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Month: May 2022

More disclosure on the cards for businesses

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A downside to running a limited company is that financial information is publicly available. However, micro-entities and small companies do not have to file a profit and loss account, so available information is somewhat restricted. This situation is set to change.

The information currently filed by a micro-entity at Companies House can be as little as just three figures: total fixed assets, current assets and current liabilities. If a company provides services, with profits largely withdrawn as remuneration, these figures might all be negligible.

Thresholds

For a company to be classed as either a micro-entity or small company, it needs to be below any two of three thresholds for turnover, balance sheet total (total of fixed and current assets) and average number of employees:

Micro-entity Small company
Turnover £632,000 £10.2 million
Balance sheet total £316,000 £5.1 million
Employees 10 50

A company can continue to qualify under either definition if it temporarily fails to meet the criteria for just the one year.

Changes

The key change in the government’s white paper, Corporate Transparency and Register Reform, published in February ­– setting out its final position on reform ahead of introducing legislation – is that micro-entities and small companies will have to file their profit and loss account. This means that sensitive commercial information will be readily available to a company’s competitors. Employees, customers, family members and any other interested parties will also be able to see how profitable a company is. In addition, small companies:

  • will lose the option of preparing abridged accounts, so a full balance sheet will be required; and
  • will have to file a directors’ report.

Although it will be some time before the extended filing requirements come into effect, they are an additional consideration when setting up a new business or deciding whether to incorporate an existing business.

Companies House accounts guidance can be found here.

Photo by Polina Silivanova on Unsplash

Zero rated food confusion

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The distinction between zero-rated food and standard VAT confectionery is a crucial, and complex, one – not helped by what may appear to be apparently arbitrary rulings. Despite its predecessor losing a notorious ruling over the zero-rating of Jaffa Cakes more than 30 years ago, HMRC refuses to give ground on marginal cases. The latest target was the simple flapjack.

As an example of the complexity, tap water is zero-rated, but a bottle of water is not (although a bottle of milk is). It ‘logically’ follows that ice is zero-rated if made from tap water, but not if from bottled water – although good luck telling the difference. Baked goods are a similar minefield.

Flapjacks

There might be little obvious difference between a flapjack and a cereal bar, but flapjacks benefit from zero-rating, being classed as cakes, simply because they were around first. The more recent cereal bars are classed as VAT-able confectionery.

Not surprisingly, HMRC is not at all happy with the distinction, and define flapjacks as narrowly as possible.

  • HMRC only allow zero-rating of ‘standard’ flapjacks, along with minor variations, such as the addition of dried fruit or chocolate chips.
  • HMRC will not accept any alteration to a flapjack that takes it into the category of being a cereal bar.

In two cases, HMRC pursued these distinctions to the detriment of the companies involved.

Glanbia Milk

This company was recently on the wrong side of a First-Tier Tribunal decision. Compared to a ‘standard’ flapjack purchased in a cafe or at a supermarket, the flapjacks produced by Glanbia Milk had fewer calories, about 10 times less sugar, and very low levels of fat. The products were not baked like traditional flapjacks, and contained significant amounts of protein, an ingredient not traditionally associated with cakes.

DuelFuel

This small start-up has hit a similar problem with its range of flapjacks and protein cake bars, and may have to close as a result. HMRC is not permitting zero-rating for their products because of issues similar to the Glanbia Milk case. Based on the taste, texture, ingredients, packaging and marketing, the products produced by DuelFuel are not considered to be cakes.

If you are tempted to embark on a baking career, be warned. HMRC guidance on the VAT treatment of food products (VAT Notice 701/14) can be found here.

Photo by Denny Müller on Unsplash

 

Small business: double hit from rising prices

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Rising prices hurt just about everyone, but small business owners face a double hit: the impact on their own spending power, but also less revenue coming in from cash-strapped customers.

The volume of retail sales fell 1.4% in March, with spending on food dropping by 1.1%. These are the first signs of the effect of high inflation, which for March was measured at 6.2%.

Managing your spending

The well-publicised drop in the number of streaming subscriptions is just one example of how household budgets are being slimmed down to cope with the cost-of-living crisis. Suggestions from government ministers to change shopping habits to own brand items may not have been well received, but there are other potential ways to make much larger short-term savings:

  • At the immediate personal level, cancelling or suspending gym memberships and other exercise-related subscriptions could produce valuable savings.
  • If you have time on your side, regular personal pension contributions can be put on hold or revised down until your finances are back to some sort of normality. Although it is also possible to opt out of workplace pension contributions, this is generally not advisable because the free employer contributions will be lost.
  • If you are facing serious difficulty, it might be possible to temporarily stop or reduce monthly mortgage repayments. The decision will depend on the lender and mortgage contract and is not a decision to be taken lightly.

Business owners

Some small business owners may have actually seen improved sales, with the amount spent on DIY and furniture increasing. However, most retailers will need to ensure their prices remain competitive to retain customers who are trimming household spending and cutting products seen as superfluous.

For small businesses providing services on credit, managing cashflow is essential, especially as clients might be tempted to delay payment for weeks or even months. The human touch is always important, and any potential non-payers need to be dealt with swiftly and decisively.

And of course, the business’s own costs need to be kept under review, especially fuel costs in the coming months. Budgeting for increased prices needs to be factored in to your planning.

If you’re walking this tightrope, the MoneySavingExpert website has a useful cost of living survival guide across a range of issues which can be found here.

Photo by Joshua Rodriguez on Unsplash

Sharp rise in higher rate taxpayer numbers…….

Written by admin on . Posted in Employment Tax, Income Tax, IR35, self-assessment, Self-Employed, Tax, Wealth. No Comments on Sharp rise in higher rate taxpayer numbers…….

……and if that’s you, then advice is now more important than ever.

There was once a time when paying tax at more than the basic rate made you a member of a somewhat select club. In 2010/11, the first year in which additional rate tax was introduced, the proportion of taxpayers who were taxed at more than the basic rate was 10.4%.

Five years later, a dose of austerity pushed the figure close to 16%. Then it began to drop as higher rate thresholds were raised, so that by 2019/20 it was down to 13.6%. From that low, the upward path was resumed.

Alongside the Chancellor’s Spring Statement in March, the Office for Budget Responsibility (OBR) issued estimates that the freeze in the personal allowance and, outside Scotland, and basic rate bands through to 2025/26 will mean by that year almost 19% of taxpayers will be liable for higher rate tax.

The number of taxpayers will also be increasing too because of the personal allowance staying at £12,570. The rising taxpayer numbers explain why the Chancellor could announce a 1p cut in basic rate tax in 2024/25 at the same time as the OBR calculated that income tax revenue for the year would increase by £12 billion. Scotland already has a starter rate of 19%.

If your head is spinning from all the numbers, there is a simple message you: you are likely to pass more of your income to HMRC in the coming years. To limit just how much extra the Exchequer gains and you lose, there are plenty of actions to consider wherever you are in the UK:

  • If you are married or in a civil partnership, make sure you are maximising the benefits of independent tax and, if you are eligible, claiming the transferable marriage allowance.
  • Check your PAYE code – it could be wrong.
  • Ensure you are claiming full tax relief on the pension contributions you make. Do not assume this will be given automatically, especially if you pay higher rate tax.
  • Consider an ISA first for any investment as it is free from UK income tax and capital gains tax.
  • Choose any employee perks with care. Some are highly tax efficient, while others carry a heavy tax burden.

Remember that if you are or likely to become a member of the ever-expanding higher rate taxpayer club, the value of taking independent financial advice rises with your tax rate.

Source: ONS data, OBR projections.