Author Archives: Kevin Cornford

VAT Basics

VAT – The Basics

In a rolling 12 month period, if a business makes over £85,000 worth of taxable supplies (sales of goods or services), it is legally obliged to register for Value Added Tax (VAT). The business must then charge VAT on its future taxable supplies and submit returns to HMRC.

It is also possible to voluntarily register for VAT, which can be beneficial in some cases.

What is a VAT return?

Put simply, a VAT return is a tax form specifically used to declare how much VAT is due to be paid or reclaimed from HMRC for a given period. VAT returns show

  • the total sales and purchases for the specified period,
  • how much VAT is owed on the sales (Output VAT), and
  • how much VAT to reclaim from purchases (Input VAT).

Even when there is no VAT to pay or reclaim for that period, there will still be a requirement to submit a return.

When do I file my VAT return?

VAT accounting periods can either be monthly, quarterly or annually. At the end of each VAT period, a return is prepared and usually needs to be received by HMRC within 5 weeks of the period end.

Once registered for VAT, you can set up an online VAT account which enables you to submit returns and check the filing and payment dates.

The VAT return and payment must be received by HMRC by the due date, so you should check how long it takes for your preferred payment method to clear in their bank account. For example, if you choose to pay by direct debit, make sure the money is in your account to transfer five days before collection date as this is how long it takes to process a first-time direct debit procedure.

How do I calculate my VAT returns?

The VAT bill you pay equates to the amount of VAT due on sales (Output VAT) minus the amount of VAT you’re liable to claim on what you’ve purchased (Input VAT).

If the amount you reclaim turns out to be higher than the amount due, you’ll get a VAT refund from HMRC.

How do I do my VAT return?

VAT returns must be submitted electronically. A Government Gateway account is required and this can be setup once VAT registration has been accepted. Currently the VAT return can be entered online through the HMRC website.

The Government remains committed to the roll out of Making Tax Digital (MTD) which is scheduled to take effect from April 2019. This means that it will be a requirement for most VAT registered businesses to report VAT returns digitally thereafter.  ‘Digital’ excludes manual books, records and spreadsheets and so it will be necessary to use a designated software package to prepare and submit VAT returns to HMRC.

Rates of VAT and what you can claim VAT back on

There are different rates of VAT. Standard rate VAT is charged at 20%, reduced rate is 5%, and Zero rate is 0%. There can also be supplies which are exempt or outside the scope of VAT altogether.

In order to reclaim input VAT, all purchase invoices must be addressed to the VAT registered entity as detailed on the VAT registration certificate.

Not all purchases qualify for reclaiming input VAT. For example, VAT is not normally reclaimable on the purchase of a car and is never allowable for non-business expenditure.

There can be significant potential penalties for incorrect VAT returns. For an undeclared error, you could expect to pay a 15% surcharge.

Flat Rate VAT scheme

If your turnover is £150,000 or less, excluding VAT, you can apply for the Flat Rate scheme. With this in place, VAT liabilities are calculated at a fixed rate depending on the nature of the trade. This can be an advantageous scheme as it can greatly reduce the administrative burden of VAT accounting.

However, under the Flat Rate Scheme it is only possible to reclaim input VAT on capital expenditure exceeding £2,000 (including VAT).

For example if the VAT flat rate was 10%, on an invoice of £120 (£100 + VAT) the VAT liability payable to HMRC would be £12, leaving a balance of £108. As mentioned above, no further deduction is available for input VAT suffered on everyday running costs.

Please bear in mind that where a business spends very little in the course of its trading, the new limited cost trade rules may apply, resulting in a VAT flat rate of 16.5%.

Accrual Basis vs Cash Basis

Accrual Basis – VAT accounting on the accrual basis requires a business to declare all output VAT on invoices which have been raised during the VAT period. This is regardless of whether the invoice has been paid or not by the customer. This can leave businesses at a cash disadvantage as VAT may need to be paid over to HMRC before it has been received.

On the other hand it does enable the business to reclaim VAT on any purchases dated within the VAT period, again even where the suppliers have not been paid.

Cash Basis – VAT accounting on the cash basis only requires a business to declare output VAT on invoices that have been paid by customers during the VAT period. Thus avoiding the potential cashflow disadvantage described above.

Similarly input VAT may only be reclaimed where the invoice was paid during the VAT period.

Businesses are eligible to use the cash accounting scheme only if VAT turnover is less than £1.35M per year.

VAT returns with Kelsall Steele

To talk about VAT and your business, please don’t hesitate to get in touch. We’re available on 01872 271655 or at


Making Tax Digital

Making Tax Digital: New Timetable

HMRC have announced significant changes to the timetable for the implementation of Making Tax Digital. We have previously written about HMRC‘s original plans for the implementation of Making Tax Digital, which would have come into effect from April 2018 for a number of businesses and landlords with gross income exceeding the VAT threshold (currently £85,000), and April 2019 for those below the threshold – however these timescales have now been relaxed.

Following HMRC’s newly reformed timetable, only VAT Registered businesses will be required to keep digital records from April 2019 – and only for VAT reporting purposes. The previous requirements for the reporting of other taxes quarterly to HMRC will not come into effect until at least 2020. This means businesses and landlords with turnovers below the VAT threshold will have at least 2 years before having to adopt a new digital system.

While the Government and HMRC are wholly supportive of MTD and the need to move to a more modern and streamlined system for the reporting of businesses tax affairs this is a significant slackening in the more imminent timescales that were previously expected. These changes have been well received by businesses and software providers alike who both recognise that more time is required to be able to make a comfortable transition to a new digital system of working.



Self-employment Business start-ups – FAQ

Self Employment FAQ

Starting-up in business, becoming self-employed, can be a bit of a daunting process, especially if you are not sure of some of the steps you need to go through. There are a few ‘hoops’ you need to jump through so we have put together a few basic pointers for those who are thinking of making that move in self-employment.

We can help you at every step of the way, so please feel free to contact us if there is anything you would like further information on or help with.

  1. Do I need to tell HMRC?
    • You will need to register as self-employed with HMRC and the easiest way to do this is online at Tell them as soon as possible after your self-employment begins.
  2. What will they ask me?
    • Your National Insurance number, address, date of birth and details of the business including nature of the business, date it began trading and your business address. If you have previously registered as self-employed you would have had a 10 digit unique taxpayer reference number. They will ask for this if you have it.
  3. Do I need to register for VAT?
    • You only need to register for VAT when your sales exceed £83,000 in a rolling 12 month period. However, you may wish to voluntarily register to enable you to claim back the input VAT on your expenses. This does mean you have to charge output VAT on your sales so it’s only advisable to voluntarily register if this will not affect your competitiveness e.g. if your customers are VAT registered and can reclaim the VAT you charge them.

Don’t forget that if you become VAT Registered you will need to file VAT Returns online with H M Revenue & Customs. You will need to create a Government Gateway account and register to file VAT Returns online. Make sure you allow enough time for this process before your first VAT Return becomes due!

  1. Do I pay myself a salary?
    • No, the money you draw from your business is not classed as a salary and is not a business expense. You do not pay tax on the money you draw from the business, only on the business profits. You can of course employ other people and pay them a salary which is a business expense.
  2. When do I pay tax?
    • Your first tax return will run from the day you start self-employment up to the following 5 April. Any tax will be due on the 31 January following that e.g. if you start self-employment on 1 June 2016, your first tax return will run to 5 April 2017 and if you have made a taxable profit, you will pay tax on 31 January 2018.
  3. Do I need to register for national insurance?
    • When you register as self-employed you will automatically be registered to pay national insurance. If your income is high enough, you will pay national insurance at the same time as any income tax.
  4. What records should I keep?
    • You need to keep records of your business income and expenditure. This will include bank statements, sales invoices and purchase invoices, details of the entries on your VAT Return and payroll records if you employ people. Keep records for at least 5 years from the 31 January following the tax year e.g. you must keep your records for the year ended 5 April 2016 at least until 31 January 2022.
  5. What happens once I’ve registered as self-employed?
    • HMRC will issue you with a unique taxpayer reference number and send you a notice to complete a tax return. You will need to enter on this tax return all your business income and expenditure to calculate your taxable profit and any tax that may be due. The tax return needs to be filed by the 31 January following the tax year end date (e.g. tax returns for the year ended 5 April 2016 are due to be filed by 31 January 2017).
  6. Aren’t things changing soon?
    • Yes! Over the next few years the Government’s plans to ‘make tax digital’ (MTD) will be rolled out and, depending on the size of your business, you may have simpler rules to follow for reporting your income and expenditure. You will also have to report more regularly, probably 4 times a year. More details will follow as they come through!

Pre-Registration VAT Expenses

Pre-registration claims for VAT – looking back

If you have recently become VAT registered and are about to prepare your first VAT Return, don’t forget to look back at your previous expenditure to see if there’s any pre-registration expenses that can be claimed for.

If you have purchased goods in the last 4 years that you still have in stock at the date of registration, then you can enter these on your VAT Return and re-claim the input VAT paid. Also, if you have purchased assets in the last 4 years, e.g. machinery and equipment, that you still hold at the date of registration , then you can re-claim the input VAT paid on these.

You can also re-claim input VAT on services that you received within the 6 months prior to registration. However they must relate to the ongoing business and not to completed projects or to goods that were used up before registration e.g. you cannot claim for repairs to a machine that was sold before you registered for VAT.

You need to have the invoices on record to be able to back up your claim in case H M Revenue & Customs were to query it.

Don’t forget that you need to register online to be able to file your first VAT Return. You can do this using your government gateway account.

If you have any queries with respect to preparing or filing your VAT Return, don’t hesitate to contact us on 01872 271655 or via email at

Tax Credits renewal

Tax Credits Renewal 2016

Deadline Day

The deadline for Tax Credits Renewal is fast approaching! Renewals must be completed and returned to H M Revenue & Customs by 31 July 2016 so if you haven’t done so already, now is a good time to tick this off the list.

If you miss the deadline your tax credits payments will stop.

In a change to the renewal process, some claimants may find that they do not need to actively renew their tax credits as those not requiring any changes will be renewed automatically.

How do I know whether to renew or not?

If your renewal pack has a red line across the first page and states ‘reply now’ then you must renew your tax credits online or via phone/post.

If your renewal pack states ‘check now’ then you should check all the details within your renewal pack, and provided there are no changes required you will not need to do anything and your claim will be renewed automatically.

If anything is incorrect, you must tell HMRC by 31st July 2016 else payments can stop and fines be imposed. As with the renewal, you can notify of changes changes to your tax credits online or via phone/post.

Self Employed

If you are self-employed, you may not yet have completed your Tax Return for the year ended 5 April 2016 so you may have to provide estimated figures. Remember to provide actual figures by as soon as possible, as your income level will affect the amount of tax credits you receive.

For the self-employed, remember that there are other reliefs available also, for example, if you have self-employed losses you can offset these against other income and also carry forward the balance to set against any future profits for Tax Credits purposes.

If you need any help with your Tax Credits renewal, or if you think you may be entitled to Tax Credits but are not currently claiming them, please contact Lydia Williams  at or one of the team on 01872 271655.

Personal Savings Allowance

Taking Interest

Personal Savings Allowance

For 2016/17 if you are a basic-rate taxpayer (i.e. your total income does not exceed £43,000) then you can earn £1,000 in savings interest without paying any tax on this. This is called the ‘personal savings allowance’. For higher-rate taxpayers (i.e. your total income falls between £43,001 and £161,000), the personal savings allowance is reduced to £500. For additional rate taxpayers (i.e. your total income exceeds £161,000) there is no allowance available.

If you have a joint account, the interest is deemed to be received equally by all the named account holders. If one account holder is a basic-rate taxpayer and another account holder is a higher-rate taxpayer, they will receive different personal savings allowances and potentially pay differing amounts of tax on the interest received.

If your taxable non-savings income does not exceed £5,000 then you can actually receive up to £6,000 interest income without paying tax. This is because the tax rate for these individuals is 0% for savings income up to £5,000. You then receive the additional £1,000 personal savings allowance on top of this.

If you earn interest in an ISA which is already tax-free, then this interest does not count towards your personal savings allowance.

You will probably have noticed that your bank is no longer deducting tax from your savings interest earned because of this new allowance. If you do owe tax on your savings income because it falls above the allowance, H M Revenue & Customs will seek to recover that tax by amending your PAYE coding notice. If you submit a self-assessment tax return, your interest income will be reported on this return and the tax paid with any other income tax due.

If you have received a PAYE coding notice from H M Revenue & Customs and you can see that they have reduced your personal allowance because they believe your interest income will be higher than your personal savings allowance, check that you are happy with their estimate. If you feel they have reduced your coding notice incorrectly, you can call them directly on 0300 200 3300 or submit your query using the HMRC’s online form.

If you have any queries at all with respect to the new personal savings allowance, please don’t hesitate to contact us on 01872 271655 or email me at

Basic Rate: Getting an Extension

In 2016/17, providing your total income is less than £100,000 you will receive a personal allowance of £11,000 i.e. the first £11,000 of your income will be tax free.

After that, your next £32,000 of income will be taxed at the basic rate. For most non-dividend income this will be at 20%.

After that, if your income falls between above the £32,000 but below £150,000 you are straying into higher rate territory and for most non-dividend income, the tax rate will be 40%.

You can however extend your basic rate band so that more of your income is taxed at the lower, basic rate. There are two ways of doing this :

  • Feeling charitable? Make sure you keep track of all the times you make gift aid payments to charities. Remember that this can sometimes include entrance fees, for example to zoos or aquariums. It could also include membership fees, for example to the National Trust. The payments you make are deemed to be made net of 20% tax, and your basic rate band is extended by the grossed up payment. If you make a payment to the NSPCC of £60, your basic rate band will be extended by £75. This means that your new basic rate band will become £32,075.
  • Planning for the future? If you make payments into a pension scheme, the same rules apply. You gross up the payments and extend your basic rate band accordingly. So pension payments of £10,000 give you an extension to your basic rate band of £12,500 bringing it to £44,500.

This is also very attractive in light of the new dividend tax rules that will come into force from 6 April 2016. Dividends falling into your basic rate band will be taxed at 7.5% and 32.5% in the higher rate band. The bigger your basic rate band is, the more will be taxed at the lower rate.

If you would like any further information on your specific personal tax situation, please get in touch via email at or phone 01872 271655


Dividends and Tax

Dividends – All change

We are fast approaching the end of the tax year and from 6 April 2016 it’s all change as far as the taxing of dividends are concerned.

The legislation

Under current legislation, your dividends are deemed to be received net of 10% tax. For example, a dividend of £10,800 is actually treated for tax purposes as being a dividend of £12,000. Providing total income (including the £12,000) remains within the basic rate band, this £12,000 is taxed at 10%, so the tax due is £1,200. As the dividend received was only £10,800 the recipient has effectively already paid the £1,200 and no further tax is due. If the basic rate band is used up, the dividend income is then taxed at the higher rate of 32.5%. A £12,000 dividend in the higher rate band would result in tax due of £3,900 of which the recipient is deemed to have already paid £1,200, so the amount due to be paid is £2,700.

Under the new rules, the tax calculation is quite different. The dividend amounts received are not adjusted upwards so if you receive £10,800 you are taxed on £10,800. The first £5,000 will be tax-free and from then on, the rates vary, depending on your level of other income. For dividend income falling within the basic rate band, the tax will be 7.5%, for dividend income falling within the higher rate band, the tax will be 32.5% and for dividend income falling within the additional rate band, the tax will be 38.1%.

This year

It is particularly important this year to ensure that you are able to take advantage of the current legislation by ensuring you receive the maximum amount of dividends within your basic rate band, so that no additional tax will be payable. Remember, any dividends voted do not have to be taken as physical cash now (although they can be), but could be added to your Directors Loan Accounts and drawn down tax-free at a later date when cash flow allows.

However you can only vote dividends if the Company has sufficient reserves to do so. Your Accounts will show the ‘Reserves’ of the Company which is normally retained profits from previous years less any previous distributions e.g. dividends.

It is also important to consider your other personal income for the year and for future years to plan ahead and ensure that dividends are voted in the most tax-efficient manner. A few things to consider would be the claw back of child benefit for couples where one partner’s income exceeds £50,000. Also your tax-free personal allowance is reduced where your income exceeds £100,000. Remember also that contributions to pension schemes increase your basic rate band so that more of your income is taxed at the basic rate rather than the higher rate. Other deductions to your income may be available also e.g. interest on qualifying loans.

An example

The following example is based on a scenario of an £8,000 salary and net dividends of £45,000 with no other personal income. You will see that by keeping the dividend level the same next year, the tax will increase by £1,762. To keep the take-home amount the same, the dividends need to rise to £47,610.

  2015/16   2016/17 2016/17
  £   £ £
Salary 8,000 8,000 8,000
Dividend received 45,000 45,000 47,610
Income tax liability (3,513) (5,275) (6,123)
Take home amount 49,487   47,725 49,487

There are always many things to take into consideration when proposing and voting dividends and if you would like assistance on any specific examples please don’t hesitate to contact us on 01872 271655.

Associated Companies

Associated Companies

Are you associated?

For the financial year to 31 March 2015, Limited Companies paid different rates of Corporation Tax depending on their profit levels. If taxable profits were higher than £1,500,000 then the rate of tax was 21%. If taxable profits were less than £300,000 then the rate of tax was 20% and for profits between these two limits, marginal relief was applied.

However, if the company was associated with other companies, then their profit limits had to be divided by the number of associated companies, for example, if there were 3 associated companies, they would all pay tax at the higher rate of 21% if their taxable profit was higher than £500,000 (£1,500,000 divided by 3).

For the financial year to 31 March 2016, the tax rates have changed so that regardless of the levels of your profits, the corporation tax rate will be 20%. It therefore doesn’t matter how many associated companies you have, you will still pay tax at 20%.

We can’t forget about associated companies altogether however as the number of associated companies also establishes the limits above which a company has to pay corporation tax in instalments rather than 9 months and 1 day after the year end.

From 1 April 2015 onwards each company has to disclose whether there are other companies that are classed as ‘51% group companies.’ If you are a 51% subsidiary of another company or if there is another company that is a 51% subsidiary of you or if you and another company are both 51% subsidiary companies of the same company, then you are classed as ‘51% group companies.’ To clarify, a 51% subsidiary company means that 50% or more of its ordinary share capital is owned beneficially (directly or indirectly) by another company.

For a company with no 51% group companies, they will not have to pay their corporation tax in instalments until their taxable profits exceed £1,500,000. This limit is reduced by every 51% group company so that a company with 2 additional 51% group companies would have to pay their corporation tax in instalments if their profit levels exceeded £500,000 (£1,500,000 divided by 3).

Even if you exceed your upper limit, if either of the following applies, you will not need to pay your corporation tax in instalments:

  • If your corporation tax liability is less than £10,000 (pro-rated for periods shorter than 12 months)
  • If your profits are less than £10,000,000 and the company has not existed for the full previous 12 months or for any accounting period ending in the previous 12 months, the tax liability was less than £10,000 or the profit levels were below the upper limit.

Please note, the £10,000,000 limit is also divided by the number of 51% group companies, so would be £3,333,333 if there were 3 x 51% group companies.

For periods beginning on or after 1 April 2015 then, it should be simpler to calculate whether your company needs to pay corporation tax in instalments. If you are unsure if your company(ies) will be affected by these changes, please let us know and we will be happy to help.

Taking it yourself or giving it away

Personal use of Goods or Services

Taking it yourself or giving it away?

If you run a business you may well use some of the services or goods that you supply, for yourself, rather than selling them on to customers. Although this is a personal transaction, for VAT purposes, it could well be classed as a ‘sale’ that you may have to charge VAT on.

If you are VAT-registered and you take for personal use some of your business stock, materials, finished goods or business assets (e.g. computers or tools), then this is a taxable supply for VAT purposes. This also applies if you temporarily use your business assets personally or lend them out to, say, an employee for their private use.

The VAT to charge depends on what you received in exchange for the personal use of goods or services. If you receive money, then you class the amount received as the VAT-inclusive sale price. You then calculate the VAT due at the relevant VAT-rate (20%, 5% or 0%).

You may receive part-money, part-goods, so you then establish a value for the goods, and again, class the total value as the VAT-inclusive sale price.

If you don’t receive anything for the goods or services then you calculate the VAT based on the value of what you’ve supplied. This value is the VAT-exclusive sale price and you calculate VAT on this amount at the relevant rate.

You can however give away a business asset as a gift without any VAT arising if the total cost of all the gifts made to that person in the year is £50 or less.

If you lend out a business asset or use it personally but the business does not receive any money in return, then you enter it on your VAT Return as a sale at the value of the cost to your business of lending it out.  The cost will be the annual depreciation of that asset (the amount it reduces in value each year), pro-rated for the amount of time it was lent out for non-business use. This will be the VAT –exclusive sale price and VAT will be due on that amount at the relevant rate.

It is more difficult to establish a cost value for the use of services that you make available for personal use. There is no hard and fast rule in establishing this, but you will need to use a method that is fair and reasonable, reflecting the cost to the business of providing this service.

If you use your own business goods or services for the business itself instead of selling it on to customers, there will be no VAT due as this is not classed as a taxable supply. There are a few exceptions to this however, for example, using your own labour to work on certain non-domestic buildings or changing the use of cars that you have claimed input VAT on.

If you think any of these rules may apply to you or if you would like any help in preparing your VAT Returns, please don’t hesitate to contact us on 01872 271655

VAT Invoice Discount

VAT: Invoice Discounts – The Update

Does it pay to be prompt  – the update

It is quite common for suppliers to offer invoice discounts to their customers if they pay promptly by a certain date. It’s a great idea from a cash flow point of view, but how does it work for VAT purposes? The rules were changed on 1st April 2015 and a few months in, how are businesses coping from a practical point of view?

Previously, the VAT was calculated with the assumption that the customer would pay early and take the discount. For example, if an invoice was raised for £100 + VAT, but the supplier offered a 10% prompt payment discount, then the VAT would not be £20 (£100 @ 20%) but instead it would be £18 which is the VAT on £90 (£100 less 10% discount). If the customer didn’t pay in time, then they would have to pay £100 + VAT of £18, as the VAT was not adjusted if the discount was not taken up.

Changes to the rules

However, as of April 2015, the supplier has to include VAT based on the full amount of the invoice, and if they offer a discount which is taken up by the customer, they will then need to adjust for the VAT accordingly.

One way of doing this is to issue a credit note for the amount of the discount with the corresponding VAT element. For example, the supplier will issue an invoice of £100 + VAT of £20 (£100 @ 20%). If the customer takes up a 10% discount, they will then pay £108 (£90 + VAT of £18) leaving a shortfall of £12. The supplier will then need to issue a credit note of £10 + VAT of £2 (£10 @ 20%) to balance the ledgers.

The overall effect of these invoices and credit notes, is that 20% VAT will be charged and paid on the invoice, regardless of whether any discount is taken up.

Alternatively, if they do not want to send out credit notes they can put additional information on their original invoice. H M Revenue & Customs recommend the following wording :

“A discount of X% of the full price applies if payment is made within Y days of the invoice date. No credit note will be issued. Following payment you must ensure you have only recovered the VAT actually paid.”

It is also recommended that the invoices provide details of the discounted price and the VAT on the discount price.

If the discount is taken up, the supplier will have to adjust their ledgers accordingly to ensure that they only declare the amount of VAT that is actually paid over.

It is very important that all businesses are diligent in keeping the relevant paperwork with respect to these transactions so that it can be clearly seen that the correct amount of VAT has been entered on their VAT Returns.

If you would like to know more about how this affects you, please don’t hesitate to contact us or email Lydia on

Business Gifts

Business Gifts – Tax Deductible?

Giving it away?

Everyone loves a good freebie and if you recently visited the Cornwall Business Fair or the Royal Cornwall Show you may have left armed with enough branded pens to last you for the whole year, not to mention the odd diary, mouse-mat or perhaps, if you were really lucky, a Kelsall Steele piggy bank!

These kind of give-aways do not fall under the general rules for business gifts and, providing certain conditions are met, they are allowable for tax. If you would like to give away some freebies from your business, you need to make sure you keep within the HMRC guidelines to ensure they are allowable for tax purposes.

The gifts must have a conspicuous advertisement on them and must not be :

  • Food, drink, tobacco or a token / voucher exchangeable for goods, and
  • The cost of the gift, together with the cost of any other gift to the same recipient must not exceed £50 in one single accounting year.

If you give away samples of your own products, even if this is food, drink or tobacco, then you can also claim a tax deduction.

It’s important to be aware that these are the exception rather than the rule with gifts however. Other gifts to customers or potential customers are not allowable for tax as they are classed as ‘business entertaining.’

If you’re thinking of spending money on business gifts of any kind and are unsure if they will be allowable for tax purposes, then please feel free to contact our tax department on 01872 271655 or email :


Rent-a-Room Scheme

UPDATE: As announced in the Summer Budget 2015, as of April 2016 the rent-a-room scheme allowance will increase to £7,500. This is the first increase to this allowance in 18 years.

If you provide furnished accommodation in your main home you may qualify for tax-free rental income under the Rent-a-Room Scheme.  If you receive £4,250 or less per year for the accommodation then you will not need to pay tax on the income.

If you receive £4,250 each year but there are 2 of you that own the property, the income will be split between you and also the allowance will be split so you will each be able to receive a maximum of £2,125 tax free.

This allowance most commonly applies to people who have a lodger in their main home or who run a Guest House or Bed & Breakfast from their home. You may not claim it if the room is not part of your main home and the room must be furnished. You cannot claim it if the room is in your UK home while you live abroad or if you let the whole of your home out and not just a part. You also cannot claim it if the room is used as an office or for business purposes although it is fine if your lodger works from your home in the evenings.

To calculate your income for the year, you must not only include the rental income, but also any amounts you receive for meals, goods and services such as cleaning or laundry. If your total income is less than £4,250 you pay no tax on the income but if it is higher than £4,250 you can choose how to treat it for tax purposes.

Your first option is to treat it as you would any other source of income by calculating the expenses you have incurred and deducting those from the income to arrive at a ‘net profit’ figure. This figure will be entered on your tax return and taxed at your marginal rate (e.g. 20% if your total income falls into the basic rate band and 40% if your total income falls into the higher rate band).

Alternatively, you may find that it is better to take the rental income for the year and deduct the £4,250 allowance. This figure is then entered on your tax return as rental income and taxed in the normal way. You cannot deduct any of your expenses if you use this method, but you may find that the overall income that is taxed is lower than using the standard method.

You can change the method you use each year, depending on which is most tax-efficient.

If your income less your expenses results in a net loss rather than a profit then it is best to use the standard method. This loss can be carried forward and offset against future rental profits, even if you choose to change your method in the next year.

For example, if you receive income of £5,000 from renting your room to a lodger, but incur expenses against that of £6,000 then you will have an overall loss to report on your tax return of £1,000. The following year, you may again receive £5,000 but only have £1,000 expenses to offset against this. Your net profit is therefore £4,000. It would be better in this case to use the second method and offset the £4,250 allowance against your £5,000 income so you only need to report £750 (£5,000 less £4,250) as your net profit. You have a loss of £1,000 brought forward from the previous year which you can offset against this £750 so your actual net profit will be £Nil and you will still have £250 losses to carry forward to the following year.

If you have any queries about the Rent-a-Room scheme or if you are not sure which method to use to calculate your net profit, please don’t hesitate to contact us on 01872 271655 or email

Sponsorship tax relief

Sponsorship Tax Relief

I’ll sponsor you!

You may have thought of paying sponsorship money from your business to an individual perhaps or a club or competition.

Can your business get tax relief on this payment? As ever, it’s not always a straight forward ‘yes’ or ‘no’ answer but more of a ‘it depends…’

To be allowable, the payment must be wholly and exclusively for the purposes of your trade. Normally when you sponsor a person, team or event, you will be looking to use this as part of a wider marketing strategy and you will be looking for all the publicity you can get out of it. If your motives for making the payment are to increase awareness of your business or brand, then this does serve the purposes of your trade. However, if the motives are to secure some private benefit and any marketing benefits are a ‘bonus’ then it will not tick the ‘wholly and exclusively for the purposes of your trade’ box. You may receive some kind of private benefit from sponsorship that is ‘incidental’ to the sponsorship and not the reason you made the payment – this sponsorship payment would still be allowable for tax.

If you sponsor a close relative or friend, or if you have some personal involvement in the sponsored activity, then it may be harder to prove that the payment is wholly and exclusively for the purposes of your trade. If you think your sponsorship payment is allowable despite it being to a closely connected party, then keep records of the sponsorship agreement, for example :

  • Details of any correspondence or contracts including negotiations over the cost
  • Details of why this particular person or event was chosen to sponsor over and above any other possible candidates
  • Details of how the business itself will be promoted and how an appropriate target audience will be reached through this sponsorship
  • Procedures in place to review the effectiveness of the sponsorship on improving your sales and increasing your customer basis

If you are thinking of making sponsorship payments and are unsure if they will be allowable for tax purposes, please don’t hesitate to contact us on 01872 271655 or email

Where Did The Money Go?

Where did the money go?

Where did the money go?

It’s all very well making a profit, but many of our clients tell us that they don’t ‘feel’ as if they’ve made a profit.

The bottom line figure in their accounts seems to bear no resemblance to their bank account balance!

Here are a few of the more common reasons why this may happen:

  • Purchase of fixed assets in the year such as new vehicles, machinery or equipment. These purchases will not be shown in your profit and loss account as they are capital rather than revenue expenditure so although you have spent the cash, your profit will not reduce.
  • Purchase of large amounts of goods still held in stock at the year end. The cash has been spent, but the goods still held in stock have not reduced your profit, as they will be carried forward to be offset against future income.
  • You may have used business funds to pay for personal expenses such as personal income tax liabilities. Again, these are not offset against your profit as they are not business related.
  • Your debtors could have increased. Although you may have a lot of income in the year which increases your profit, if your customers have not paid you, then your cash flow will suffer.
  • Repayment of loans. You may have used cash to repay business loans or hire purchase agreements. These repayments do not affect your profit, but definitely affect your cash flow.
  • Your creditors could have decreased. You may have been repaying your creditors earlier than in the past so that from a cash flow point of view, your cash is leaving your bank account earlier than before.

Cash flow forecasting can be a very important tool in making decisions such as when to purchase machinery or deciding whether to apply for a loan.

If you would like any help with preparing a cash flow forecast, or advice with managing cash flow, please don’t hesitate to contact us on 01872 271655 or email :

PAYE Coding 2015/16

HMRC Tax Codes 2015-2016

New tax year, new tax code

HMRC have been issuing new tax codes over the last few months for the 2015-2016 tax year. You may well have received a Coding Notice explaining your new tax code, particularly if you have more than one job, or income from more than one pension, or even a combination of both.

HMRC also informs your employer or pension provider of your new tax code, so from 6 April 2015 they should be able to deduct the correct amount of tax from your income.

Cracking the PAYE Code

You need to have a different tax code for each of your sources of income to ensure that you get the full benefit of your personal allowance (for those under 65 this is £10,600 for the 2015-2016 tax year). For example, if your earnings from one job exceed your personal allowance, then HMRC will offset your personal allowance fully against that income and deduct tax at basic rate (or higher rate) from your second source of income.

Difficulties can arise if both your sources of income fall below the personal allowance. If this is the case, HMRC have to apportion the personal allowance between them, for example, they may allow £6,600 against your first job and £4,000 against your second job. If at the end of the tax year, the income from your first job was less than £6,600 or the income from your second job was less than £4,000 then you will not have received the full benefit of your personal allowance and should be due a tax refund.

Additional Reliefs

As well as your personal allowance, other reliefs that you are entitled to may be included in your tax code, for example, blind persons allowancemarried couples allowance (for those born before 5 April 1935) and also the new Marriage Allowance, allowing you to transfer 10% of your unused personal allowance to your spouse, or vice versa . You may also be entitled to relief for expenses you pay that HMRC deem to be tax deductible, the most common of which is professional subscriptions or higher rate tax relief on gift aid payments.

You may also see negative entries on your Coding Notice which reduce the reliefs available against your income. These may include amounts of unpaid tax in previous years, an estimate of other income receivable in the year (for example rental income) or taxable company benefits that you receive.

Check Your P60!

Although your Coding Notice is designed to try and ensure that you pay the right amount of tax throughout the year, it is still important to look at the figures entered on your P60’s at the end of the tax year and check that you are happy that the correct amount of tax has been deducted. If you have any concerns with this, please contact us and we will be happy to help.

If you are unsure about any entries on your Coding Notice, you can contact HMRC using the contact details on the Coding Notice. For more information, please don’t hesitate to contact us on 01872 271655.

Tax Credits renewal

Tax Credits – Time to Act

It’s that time of the year again when thousands of us receive Tax Credits renewal packs through our door. The deadline for completing these and returning them to H M Revenue & Customs is 31 July 2015 so if you haven’t already, it’s definitely a good idea to get this job ticked off the list as soon as possible. If you miss the deadline your tax credits payments will stop.

Some people are able to renew tax credits online, providing they have no changes to report but many will need to renew by phone or by post. You must renew by phone if you don’t receive your renewal pack by 30 June 2015.

It’s important to check through your Annual Review form carefully to make sure your circumstances are still the same. You then keep this form for your records and only return the Annual Declaration to HMRC.

You should also have received help notes which explain what needs to be entered in each box on the Annual Declaration. These also contain workings sheets which are very useful, for example, in the working sheet for ‘other income’ HMRC confirm that the first £300 of other income does not need to be declared. You are also able to deduct gift-aid payments and personal pension contributions from your employed or self-employed income.

If you are self-employed, you may not yet have completed your Tax Return for the year ended 5 April 2015 so you may have to enter estimated figures. Remember to provide actual figures by 31 January 2016 to ensure that you are paid the correct amount.

For the self-employed, remember that there are other reliefs available also, for example, if you have self-employed losses you can offset these against other income and also carry forward the balance to set against any future profits for Tax Credits purposes.

If you need any help completing your Tax Credits renewal form, or if you think you may be entitled to Tax Credits but are not currently claiming them, please contact Lydia Williams  at or one of the team on 01872 271655.

Class 2 NI

Class 2 NI – Making it Easier to Pay

National Insurance for the Self-Employed – making it easier to pay

At the moment, if you are self-employed, you will pay income tax and Class 4 National Insurance (NI) on your profits. These amounts are calculated when you prepare your Self-Assessment Tax Return and are payable on 31 January following the end of the tax year. If your tax liability is over £1,000, then you will make payments on account for the income tax and Class 4 NI for the following tax year in 2 instalments, one on 31 January and the second on 31 July.

You will also pay Class 2 NI contributions, which are currently a flat rate of £2.75 per week. Most people will pay these by Direct Debit or cheque, separately to the payment of the other taxes.

The amount of state pension and other benefits that you can claim is based on the National Insurance contributions you have paid. For those who will reach state pension age after 6 April 2016, 35 qualifying years of National Insurance contributions are needed to enable receipt of the full basic state pension.

From 6 April 2015 HM Revenue & Customs (HMRC) want to simplify the system by collecting Class 2 NI contributions at the same time as collecting the income tax and Class 4 NI contributions due. When calculating your tax liability based on your Self-Assessment Tax Return, your Class 2 NI contributions will be added on as well.

This comes with the added bonus that if the profits reported on your Self-Assessment Tax Return are below the Class 2 NI threshold (currently £5,885 per annum), then you will not have to apply separately for a Class 2 NI exemption, but will automatically be given the option not to make Class 2 NI contributions for that year. Anyone who currently has a Small Earnings Exception certificate in place will be notified that their certificate will cease to be valid from 2015/16 onwards.

Please note that currently Class 2 NI is collected four months in arrears, so if you have a quarterly Direct Debit in place your final payment for 2014/15 will be taken in July 2015. This Direct Debit should then cease.

If you have any concerns about your NI contributions, please do not hesitate to contact us on 01872 271655 or email