The Spring 2013 budget
For small businesses, the most important Budget announcement was probably that, for 2014/15 and subsequent tax years, they will be excused payment of the first £2,000 of employers National Insurance contributions otherwise due. This relief, to be known as the Employment Allowance, will be available to all kinds and sizes of businesses, and to charities, but not, for example, to families employing nannies to work in a private household. Otherwise, very little detail is yet available. For example, presumably there will be rules to stop multiple claims from associated companies, and it is not yet clear whether companies where the only employee is the director-proprietor will be entitled to the Allowance at all.
Cash accounting scheme for small businesses
Another important development, although not mentioned in the Budget Speech itself, is that there have been substantial last-minute amendments to the cash accounting scheme for small businesses, originally announced in last years Budget.
The scheme will give qualifying businesses the option of calculating their taxable profits as cash received less payments made in the year, so ignoring creditors, debtors, changes in stock levels, etc. It takes effect for 2013/14 and, initially, can be used by sole traders and partnerships (but not companies or LLPs) with annual receipts below the VAT registration threshold (currently £79,000).
Two of the principal disadvantages of adopting cash accounting, as it would have worked under the original proposals, have been removed by the last-minute amendments. First, the requirement to claim motoring costs on the basis of a fixed allowance of 45p a mile will no longer apply.
Instead, traders will retain the option of claiming the business proportion of costs actually incurred, as hitherto. Second, the requirement to prepare accounts on a tax year basis has been removed. The significance of this is that the transition from a traditional accounting date to the tax year end would, in many cases, have produced a spike in taxable profits for the transitional year.
There is no rule of thumb to say which businesses might, or might not, benefit from cash accounting. Some trades are anyway conducted on a cash basis, with little or no stock and no trade credit for purchases or sales, so it will make very little practical difference. In other cases, HMRC has said that cash accounting will simplify record-keeping, but we are not so sure. For example, if goods are sold or services supplied without immediate payment, the trader will in any case have to keep copy invoices or other records of sales, in order to be able to chase up non-payers.
As part of our annual review of each clients affairs, we shall be considering whether cash accounting could be beneficial, but we doubt that it will be in very many cases. Alternatively, if you think you would find cash accounting easier or in some way beneficial, we would be glad to discuss the pros and cons with you.
Since the last General Election, the Chancellor of the Exchequer has, in stages, reduced the main rate of corporation tax from 28% to 23%, and in 2011 he reduced the small company rate from 21% to 20%. He has now stated that the main rate will be reduced to 21% in April 2014 and to 20% in April 2015. This generally applies to companies with profits over £300,000 although there are some exceptions.
He has also made it clear that he has no plans to reduce the small company rate and that the final target is that, from April 2015, all companies will pay corporation tax at 20% (subject to some special rules for companies drilling for oil in the North Sea).
Value Added Tax
The VAT registration threshold was increased to £79,000 with effect from 1 April 2013 and the VAT scale charges for taxing the private use of road fuel (on which input tax has been reclaimed) are to be increased by approximately 1.1% with effect from 1 May 2013. Please contact us if you require further details.
National Insurance Retirement Pension
The Chancellor also announced that the single tier State Pension will now come into force on 6 April 2016. In outline, this means that someone reaching State Pension age on or after that date (which means men born on or after 6 April 1951 or women born on or after 6 April 1953) will be entitled to a flat rate pension of £144 a week (plus index-linking from 2013) or, if higher, their accrued entitlement under the existing scheme (including earnings-related additions under S2P/SERPS and the old Graduated Pension scheme). The main drawback to the new scheme is that people reaching State Pension age on or after 6 April 2016 will need to have paid National Insurance contributions for 35 years (or to have qualified for equivalent credits) to qualify for a full pension, rather than the present 30 years.
Accordingly, anyone who will reach State Pension age on or after 6 April 2016, and who does not expect to have paid, or qualified for credits for, 35 years contributions before reaching that age, should consider whether it is worth paying voluntary contributions. To assist them, there are to be some concessions in the rules governing the time limits for paying contributions, and the rates at which contributions are payable.
For 2014/15, the income tax personal allowance will be increased to £10,000, which will reduce the annual liability of a basic rate taxpayer by £112 compared with 2013/14, or by £379 compared with 2012/13.
Buying an annuity
When people who have saved for their retirement in a personal pension plan or similar arrangement wish to start drawing their benefits, they usually do so by way of using the majority of their pension fund to buy an annuity. The Government, the newspapers and the independent money advice agencies all stress that such individuals should not simply take the annuity offered by the life assurance company or other financial institution currently holding their pension fund; rather, it is said, they should use their open market option to shop around and see if another institution is offering a better annuity rate (the amount of pension which can be bought for each £1,000 in the pension fund).
However, there are four traps, which mean that a higher headline annuity rate may not necessarily mean a higher pension:
The incredible shrinking pension fund
Firstly, at retirement the institution with which the individual has been saving will quote a fund value and an annuity rate. It seems obvious that the individual will get a better deal by buying his annuity from another institution if it offers a higher annuity rate. But in fact, it is commonly the case that the institution with which the individual has been saving will charge a substantial fee for transferring the fund to another institution, or alternatively reduce or withhold a terminal bonus. These adjustments are not always clearly explained in advance, so it is very necessary to establish exactly how much will be available for annuity purchase if the fund is transferred to another institution – otherwise, you may well lose more on the swings than you gain on the roundabouts.
Dont make a mistake with the date
Another potential trap is that institutions may also make substantial adjustments where the pension fund is not transferred on the default retirement date specified by the policy – especially, where it is transferred a few days early. Therefore it is important to know the institutions exact requirements and to follow them precisely.
Remember to claim what’s yours
Thirdly, hidden away in the small print of some older pension plans (especially those taken out before about 1990) is the option to take a pension calculated according to a set formula – effectively a guarantee to pay a stated minimum pension. Originally, such guarantees were not particularly generous, but now that interest, and therefore annuity, rates have fallen to historic lows, these guaranteed pensions are often far higher than anything that can be bought on the open market. However, because they are technically an option, not all institutions feel obliged to remind their savers that the right to take a guaranteed pension exists, and so in the first instance they may simply quote their standard, current annuity rate – and may even recommend the saver to explore his open market option!
A related point is that entitlement to the guaranteed pension is often conditional upon taking the pension at a fixed date – usually the default retirement date specified by the policy. We would strongly advise anyone with a pension plan to see if it promises a guarantee and, if it does, to make a prominent reminder to self of the date by which it must be claimed. A lot of money could be at stake.
In sickness and in wealth
Finally, there is the delicate question of enhanced or impaired life annuities. Basically, the principle is that the institution is willing to pay a higher annuity because the annuitant health or lifestyle is such that his life expectancy is less than average. It is not necessary to be seriously ill all kinds of factors may be taken into account, for example high blood pressure (even if controlled by medication), moderately heavy drinking or even the postcode in which the annuitant lives.
Simply smoking ten cigarettes a day may bring an enhancement of 30 per cent. In fact, it is thought that one in three people looking to buy an annuity qualify for an enhanced, impaired life annuity. But each institution has its own criteria and enhancement rates, so it is necessary to compare like with like, by obtaining quotations for your own circumstances, rather than simply comparing the headline, advertised rates for the healthiest individuals.
…and there is an alternative
As already mentioned, interest and therefore annuity rates are at an historic low, so it could be said that now is the worst time ever to be buying an annuity. The alternative is to take pension drawdown – essentially, not buy an annuity but withdraw an equivalent amount from the pension fund each month or quarter. The drawback is that charges are incurred and it may be difficult to arrange drawdown if there is less than, say, £50,000 in the pension fund. If drawdown is taken, it will always be possible, at a later date, to use the remaining fund to buy an annuity, for example when annuity rates improve.
Employing family members
There is a band of earnings which are subject to nil rate National Insurance Contributions and this apparent contradiction in terms means that no contributions are payable, by employee or employer, but the employees contribution record is still franked for pension and Social Security benefit purposes. For 2013/14, the nil rate band runs from the lower earnings limit of £109 a week (£473 a month) to the Secondary Threshold (the point beyond which employers contributions become payable) of £148 a week (£641 a month).
Where family members work part-time in a family business, it is important to remember that worthwhile pension rights can be accrued, at no cost, by paying them a salary just over, rather than just under, the Lower Earnings Limit. If you are already doing this, watch that the Lower Earnings Limit rises slightly each April – this year from £107 to £109 a week – so you must remember to increase wages accordingly.
If you are not already franking the contribution records of family members, consider whether you should start, bearing in mind that – as explained on the second page of this newsletter- people reaching State Pension age on or after 6 April 2016 will need a 35 year contribution record to qualify for a full National Insurance pension.
Real time information
Earlier this year we upgraded our payroll software to meet the Real Time Information (RTI) requirements taking effect from April 2013. In a nutshell, these new requirements require an RTI submission to be made electronically, giving details of payments to be made to employees in advance of those payments being made.
There are also additional RTI submissions required for those limited company employers who are subject to the CIS deduction scheme in respect of income from their customers. As these submissions are to be made in real time it is now essential that payroll processing is accurate so that the submissions are correct.
It also means that the payroll has to be processed before payments are made to employees, including limited company directors and, therefore, if payments are drawn on a monthly basis, the payroll must be run each month. Clearly, where there are weekly paid employees timing becomes more of an issue with the RTI submission having to be made each week and some employers have persuaded their weekly paid employees to switch to monthly payments to minimise the increase in payroll processing costs as a consequence of the introduction of RTI.
The publicity regarding the introduction of RTI concentrated on the need for this information in order for the new universal credit system to work. One side effect of RTI is that HMRC will know on a monthly basis how much they should be receiving from employers in respect of PAYE and NI deductions made through the payroll system. It will be interesting to see if this information is passed through to the HMRC debt collection team in order that they will know exactly how much should be paid, which currently they can only determine at the end of each tax year. It will also make the calculation of the penalties that were introduced a couple of years ago by HMRC for late payment of PAYE and NI deductions far easier for HMRC and we would anticipate an increase in the imposition of these penalties where employers do not pay by the correct date.
Personal service companies – IR35
HMRC have created new specialist teams based in Croydon, Edinburgh and Salford following on from the business entity tests introduced last year and mentioned in previous newsletters. The approval by directors of the annual employers return (P35) confirms that the IR35 rules do not apply to their company, however, it is still incumbent upon those directors to assess whether or not their contracts do fall within the IR35 regime.
If any director is concerned about their status and the likelihood of being assessed by HMRC as high risk, please contact us for further information.
As part of our Sage Accountants Club professional membership we receive regular updates on software developments from them; two recent communications concerning the support given to users of their software cause concern for our clients. The first was a notice that they will shortly be withdrawing support for companies using the 2010 version of the Sage account system. The second is linked to the announcement that Microsoft will withdraw support for Microsoft XP in 2014 and as a consequence Sage will follow suit.
While it is understandable that software developers will wish to limit their support operations to software sold within a reasonable period, in our view these announcements seem to be rather premature and we would have hoped that support would be offered for a longer period than that suggested here. This is especially true where companies charge for their support; however it is possible that they believe they can make more money by selling upgrades than offering support for previous versions of their products.
Some clients are looking to avoid the regular costs of upgrading their in-house accounting software by moving to online accounting. Effectively your accounting data is input to an accounting system accessed through the internet (in a similar way as online bank transactions are managed) and a monthly fee is paid. There are pros and cons to these systems and we should be happy to discuss this further if you wish.
Fuel only rates
Where an employer provides a company car, but the employee pays for the fuel, the employer may pay a mileage allowance for business journeys. HMRC accepts that payments not exceeding the advisory fuel rates are reimbursements of expenses, not subject to income tax or Class 1 National Insurance contributions.
The advisory fuel rates (AFRs) are now reviewed quarterly and the AFRs for journeys taking place on or after 1 June 2012 are as follows (old rates in italics):
|Rate per mile|
|* Including petrol hybrid cars|
|Up to 1400cc||15p||15p||10p||11p|
|1401cc to 2000cc||18p||18p||12p||13p|
|Rate per mile|
|Up to 1600cc||13p||12p|
|1601cc to 2000cc||15p||15p|
These rates may be used to reclaim input VAT in respect of fuel used for business journeys (remembering that VAT receipts to cover the amount claimed are required).These rates are scheduled to change quarterly and the current rates can be found on the HMRC website.