The Taxman is concerned that many small businesses are not keeping adequate records to support the entries on their tax returns. To encourage better record keeping he is taking a carrot and stick approach.
The carrot encouragement comes in the form of a number of new HMRC leaflets, and an online tool www.businesslink.gov.uk/recordkeepingcheck designed to help small businesses decide what records they must keep. These tools and leaflets contain quite a lot of jargon words and phrases, so we would recommend discussing your requirements with us.
The stick is a letter he is about to send to 50,000 small businesses, advising that they may be subject to a detailed records check.
Only a minority of these businesses will actually receive a visit from the Tax Office compliance check unit, and those visits will normally be arranged in advance. However, if your business is visited and your records are found to be inadequate you may receive a penalty of up to £3,000, which cannot be suspended even if you promise to keep better records in future.
In addition to the 50,000 letters being sent about keeping business records, the Taxman is writing to 12,000 self-employed people who claim Tax Credits, to check whether they have been understating their income.
As a self-employed person you can claim Child and Working Tax Credits just like an employee, but your self-employed income is likely to be more variable than a regular wage or salary. If the income from your self-employed business has fluctuated wildly during the past recession, you may well get one of those letters from the Taxman. You will be asked to supply evidence of your income, which will normally be your business accounts and possibly bank statements. We can help you compile the information requested.
The Taxman is also getting serious about tackling those who deliberately cheat the tax system, as opposed to those who make careless mistakes.
He is targeting individuals and businesses identified as deliberate tax cheats since April 2009, and will regularly monitor all aspects of that person's tax affairs. This will involve asking for further information to support figures on tax returns, and possibly making unannounced visits to business premises.
The monitoring will continue for two to five years, or as long as the Taxman thinks the person is a tax risk. Initially, about 900 people will soon be informed they are included in this monitoring scheme but this number may well increase in time.
The VAT flat rate scheme for small businesses is generally straight-forward to operate, but here are a few traps to watch out for.
You will be aware that the standard rate of VAT increased to 20% on 4 January 2011. The flat rates used by traders in the flat rate scheme to calculate the VAT to pay to HMRC also changed from that date. Did you remember to apply the new rate for your business sector? Check whether you applied the correct flat rate from 1 January 2010 to 3 January 2011 when the standard rate of VAT was 17.5%, and from 1 December 2008 to 31 December 2009 when the standard rate was 15%.
You need to apply the flat rate for your business sector to all your business income, including income that is exempt from VAT such as rents. If you are self-employed and operate your VAT registered business in your own name, any income from property you let in your own name must also be subject to the flat rate scheme.
This applies whether or not you consider the lettings to be part of the VAT registered business. If you run your VAT registered business through a company and hold the let property in your own name, the flat rate scheme operated by the company will not include your rental income.
If you receive interest in your business as a core part of your business activities that interest should be included in the turnover to which you apply the flat rate. This could apply to businesses who handle large sums of money on behalf of clients and keep a share of the interest as part of the deal. However, where the interest is received as a passive activity, such as on a current or deposit account it is outside the scope of VAT and should not be included in the sum to which you apply the flat rate.
If you haven't made a Will, you should do so without delay. If you don't have any relatives you want to leave your estate to, consider making a Will that leaves most of your assets to specified charities. This avoids the potential problem of intestacy (dying without a Will), and saves tax as gifts to charities are free of inheritance tax. However, there are two traps to avoid:
Many charities have merged or changed their names in the recent past, so when it comes to distributing the estate according to the Will, it may be difficult to work out exactly which charity you intended the funds to go to. To avoid this problem make sure your Will states the charity's registered office and charity number. You can also include a clause in your Will specifying that the gift should be directed to any organisation that amalgamates with the original charity.
The second problem can occur where the charity has been left an undefined amount in your Will, such as the residue of your estate. This can lead the charity's officers hassling the executors, querying deductions such as legal fees and in extreme cases challenging the distribution of your estate in Court. To avoid this problem leave specified amounts of cash or assets to your chosen charities rather than the amount left over after other gifts have been made and any tax paid.
Q. I've been told I will have to pay all my business taxes online very soon. How can I do this if I don't have internet banking?
A.It will be compulsory to pay corporation tax electronically from 1 April 2011, and to pay all VAT due electronically from 2012. However, there are no plans to make all PAYE or CIS payments electronic, yet. Electronic payments include direct debits, debit and credit card payments. You don't have to have internet banking, you can set up electronic payments with your bank by using telephone banking.
If you would rather pay your tax bills by cheque you can do so using a Bank Giro payslip at your own bank branch. This counts as an electronic payment, as do similar payments made at the Post Office counter by cheque, cash or debit card. You need to order the Bank Giro payslips specific to your business from HMRC.
Q. My rental property makes a profit of £2,400 a year. I checked the HMRC website and it says I don't have to complete a tax return. Does that mean I don't have to pay tax on my property profits?
A. Although the HMRC website (www.hmrc.gov.uk/sa/need-tax-return.htm) says you don't have to complete a tax return if your income from property is less than £2,500, you should scroll down and read the text under 'Things to check if you don't need a tax return'. This makes it clear that you must tell the Tax Office about any new sources of income. The deadline for reporting new income is 5 October following the tax year in which the new income first arose. If this date passed sometime ago you need to contact the Taxman as soon as possible and declare all your income and expenses relating to your let property. The Taxman may decide to charge you a penalty for failing to declare your income at the right time.
You do have to pay tax on your property profits, but if the amount owing is small compared to your salary, it may be deducted through your PAYE code. In this case you don't need to complete a tax return each year, but without an annual tax return the Taxman will not know to vary your tax code if your rental profits increase or decrease.
Q. I try to run my business on green principles so all the company cars are hybrid petrol/electric models. But I've heard that the car benefit is going to increase for all these cars from April, how is this going to affect my employees?
A. The good news is where your hybrid cars have CO2 emissions levels of 120g/km or less, the taxable benefit will remain at 10% of the list price. The tax increase will only apply to cars with higher CO2 emissions. Hybrid petrol/electric cars in this category currently get a 3% reduction in the percentage of list price that forms the basis of the car benefit charge for employees. From 6 April 2011 that discount will be removed, and the regular 1% increase in list price percentage will apply to all cars. For example the taxable benefit for a hybrid car with CO2 emissions of 179g/km is currently 21% of the list price. From 6 April 2011 the benefit for this car will increase to 25% of its list price.
19/22 - PAYE/NIC and CIS deductions due for month to 5/3/2011
31 - Last minute tax planning for the 2010/11 tax year. Ensure you use up all exemptions to which you are entitled.