Smaller businesses don’t believe that Making Tax Digital (MTD) applies to them, according to a study carried out by Yonder Consulting for HMRC.

While businesses indicated they were aware of MTD for VAT, many still do not understand the process of the scheme and whether their business needs to comply with the rules.

In a second survey, 26% of businesses said they had not yet linked their MTD-compatible software with HMRC’s systems, misunderstanding a fundamental part of the Government’s flagship policy for tax digitisation.

Although all businesses polled are required to use MTD-compatible software, the results vary:

• 36% said MTD would affect their business
• 29% said they were compliant
• 28% believed MTD would not affect their business
• 7% did not know whether they would be affected or not.

A high number of businesses were found to not have invested in software yet. When asked about their preparations:

• 48% had discussed the changes with their accountant
• 17% had purchased a software package
• 54% of firms said they have researched MTD software
• 48% had started keeping digital records.

On the specific requirements for MTD, only 51% of businesses were able to remember a single one, while 12% answered incorrectly and 37% could not think of any requirements.

Contact us to learn more about MTD.

More than half of cryptocurrency investors have limited or no understanding of capital gains tax (CGT) and the associated tax liability on crypto transactions.

Understanding of CGT was mixed, with 34% of owners stating they had a good understanding, compared to 37% who knew little or nothing and 22% who were not familiar with it at all, according to research commissioned by HMRC.

Over two fifths (42%) of cryptocurrency owners were aware that they might be liable to pay when they bought goods and services with crypto, but only 45% thought CGT might be payable and 40% said VAT, according to HMRC.

Cryptocurrency is a decentralised form of finance, which many people purchase for investment purposes, so they are generally in scope of CGT.

Therefore, HMRC has published guidance and advice on the taxation of cryptoassets.

Only three in ten owners (28%) had seen this guidance, however, although the majority (87%) agreed the advice was clear and that it helped them to understand their responsibilities (81%).

Just over half (56%) said they had received information on the tax treatment of cryptoassets from at least one source.

Perhaps surprisingly, respondents noted high levels of contact with HMRC, with 53% of owners saying they had contacted HMRC at least once in the last year, although not necessarily about cryptoassets.

How to reduce penalties for accounting errors.

HMRC recently announced new powers to investigate companies they suspect of evading taxes, so as a business owner, you might be worrying about what happens if your company comes under scrutiny.

Even if you’ve played entirely by the rules, the stress of an investigation can be a lot to deal with, especially after the last few difficult years. However, you needn’t worry – understanding the process will help you and your company deal with the situation and we’ll be on hand to support you throughout.

If, for whatever reason, you come under investigation, here’s what you need to know.

Why are you being investigated?

Just because your business is being investigated, it doesn’t mean you’ve done anything wrong. Some investigations are called entirely at random.

Otherwise, it might be that the sector you work in is facing a lot of scrutiny, as is currently happening with companies selling electronic sale suppression systems.

Alternatively it may be that you filed your tax return late, or that it contained accidental inconsistencies.

Knowing exactly why you’re being investigated by HMRC is a great way to understand the severity of the investigation and how you can best prepare.

Once their investigation begins, HMRC can look into every aspect of your tax affairs. This could mean the tax you’ve paid, your self assessment and business tax returns, PAYE or VAT records and your business accounts.

Preparing such information is highly advised, as we’ll see in more detail later on.

What are the types of inquiry?

HMRC conducts three main types of inquiry. First, there are random checks. As the name suggests, these inquiries can open into the affairs of any business at any time. As long as you’ve kept your accounts up to date and comprehensive, there’s no need for you to worry.

Second, there are aspect inquiries. These inquiries look into one part of your accounts in which HMRC suspect an error may have been made. This could very easily be down to a mistake at the accounting stage, rather than a deliberate attempt to break the rules. A common error is forgetting to include savings income on your tax return.

Lastly, there are full inquiries, which happen if HMRC thinks there is a strong chance your company has made a large scale accountancy error or series of errors. In this case, they could take a look at all accounts, both business and personal, to get to the bottom of the issue.

It’s worth noting that the first two inquiries can turn into full inquiries if HMRC finds major inconsistencies or issues with your company’s accounts.

How does the process work?

If your company is going to be investigated, HMRC will contact you through your accountant, or they might contact you directly by a letter or by telephone.

If you realise there and then that you’ve made a mistake in your tax returns, it’s important you admit it as soon as possible. HMRC will take your honesty into account during their investigations, and trying to cover up errors could end in more serious consequences for you and your firm.

Once the investigation is up and running, investigators might want to visit your company or even your home. Under these circumstances, we strongly advise that you have us present, perhaps suggesting a meeting at our offices instead. The situation can feel quite high pressure, so having the experience and perspective of an accountant can be of great help.

The length of an investigation varies. It may be that HMRC finds everything they need fairly swiftly and are able to promptly draw their conclusions. The length of an investigation can be determined by its range and the speed with which they are given information.

Most investigations that are over quickly have simple explanations. For example, if your income shrank over one month, suspicions can easily be allayed by evidence of illness or injury. But if your case is less easily solvable, the investigation will probably take longer. It will help if you get the ball rolling by replying promptly to any requests for information – you will generally be given 30 days to do so.

It’s important not to feel like you are in grave trouble. Most tax investigations simply end with HMRC informing you if you have paid too much or too little tax, letting you know if there are any penalties.

How far back will the investigation go?

This very much depends on what is being investigated and the extent of their inquiries. If HMRC believes the errors to be innocently made, they can look back at records going back four years. If they decide mistakes are the result of careless behaviour, this can be extended to six years –  with the exception of VAT which is still four years.

If HMRC believes there has been deliberate tax evasion, they can request records going back twenty years.

What are the penalties?

You may find yourself facing a penalty if your tax returns or other documents give the wrong amount of tax owed or if you didn’t notify HMRC they were taxing you at too low a level.

There are several factors that determine the level of penalty you could face:

• if HMRC believe you deliberately evaded tax
• if you notified HMRC about any errors made
• how much time has passed.

HMRC’s penalties come under different categories, depending on their seriousness and how the errors came about.

First, it will apply a penalty based on whether you practised reasonable care in your tax affairs or not. If you’re found to have been negligent in your duties, you can face a penalty of up to 30% of the extra tax due. This is arguably the least serious judgement.

Next, HMRC will determine whether your mistake was a deliberate error. If you made no effort to conceal your fraudulence, the penalty can range from 20 to 70% of the tax owed. If you tried to hide the deliberate error, your penalty can range from 30% to 100%.

If you feel you’re heading for a penalty, it’s possible to reduce it by being cooperative and helpful. Make sure you tell HMRC about any errors you are aware of, let them know how much you think you owe and give them swift and full access to any information they seek.

Deliberately unpaid tax

While we hope this won’t be the case, it might be that HMRC decides you have committed tax fraud. If this is the case, you should ask about their contractual disclosure facility. This gives you the chance to give a full disclosure of any unpaid tax, in return for immunity from prosecution. This only applies to individuals rather than companies.

If you have made genuine errors and want to disclose them, the contractual disclosure facility won’t be the right path to take. Instead, cooperate with HMRC and you’ll probably just be hit with a small financial penalty.

If HMRC ever investigates your business, we’ll be by your side. We’ll give you the best advice and guidance to straighten the situation out. If there’s anything else you need to know about facing a tax investigation, just get in touch.

Talk to us about HMRC investigations.

Spring Statement changes come into effect.

As you may have heard, there are changes happening to National Insurance contributions (NICs).

From 6 July, the new thresholds will come into effect. But what does that mean for you?

As a self-employed worker, you will already pay your National Insurance differently to that of an employee. But now your threshold is changing, you’ll need to know how much by and when.

This article will explain all the changes and what this means for you and your business.

How does National Insurance work?

Before we go into detail about how the new NICs thresholds will affect you, let’s start with an overview of the National Insurance system.

There are different classes of NICs which will vary depending on your employment status and whether you choose to voluntarily pay contributions.

Class 1 NICs are paid by employers and employees. Employees pay Class 1 NICs if they are under the state pension age and earn more than the primary threshold, in the majority of cases. These are automatically deducted by employers.

Class 1A and 1B NICs are paid directly by employers on their employees’ expenses or benefits.

Class 2 NICs are paid by self-employed people earning more than the small profits threshold. If you earn less than this, you can choose to pay voluntary contributions to fill in the gaps in your National Insurance record.

Class 3 NICs are voluntary contributions paid to fill gaps in your National Insurance record. You might need to do this if you are unemployed or earn below certain thresholds.

Class 4 is for self-employed people earning profits above the lower profits limit.

Most self-employed people pay class 2 and class 4 NICs through self-assessment tax returns.

As well as different classes, there are a number of different thresholds based on earnings. For the purposes of this article, though, we’ll focus on the main thresholds at which employed and self-employed individuals start paying NI: the primary threshold for class 1 NICs, the small profits threshold for class 2, and the lower profits limit for class 4.

What’s changing?

As announced in the Spring Statement, both the primary threshold and the lower profits limit are rising from £9,880 to £12,570 as of 6 July 2022, bringing them in line with the income tax personal allowance.

Going forward, the NICs and income tax thresholds will remain aligned.

Aligning these thresholds has been an ambition of the Government’s for a number of years, but the announcement also came ahead of the new health and social care levy, which was introduced in April 2022.

This saw all National Insurance rates, as well as dividend tax rates, increase by 1.25 percentage points. The change is expected to raise £36bn over the next three years to help pay for reforms to health and social care – but it was a controversial decision, increasing taxes for workers when many were already feeling the pressures of rising costs.

In his Spring Statement speech, Chancellor Rishi Sunak insisted “it is right that the health and care levy stays … But a long-term funding solution for the NHS and social care is not incompatible with reducing taxes on working families”.

The £2,700 threshold rise will save employees an average of £330 in National Insurance each year compared to the previous threshold.

The new thresholds for the self-employed

While employees’ National Insurance is deducted by their employer throughout the year, being self-employed means you pay NICs on an annual basis at the end of the tax year.

This means things aren’t as straightforward as implementing a new threshold from July. Instead, the lower profits limit for  class 4 NICs will rise to an apportioned threshold of £11,908 in 2022/23 – allowing for 13 weeks under the previous threshold and 39 weeks at the new threshold.

Taken together with the rate increases, this means self-employed profits between £11,908 and £50,270 will be charged at 10.25% in 2022/23, and anything over £50,270 will be charged at 3.25%.

From April 2023 onwards, the self-employed will be able to earn £12,570 before paying any NICs.

Meanwhile, class 2 NICs liabilities have been reduced to nil on profits between the small profits threshold and the lower profits limit, which will allow individuals to continue to build up National Insurance credits.

To receive the credits, you’ll have to submit a tax return – but if you have no other income that year you won’t have to pay any tax.

How will you be affected?

The main change you can expect to see is a difference in your take home pay.

A higher threshold means you’ll be able to earn more before having to pay National Insurance. From July, the Government says around 70% of NICs payers will be paying less, even with the introduction of the health and social care levy.

The change to class 2 NICs will provide a tax cut for 500,000 self-employed people and is worth up to £165 per year.

That said, actual gains for individuals will be different depending on their circumstances.

For example, if you had annual profits of £20,000 over the 2021/22 tax year, you would be expected to pay £1,097.48 in Class 2 and 4 NICs. With the threshold increase that would go down to £994.31, representing a saving of £103.17.

If you would like to know more about the NICs threshold changes, talking to us for advice is the best next step.

Get in touch about your NICs.

People are unprepared and unenthusiastic for Making Tax Digital (MTD), according to a survey commissioned by HMRC.

Global market research group Ipsos recently released data suggesting “awareness of MTD in general, and MTD for income tax self-assessment (ITSA) specifically was low”.

MTD ITSA will require people with annual business or property income above £10,000 to keep their records and file their returns with specialist software from April 2024.

HMRC claims MTD ITSA will make it easier for people to file their taxes without making mistakes that cost the Treasury billions in lost tax revenue.

But only 38% of respondents agreed that using MTD-compatible software would be easy, compared to 35% who disagreed.

Under half (43%) said MTD would make submitting quarterly returns easy, while almost four in ten (39%) said it would be more difficult.

Similarly, just 34% said a quarterly summary would ease the end of year burden, compared to 42% who said it would become more difficult with MTD.

Ipsos randomly selected 2,200 individuals eligible for MTD for ITSA and weighted the final data to be representative of the MTD for ITSA population.

Andrew Jackson, representing both the Association of Taxation Technicians and Chartered Institute of Taxation, said:

“The survey results suggest the lack of understanding among affected people of what the changes mean in practice.

“The survey results show an alarming lack of readiness and enthusiasm for MTD, fuelled largely by a lack of awareness that MTD for ITSA begins in less than two years’ time.

“The survey adds to our concerns about the lack of available and affordable Making Tax Digital software and the low numbers of businesspeople and landlords signing up to take part in the Making Tax Digital for Income Tax pilot.

“This taxpayer scepticism and overall lack of readiness is combined with a lack of certainty and continuing questions from agents on practical matters.”

He added that HMRC should publish more detailed guidance about MTD to improve awareness about the scheme.

Talk to us about MTD.

The Government’s flagship Covid business recovery scheme officially came to an end late last month (30 June).

The recovery loan scheme opened to applications on 6 April 2021 to help businesses cope with trade lost to the Covid pandemic.

The scheme offered £1.06 billion to small businesses through almost 6,200 facilities, with the latest figures from the British Business Bank showing £822.8 million had been claimed by October 2021.

The Government guaranteed 80% of loans to lenders who lost money to borrowers defaulting on their repayments.

When the scheme first launched, Chancellor of the Exchequer Rishi Sunak said:

“As we safely reopen parts of our economy, our new Recovery Loan Scheme will ensure that businesses continue to have access to the finance they need as we move out of this crisis.”

Announced in Spring Budget 2021, the recovery loan scheme was just one of several business recovery programmes, including the coronavirus business interruption loan scheme (worth £26.29bn) and the bounce-back loan scheme (worth £47.36bn).

Businesses could claim loans between £25,001 to £10m with a capped interest rate of 14.99% until 31 December 2021, although the Government later decided to extend the scheme to the end of June 2022.

The rules were also changed so that businesses could only apply for a maximum loan offer of £2m from 1 January 2022 onwards, while the Government reduced their guarantees to lenders to 70%.

Ministers are reportedly preparing to launch a replacement £3bn-a-year recovery loan scheme to help businesses recover from the pandemic.

The new Government-backed loans will have tighter requirements for borrowers, who will have to offer personal guarantees.

Craig Beaumont, chief of external affairs at the Federation of Small Businesses, said:

“If we head into recession, having a new loan scheme in place in the lending market could prove vital, especially if banks pull up the drawbridge on commercial lending.”

Talk to us about your business.

The Government is increasing the threshold at which workers start to pay National Insurance contributions (NICs) by £12,570 this month – the largest increase in a basic rate threshold.

The increase in the threshold means workers can earn an extra £2,690 before having to pay NICs.

The change also brings the NIC and income tax payment thresholds in parity for the first time.

According to the Treasury, the change equates to a tax saving of over £330 for a “typical employee” and benefits almost 30 million working people.

When Chancellor Rishi Sunak announced the shake-up in the Spring Statement 2022, the NIC threshold was £9,568 and rose to £9,880 at the start of the 2022/23 financial year.

Most individuals will now pay less National Insurance in spite of the increase in rates by 1.25 percentage points.

According to the Government, 70% of those who pay NICs will pay less starting this month (July), while 2.2 million people will be taken out of paying NICs altogether.

Consumer website Money Saving Expert said those earning under £30,000 will pay less National Insurance compared with 2021/22.

Talk to us about NIC changes.

Exploring your options as interest rises.

 Most businesses rely on funding in one form or another to keep their operations running, invest in new equipment or projects, and grow.

The past few years in particular have made it necessary for many businesses to source extra funds, either for dealing with the impacts of the pandemic or the rising cost of supplies.

According to UK Finance, SMEs borrowed a total of £22.6 billion in 2021, with demand for finance stabilising towards the end of the year.

But as interest rates rise, so does the cost of debt, and that’s putting additional pressure on businesses across the UK. As loans become more expensive, you might be wondering about your other options when it comes to financing.

Debt vs equity

You don’t have to choose between debt and equity finance – in most cases, businesses use a combination of the two. But it’s important to know the pros and cons, so you can make sure you’ve got the right mix.

Put simply, debt finance means you’re borrowing the money and will need to pay it back, usually with interest. Equity, meanwhile, means you’re selling a stake in your business to an investor – so they won’t expect you to pay the money back.

Because of this, getting finance through investment means you avoid the problem of rising interest rates altogether. But it does mean you’re giving up a portion of your business – and its profits – to someone else.

Your investor will expect to receive a return on their investment, and they’ll want reassurance you can provide it. This will generally mean you have more reporting obligations to show shareholders your progress, and they may want to influence your business decisions.

Having multiple owners can make processes like selling or closing the business more complicated when you eventually want to leave, so it’s always important to make sure you set up and understand the right formal agreements with them from the outset.

With a loan, meanwhile, you maintain a greater degree of independence from the lender, and full control over your company. Your only obligation is to repay the loan, but once that’s done in full, the lender won’t have any involvement in your business.

That said, having an experienced investor on board can also be an advantage, giving you access to their business knowledge and networks.

Types of debt finance

A common form of debt finance is a term loan. This is a loan you receive as a lump sum, that must be repaid over a set period of time. These can be long or short-term, and may be secured (meaning you offer a valuable asset your business owns as collateral, in case you can’t repay it) or unsecured.

The interest might be fixed over the period of the loan, or variable, so it’ll change over time depending on the bank’s borrowing costs or the Bank of England base rate.

For shorter-term financing needs, you might use a credit card, an overdraft, or another line of credit you can access as and when you need to. You’ll only pay interest on the amount you borrow with these, although there can be fees involved and you’ll pay extra if you miss your repayment date or go over your credit limit.

Besides these two traditional loan options, there are various alternatives to explore, too. Peer-to-peer lending websites, for example, allow people to lend and borrow money through a marketplace-style setup. These can, in some cases, be easier to access than a traditional loan, but they can also come with higher fees and interest rates.

It’s also worth looking into whether any Government loans are available to you. During the pandemic, thousands of businesses accessed emergency relief such as bounce-back loans and the coronavirus business interruption loan scheme, and while these are both closed, you can still apply for the recovery loan scheme until 30 June 2022.

Types of equity finance

If you decide to go down the equity finance route, one option is to seek funding from an angel investor. These are individuals who invest in your business because they can see an opportunity in it – perhaps they have a particular interest in your sector, or in what you’re trying to do.

For later-stage funding, venture capitalist (VC) investors are another option. These are professional investors who’ll want to see a substantial return on their investment, and generally want to be more involved in your business because of this.

VCs will sometimes be incentivised to invest through Government tax relief schemes, including the enterprise investment scheme (EIS), seed enterprise investment scheme (SEIS), or venture capital trusts (VCT).

Equity crowdfunding is another option if you can get enough people interested in what you’re trying to do, allowing you to offer unlisted shares in your business to multiple members of the public. This is often more relevant for consumer products than it is for business-to-business ones.

For certain businesses, particularly within the tech sector, you can also look at development schemes such as incubators and accelerators. These programmes offer investment, but they can also provide resources, mentorship and access to networks.

Finally, a common option for new businesses is to get some initial investment from friends and family. The people closest to you might be the most willing to help you succeed, and to put their money towards your goals – but make sure both sides are clear on what they’re getting into.

Other types of finance

Besides loans and investment, there are some other options to consider when accessing finance for your business.

Government grant schemes may be able to provide support, depending on your location, sector, and business activities. You can find a list of the schemes available on the Government website.

It’s also important to consider how you might be able to save money within your business, either by reviewing and streamlining your costs, or by making the most of the tax relief and allowances available to you.

Tax reliefs are available for research and development projects, for example, or for specific sectors like the creative industries.

You might be surprised by how much you can save by using these and cutting down on your tax bill – so be sure to find out exactly what you can access before making any financing decisions.

Get in touch to talk about financing your business.

Small and medium-sized businesses are underprepared for Making Tax Digital (MTD), according to new research by the Association of Chartered Certified Accountants (ACCA).

Working with the Corporate Finance Network (CFN), the ACCA’s SME tracker showed that 14% of accountants in the UK say their SME clients are “unprepared and will not be ready” for future phases of MTD.

In a survey of 8,900 accountants, 40% said their clients are “partially prepared” but are “not confident they will be ready”.

In comparison, only 22% said their clients are fully prepared for MTD and have the appropriate software set up.

Analysis also revealed a north-south divide between SMEs and their awareness of MTD, with half of London-based advisers saying businesses will be ready, compared to with just 17% outside of London.

MTD aims to remove paper-based filing and currently involves online submission of VAT.

From April 2024, MTD will apply to self-employment and property income over a £10,000 threshold, spelling the end of the self-assessment tax return as we know it, while MTD for corporation tax will arrive no sooner than April 2026.

The SME tracker also found that businesses are underprepared for other tax schemes, which could stump the Government’s plans for the future.

For instance, 42% of accountants said their SME clients have not asked about the ‘help to grow’ scheme or do not know what it is.

Instead, businesses are focused on immediate issues, according to the ACCA, such as tax compliance and access to finance.

Glenn Collins, acting head of ACCA UK, said:

“Government strategies to spur investment for the future are not cutting through with SMEs who seem to be taking a short-term approach, coupled with a belief that schemes are not applicable or relevant to them.

“SMEs outside of London also need a comms boost to ensure they’re part of the levelling up agenda – the Government can do this by working with intermediaries and the UK’s local authority infrastructure.”

Contact us to discuss the benefits of MTD.

Employees who claimed tax relief for working from home during the pandemic may no longer qualify in the 2022/23 tax year as HMRC changes its guidance for the scheme.

During the COVID-19 pandemic, people who could do their normal job at home were required to do so at various times and were allowed to apply for tax relief for the whole year.

The relaxed take on the system remains in place until the end of the current tax year but the rules for eligibility changed on 6 April 2022 now that there are no longer any legal restrictions on going into workplaces.

Tax relief can now only be claimed by workers who must work from home, as opposed to those who prefer to.

As a result, working-from-home tax relief can only be claimed if one of the following applies:

• there are no appropriate facilities for you to work on your employer’s premises
• the job requires you to live so far from the employer’s premises that it is unreasonable for you to travel there on a daily basis
• you are required, under Government restrictions, to work from home.

You may be able to claim for additional household costs when working from home, but only the element of the cost that relates to your work.

Speak to us about claiming tax relief.