Making Tax Digital – Update July 2020

Things have been a bit quiet about Making Tax Digital and the timescales that had been announced have been delayed and even paused due to the Covid-19 pandemic. However, the government made an announcement on July 21, 2020, and provided some new timelines for going forward with MTD.

What is Making Tax Digital?

Making Tax Digital (MTD) is the government’s plan to make it easier for individuals and businesses to know what tax they have to pay before the end of the year. Businesses will need to submit their tax information to HMRC digitally.

What’s the latest on MTD?

Currently, only those businesses that have had to register for VAT due to reaching the £85,000 turnover threshold, have had to file their VAT returns through MTD. Live pilots have been continuing to be run to help HMRC get the system in place for the remaining taxes.

HMRC are going to be ready to continue with getting all businesses and individuals filing their taxes through MTD starting with those businesses who have voluntarily registered for VAT. From April 2022 all VAT registered businesses will need to file their returns through MTD. In April 2023, all self-employed businesses and landlords with business turnover above £10,000, will need to follow MTD for filing tax returns and they will need to do this quarterly.

How can I get ready for MTD?

Even if you don’t need to file your taxes with HMRC through MTD yet, you can start to get prepared so that when you do need to follow the guidelines, you are already up and running.

1) Start using MTD Compliant software like QuickBooks Online – now.

Keep your accounts on MTD compliant software so that you know the software will be able to file your tax information with HMRC without needing to use bridging software, or change how you do your accounts. This will help to reduce your stress and panic, because by the time you need to file your taxes with HMRC through MTD, you are confident in using the software and already all set up.

2) Get into the habit now of attaching copies of invoices/receipts to your transactions within the accounts software.

Part of following MTD and filing your accounts, is ensuring that you are sending digital information to HMRC – they will no longer accept paper records. You need to have all of your transactions digitally, and have an audit trail for what those items are. You can do this by ensuring that you attach a copy of any invoices/receipts to each transaction in the software. Depending on your accounts software, you can often take photos with the app on your phone/tablet, enter a small amount of information and save it – this then puts the transaction into your accounts and attaches a physical copy of the invoice/receipt to it. You can also use a third party software like AutoEntry which will not only attach a physical copy of the invoice/receipt to your transactions, but it also stores your paperwork digitally for you! By ensuring you are attaching a physical copy of the invoices/receipts to your transactions, you won’t need to store the paperwork, because you will have a copy stored digitally.

3) Keep watching for announcements!

This is probably the simplest of the steps, and the easiest one to do. Keep an eye on our Facebook page and our blog as we will share any further updates about Making Tax Digital so that you know when you need to start following the guidelines. You can find our Facebook page here: https://www.facebook.com/ihelmenterprises.

What expenses can I claim as self-employed?

Question Mark

Now that you have registered as self-employed and your business is up and running, it is very important that you ensure you are keeping track of your sales and expenses.  However, it isn’t as straight forward as keeping track of all the money coming in and going out of the business.  You need to make sure that you are only claiming for those expenses that HMRC recognise as allowable expenses, as otherwise, you could end up with unexpected fines.

There is a lot of information out there about what expenses a self-employed person can claim through the business and the HMRC website does have a pretty comprehensive set of articles on this topic.  I wanted to be able to give business owners an overview of what can be claimed to get them started.  If you are unsure as to whether something can be claimed as an allowable business expense or not, contact HMRC or your accountant or bookkeeper.

For the most part, the majority of business expenses can be claimed on your self-assessment.  There may be some expenses that you enter into the accounts for accounting purposes but then need to discount for tax purposes – ie. Depreciation of assets, entertainment costs relating to clients/suppliers/customers or charitable donations.  The main thing you need to keep in mind is that the expense is “wholly and exclusively” for business use.

Some of the expenses are straightforward to deal with.  You simply enter them straight into your accounts as long as they are for the business.  They include:

  • Stationery
  • Printing costs
  • Postage
  • Advertising
  • Computer software
  • Business premises expenses: rent, utility bills, insurance
  • Staff costs: salaries, NI contributions, PAYE, pension contributions
  • Legal and professional costs: accountants, solicitors
  • Purchase of stock or raw materials and other associated costs
  • Business insurance
  • Membership to trade/professional bodies relevant to your business

There are then some types of expenses that aren’t as straight forward.

Travel:

While you can claim for business-related car/van costs like insurance, fuel and repairs – you would only be able to claim for the business portion and no personal use at all, so you would need to work out exactly what your business use is, which can be difficult to calculate.

Instead, you can use the simplified vehicle expenses from HMRC which is a flat rate per mile.  This would cover your costs for your vehicle.  If you use this method, you do need to keep using it until you have stopped using the vehicle.  In order to claim the fate rate, you will need to track your business mileage and have a record of it.

The current rates are (as of 06/04/2020):
Cars and Goods Vehicles (first 10,000 miles) £0.45p/mile
Cars and Goods Vehicles (over 10,000 miles) £0.25p/mile
Motorcycles £0.24p/mile

You can claim for all public transport costs – but only for the business portion, so if you take a journey that is not “wholly and exclusively” for business, you will need to separate out the business portion.

The same applies to hotels and meals.

It is very important to note that you cannot claim for travel between home and your main place of work.

Clothing:

There are very strict rules when it comes to claiming for clothing and this is down to the “wholly and exclusively” rule.  You can claim for uniforms, protective clothing needed for work, and costumes for actors or entertainers.  If the clothes are not branded with your logo or they could be worn outside of work, you cannot claim these costs on your self-assessment.

Use of Home:

The majority of sole traders work from home and therefore will want to be able to claim for a portion of the household bills.  The easiest way to do this is to use the simplified expenses that HMRC have set-up.  This method can only be used for those who work at least 25 hours or more a month from home.

Hours of business use/monthRate/month
25-50£10
51-100£18
101 and up£26
*these are the current rates provided by HMRC

The other method is more complicated and you would need to calculate out the proportion of business use for your home.

These methods only cover things like gas, electricity, mortgage and council tax.

Telephone and Internet:

There are quite strict rules when it comes to claiming for the telephone and internet use when you are self-employed and work from home.

If the telephone/mobile is used for both personal and business purposes, you can’t claim for line rental and can only claim for business calls if they are identifiable on the bill.  With the way phone packages work nowadays it can be quite difficult to prove what is a legitimate business expense.  A way around it would be to get a completely separate phone line for the business so you are able to claim 100% of the costs.

The same applies to the internet – you need to work out the proportion of the business use and only claim that percentage of the bill. One way is to work out how many hours per month you work from home.  Ie. Monday to Friday 9 am to 5 pm – so 8 hours a day, 5 days a week which is 40 hours/week and 160 hours/month (in a 4-week month).  There are 672 hours in a month, so the percentage of the internet bill you could claim would be 23.81%.

This is only a brief guide to help get you on-track.  If you are unsure about whether an expense is tax allowable, I would encourage you to speak to HMRC or your accountant/bookkeeper.

How do I register as self-employed?

Self-employed

Now that you have decided that you are indeed running a business and you need to register as self-employed; the process is pretty straight-forward. It is important to know that you must register by 5th October of your second year of trading, but it is advised that you register a lot sooner, and preferably within 3 months of starting your business.

To register as self-employed go to https://www.gov.uk/set-up-sole-trader, click on the link within the article, “Register for Self Assessment”, and follow the steps. Once you have submitted the information, HMRC will post out your Unique Taxpayer Reference (UTR) and login details for Government Gateway. After you receive this information, you need to log onto your Government Gateway Account and complete your registration.

You may also need to consider the following:
1) Registering for VAT if your turnover is above the VAT threshold which has been £85,000 since 01/04/2017.
2) Registering for the Construction Industry Scheme if you are working as a contractor or sub-contractor in the construction industry.
3) Registering as an employer if you will be employing staff.

Once you are registered you will need to keep track of all income and expenses for the business so that you are able to file your Self-Assessment Tax Return and pay Class 2 and Class 4 National Insurance Contributions.

To make it easier to keep your business records straight, it helps if you separate them from your personal records. One way to do this is by setting up a separate bank account and/or PayPal account. This will ensure that only business transactions are tracked and make it easier for you to complete your accounts.

The amount of tax you will pay will depend on the profit of the business – this is calculated by subtracting allowable business expenses from your income. You are then taxed on the taxable profit. The tax-free personal allowance for both the 2019/2020 and 2020/2021 tax year is £12,500. After that, you will pay 20% tax up to £50,000, 40% tax on income over £50,000, and then 45% tax on income over £150,000.

Watch for my next blog post which will cover what you can claim as self-employed.

Is it a hobby or am I running a business?

You might spend your time baking cakes for people or making craft items – like decorations – and selling them, but how do you know if what you are doing is just a hobby or if it is a business?

There are several indicators that HMRC have outlined for you to look at and help you to decide if you need to register as self-employed. These are guidelines only and you are responsible for deciding if it is just a hobby or not but be aware that if HMRC thinks you are actually running a business; they will contact you and you may be fined.

One of the main indicators is whether you are buying/making goods with the intention of selling them for a profit. An example would be if you are making a cake and you sell that cake for more than it cost you to make it, that is selling with the intention of making a profit.

Another key indicator is the frequency that you are making and selling the items. Did you make the cake as a one-off or are you making several cakes each week and selling them? If it is the latter, then you are doing this on a regular basis.

What about what you are charging? Have you provided a fixed cost for the cake and the person buying it has agreed to pay that price? If so, then you have actually entered into a contract with that person. This would indicate that you are trading as a business.

Are you responsible for fixing errors with the item in your own time? If you are, then HMRC will see this as another indicator that you are running a business. As you have a contract in place to provide someone with a cake for a set price, that looks a particular way or uses specific colours, if the cake looks nothing like what was expected, the person can ask that you correct the imperfections asap.

Another indicator that you are running a business is whether you are able to hire people at your own expense to help you out or do the work for you or not. If someone has asked you to bake and decorate a cake for them and it needs to be done for a certain date, but you then agree to make a cake for someone else for the same date, you may decide to pay someone to help you to meet both deadlines instead of letting either person down.

If you are still unsure whether you are running a business or it is just a hobby, you can call and speak to HMRC to get further guidance.

Watch out for our next blog post on how to register as self-employed!

(Image by rawpixel from Pixabay)

Making Tax Digital (MTD)

What is Making Tax Digital and how will it affect me?

Making Tax Digital – better known as MTD – is the Government’s plan to make it easier for individuals and businesses to know what tax they have to pay before the end of the tax year.

Eventually, all businesses regardless of size and industry will be required to submit monthly figures to HMRC.

This will need to be done on Making Tax Digital (MTD) compatible software. So, anyone still using cashbooks, Excel or desktop accounting software such as older versions of SAGE 50, will need to move onto compatible cloud-based accounting software.

How will Making Tax Digital (MTD) work?

Everyone will have their own digital tax account that they can log into and check to ensure all the information HMRC hold on them is up to date and correct. HMRC will then use this information to ensure that each person is receiving all the services they should be. The theory is that by the end of 2020, customers will be able to see all their tax liabilities and benefits in one place.

How will Making Tax Digital affect my bookkeeping?

All businesses will have to use a software that is compatible with HMRC’s MTD software to keep their accounts – like QuickBooks Online for example. The software will send the necessary information to HMRC using an API key. All transactions in a business will have to be recorded digitally as paper records will no longer be accepted as meeting the legal requirements.

When will I need to be ready for Making Tax Digital?

At this point in time, only VAT registered businesses with a turnover above the VAT threshold of £85,000 will need to be compliant as of April 2019 and they only need to file their VAT returns. Eventually, all businesses within the UK will be required to file all information – including self-assessments and corporation tax returns – with HMRC using MTD compliant software.

When will Making Tax Digital start?

making tax digital timeline

What should I do now?

As further information is released by HMRC we will update our clients so that they are able to be compliant in time.

Currently bookkeeping clients of Ihelm Enterprises are one step ahead as we only use QuickBooks Online to maintain accounts and the software is MTD compliant.

If you would like to discuss how we can help you with your accounts and become MTD compliant please contact us on info@ihelm-enterprises.co.uk or use the contact form.