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From the 2013-14 tax year, the HMRC has introduced Simpler Income Tax reporting for small self-employed businesses.
To qualify, you need to be a sole trader or a partnership of individuals with an income of £81,000 or less.
This amount is the current threshold for compulsory VAT registration but, if you are voluntarily VAT-registered, so long as your income is below £81,000 you are still eligible to use the scheme.
Limited companies and limited liability partnerships cannot use Simpler Income Tax reporting.
There are two aspects to Simpler Income Tax reporting – using Cash Basis Accounting and Simplified Expenses.
Cash Basis Accounting
Traditionally, income and expenses reporting on your Self-Assessment Tax Return has been under the ‘Accruals’ method. This means that you record your income as you raise an invoice to a customer and you record your expenses when you receive a bill from a supplier.
The Cash Basis allows you to report on your Self-Assessment Tax Return based on the money that has come into and has been paid out of the business. Money in this context means all forms of payment including cash, card payments, cheques, PayPal, etc.
The potential advantage to a small business is that, at the end of the tax year, you will not have to pay Income Tax on invoices that you have raised in the tax year but that have not been paid.
From the 2013-14 tax year, you have the option to use either method. You don’t have to use the Cash Basis and we would only advise you to do so if it suits your business.
However, if you decide to convert from the Accruals Basis to the Cash Basis, we would advise that you seek professional advice to ensure that you don’t end up paying tax on the same transaction twice.
As your business grows, you can stay in the Cash Basis scheme until your income reaches £162,000 in a tax year. Thereafter, you would need to use the traditional Accruals Basis.
There are some specific types of businesses that are not allowed to use the Cash Basis scheme that include:
• Lloyd’s underwriters
• Farming businesses with a current herd basis election
• Farming and creative businesses with a section 221 ITTOIA profit averaging election
• Businesses that have claimed business premises renovation allowance
• Businesses that carry on a mineral extraction trade
• Businesses that have claimed research and development allowance
• Dealers in securities
• Ministers of religion
• Intermediaries treated as making employment payments
• Managed service companies
• Waste disposal companies
• Cemeteries and crematoria
Simplified Expenses
From the 2013-14 tax year, Simplified Expenses allows a small business to use Flat Rates for certain categories of business expense rather working out your actual business expenses which can involve more complex calculations.
You can use Flat Rates for any or all of these expenses:
• Business costs for vehicles
• Business use of your home
• Private use of business premises as a home
All other business expenses need to be calculated in the usual way.
Business Costs for Vehicles
For vehicles, the Flat Rate replaces the actual amounts spent on fuel, repairs and servicing, insurance, licences, etc. and, therefore, the need to allocate these amounts between business and personal use.
The Flat Rate for Cars and Goods Vehicles is 45p per mile for the first 10,000 business miles and 25p per mile for any additional business mileage.
The Flat Rate for Motorcycles is 24p per business mile.
You will need to keep a log of the number of business miles travelled but this replaces the need to keep a track of the running and repair costs of the vehicle.
You do not need to use the Flat Rate for all your vehicles but, if you chose this method for a vehicle, you must continue to report this way whilst this vehicle is used for your business. In addition, if you have already claimed Capital Allowances for a vehicle, you are not allowed to use the Flat Rate.
The remainder of your business travel, such as train fares, would continue to be reported in the usual way.
Business Use of Your Home
This offers a Flat Rate based on the hours you work from home each month rather than calculating the proportion of the actual costs, such as utility bills, telephone, internet, etc., between personal and business use and applies if you work from home for twenty-five hours or more per month.
For the 2013-14 tax year, the Flat Rates per month are as follows:
25 to 50 Hours – £10.00
51 to 100 Hours – £18.00
101 or More Hours – £26.00
Private Use of Business Premises
A small number of businesses use their business premises also as their home. Guesthouses, Bed & Breakfast accommodation and small Care Homes are prime examples.
In these cases, some of your business premise expenses will be for personal use.
Under Simplified Expenses, you deduct a Flat Rate for private use from the overall running expenses and this Flat Rate depends on how many people use the business premises as a private home.
Again, the advantage is that you don’t have to work out the split between your private and business use of these expenses.
For the 2013-14 tax year, the Flat Rates per month are as follows:
1 Person – £350.00
2 People – £500.00
3 or More People – £650.00
Please note that the Flat Rate does not cover Mortgage Interest, Rent, Council Tax or Rates and you would still need to work out the business and personal proportions of these separately.
As with Cash Basis Accounting, Simplified Expenses is optional and, again, we would only advise you to do so if it suits your business.
At CooperFaure, we have extensive knowledge of personal tax matters. If you have any questions on your circumstances, please contact welcome@cooperfaure.co.uk to arrange a free consultation.
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