and in favour of the HMRC.  We checked all the entries and discovered the error.  We then submitted the return outside the Freeagent system.

VAT is frequently overlooked, as many accountants expect the clients to prepare their own returns.  But it is a very expensive tax to get wrong.  

Our preferred solution is to inspect the books and the VAT reports from systems like Quickbooks online, FreeAgent, and Xero in Excel.  We can then see errors more easily and make changes in the source books before preparing the return.  We can also perform overall checks on the accumulated liabilities versus the cumulative balances in the books.  We only submit the electronic VAT Returns through VAT bridging software.  There is no guarantee that we will spot coding errors – but this solution at least gives us a fighting chance.

And sometimes it saves a client as much as £2000

PAYE Tax Coding – is your Code right? top
Reform of R&D Tax Credits
It is important to keep an eye on the tax code used on your payslips. If that code is 1257L for 2022/23 you are getting the full personal allowance (£12,570) and the tax code is probably right – any other code needs further investigation.

Under HMRC’s system of ‘Dynamic coding’, new tax codes are issued by HMRC when they receive notification of a ‘trigger’ from employers, pension companies, or the taxpayer themselves (via entries on their tax returns). The new code will remain in place until another ‘trigger’ is applied e.g. receipt of a personal tax return, a new employment, an increase in salary, etc. HMRC also take into account tax owed from previous years.

In issuing the code HMRC assume the employee will continue to receive the same level of pay for the rest of the tax year as they have to date.

Potential Problems
If you already submit personal tax returns you may already be paying Payments on Account during the year and a potential balance after the end of the tax year, dynamic codes justs adds one more unnecessary complication when you will be paying your tax in full on time anyway.

Increasingly HMRC has been issuing codes to include an estimated amount of dividends or rental income based on the previous year’s tax return information. Tax on such income is not due until 31 January after the tax year-end and therefore HMRC is, in effect, collecting tax in advance.

K Codes
The letter K is used at the front (unlike other letters) of an employee’s tax code when the deductions (eg company benefits, state pension) are greater than their Personal Allowance. It may also be triggered if you owe substantial tax from previous years.  If for example if you have a tax code of K475 you have a negative personal allowance of £4,750.  If you earn a salary of £27,000 your taxable income will be £31,750 (£27,000 plus £4,750). They should not be doing this in the case of a potential debt (eg for dividends or rental profits).

Getting your tax code changed
We will ring HMRC on behalf of our clients to get a tax code amended.  Just if you need some help with this. 
What are R&D Tax Credits?
stands for research and development. R&D tax credits are a government incentive designed to encourage innovation across multiple industries. This is an opportunity for you to reduce your corporation tax bill or receive a refund from HMRC based upon the number of working hours your business dedicates to Research & Development. This is the process of taking an idea and transforming it into a fully-fledged product or process.

You already get 19p tax relief for each £1 you spend.  Under R&D Tax credits you get 230% of this 19p ie 43.7p. So the extra relief is 24.7p.

Changes to the Scheme
The definition of qualifying revenue expenditure will be broadened. Refocussing support on innovation in the UK.  Where companies subcontract, they’ll only be able to claim R&D relief where that work is done in the UK, unless exceptions apply.  Research workers need to be paid through a UK payroll.  

New R&D Filing requirements
The government intentions from April 2023 include new filing requirements:
1 All claims will have to be made digitally
2 More detail will be required on those digital claims (details of expenditure, nature of advance sought, field of science / technology and uncertainties overcome)
3 A senior officer within the company will need to endorse the claim
4 Advance notification of claims will be required
5 R&D agent advisor details provided

Use your Employment Allowance!
Sometimes small businesses ask us if a new recruit should be taken on, as self-employed rather than employed.  In general our view is that we would rather this arrangement was included in the Company affairs directly.  This is partly because we want to be objective about the company’s affairs to justify the company tax treatment rather than Self Assessment Income tax.  It is also the legally straightforward.  Staff who are officers, or who are regularly employed (even if only part-time), or who have to work agreed hours, are employees not self-employed.

But there is another reason.  Let us say you have a small company owned by a director worker, but you take on an employee who is not a director.  This creates a tax opportunity for the company.  This will enable the co to claim the Employment Allowance.  This is a £5,000 government rebate.  It will offset any Employer national insurance that either incur on salaries run through the company.  You are eligible to claim the Employment Allowance if you have two directors (or one Director and one employee).  Both must be paid above the secondary threshold (£9,100pa or £758.33 a month ).    

Normally the ideal salary is £11,908 pa plus a minimum of £2000 dividends as explained in our April newsletter. What is you want to pay more?  Well an extra £1000 dividend attracts dividend tax of say £87 in dividend tax.  What if you pay this extra £1000 as a salary?

If you have unused Employment Allowance you will not pay Employer NI, but you will suffer Employee NI of 13.25%.  You also suffer PAYE/income tax at 20%.  So from £1000 you lose 33.25% of say £332; you end up with £668.  But if the company is profitable the salaries get 19% Corporation Tax relief on the cost of £1000.  (Dividends do not get this relief.)  This is £190.  If you lose £332 and gain £190 overall you lose £142 difference – so not much worse than the £87 using the dividend route.

This is conditional on your company getting the Employment Allowance.  Therefore for small payrolls in profitable companies it becomes very important for your Company to qualify.

May Questions and Answers top
May Key tax dates top
Q1. I am the director of my own company incorporated 15 months ago. The business has expanded such that I have taken on a bookkeeper. Whilst preparing the information required to give to my accountant at the year-end, my new bookkeeper has found a batch of sales invoices that I issued soon after registration but inadvertently did not include VAT. Can I now issue additional invoices to correct the VAT error? Answer

Q2. In 2020 I entered into an agreement to purchase the leasehold of a commercial property that was under construction in exchange for a premium of £500,000. The agreement stated that a 20% deposit was to be paid plus a 10% stage payment 12 months later with the balance on completion. Unfortunately, my business folded due to Covid and I defaulted on the later stage payment. This was deemed a breach of the agreement, the contract was never completed and the builder kept the deposit. Can I claim a capital tax loss in respect of the lost deposit? Answer

Q3. I live within walkable distance of a train station with a direct route into London. I work locally and drive to work so the drive is not used in the daytime. What are the tax implications if I rent out the drive? Answer
1 – Submission of Annual accounts to Companies House and payment of Corporation Tax for accounting periods ending 31 July 2021

1 – VAT fuel scale charge: new rates apply from the next VAT period beginning on or after 1 May 2022

6 – Electronic VAT return submission and payment due for the quarter ended 31 March 2022

19/22 – PAYE/NIC, student loan, and CIS deductions due for the month to 5 May 2022

31 – Submission of Corporation Tax returns: 31 May 2021 year-end

31 – VAT annual accounting: 31 March stagger VAT return and balancing payment

31 – P60: issue to employees

Need Help? top
New Clients Welcome top
Please contact us if we can help you with these or any other tax or accounts matters.

In addition, if there’s anyone else who you think would benefit from the newsletter, please forward the email to them or ask them to contact us to be added to the newsletter list.
If you are not already a client and are interested in becoming one, we would love to discuss how we can help and provide you with a competitive quote for our services.

See details of our Business Companion Service.
About Us top
Simple Accounting Limited offers a cost effective Business Companion service to business owners who use MYOB, Acclivity, Mamut, Xero, Quickbooks or Freeagent.

‘All clients using these software packages can benefit from our support. Visit our website for a look at the resource on offer.’

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