Self-Assessment Tax Returns
Self-Assessment Tax Returns for the year ended 5th April 2016 MUST be submitted online to HM Revenue & Customs at the very latest by 31 January 2017.
Automatic £100 penalty fines are issued from HM Revenue & Customs for any Tax Return not filed by the deadline date. This is irrespective of there being any tax due. Additional penalties can also be charged, including daily penalties.
If you haven’t done so already then please do let us have the required information now to enable us to process your Return ahead of the 31 January deadline.
Please note that we carry out all work strictly in the order in which the office receives it, so leaving it to the last couple of weeks in January to get your information in to us may not be sufficient time for it to be processed ahead of the deadline date - so please act now to avoid the possibility of an automatic penalty!
Don't forget to make your self-assessment payment due on the 31st January 2017!
Making Tax Digital: HMRC has a Dream
In 2015 HMRC issued a paper `Making Tax Digital` which proposes that by 2020 HMRC will have moved to a fully digital tax system.
By the end of 2018 it is envisaged that all businesses will be updating HMRC quarterly for their income tax and national insurance obligations through their online portal.
This means that accounting records will need to be software based and the most efficient means will be to have the records online in the cloud.
So we and our clients need to aim for there to be no more boxes and bags of records within the next 3 years.
The HMRC have made an assumption that their 'Making Tax Digital' system is what the tax payer wants and that it will reduce compliance fees. What they seem to have missed is that many businesses will need to invest in computer hardware, software and possibly a bookkeeper, which will increase costs.
Cloud based accounting will mean accounts and financial information, whether monthly, quarterly or annually, can be produced more timely, and changes the dynamics of preparing accounts and record keeping.
To enable our clients to move towards 'Making Tax Digital', we are looking into ways to streamline the way you keep accounting records, by offering an online cloud service to keep the additional compliance costs down, or if you require where we can maintain the records.
The first step in the process is the publication of our app where you can find information and contact us. On the app there will be a portal where you will be able to access your accounts, returns and correspondence, making it easier and quicker for you to deal with.
The app is available by scanning the QR code shown here:
The flat rate scheme (FRS) is used by numerous small businesses to simplify their VAT reporting. Lots of these businesses also gain a cash advantaged from using the scheme, but this advantage is going to be cut back significantly from 1 April 2017. The FRS will continue but many businesses will not find it economical to use.
When using the FRS the business ignores VAT incurred on purchases when reporting VAT payable, with the exception of capital items which cost £2,000 or more. The trader simply multiples the gross turnover (including VAT charged at the normal rates) by the FRS percentage set for the particular trade sector.
This FRS percentage is supposed to take account of the amount of VAT likely to be incurred on business expenses. The common percentages used by service-related businesses are:
Accountancy and legal services 14.5%
Journalism or entertaining 12.5%
Computer or IT consultancy 14.5%
Business services not listed elsewhere 12%
Estate agents and property management 12%
Management consultancy 14%
If the business incurs few expenses, and it operates in a sector with a relatively low FRS percentage, it will pay out less VAT to HMRC under the FRS than it would outside the scheme. Many businesses register for VAT voluntarily before their turnover reaches the VAT registration threshold, so they can use the FRS and bank the cash advantage.
From 1 April 2017 a business will be required to use a FRS percentage of 16.5% if it is a “low cost trader”. This is likely to adversely affect businesses in all of the trade sectors listed above, and possibly many other similar businesses, as 16.5% of the gross turnover is equivalent to 19.8% of the net leaving almost no credit for VAT incurred on purchases.
Low Cost Trader:
This is a business whose expenditure on goods (not services) is less than 2% of its gross turnover, or if more than 2% of its turnover, the amount spent on goods is less than £1,000 per year. Any expenditure on; capital items, motor expenses, or food or drink for consumption by the business, is ignored when working out the 2% or £1,000 threshold.
This emphasis on ‘goods’ will discriminate against businesses who incur VAT on services such as: rent, software licences, IT support, digital journals, sub-contractors, telecoms etc. In VAT terms a service is anything which is intangible, or where the cost relates to a tangible asset it is the temporary use of that asset – such as hiring.
All clients that currently use the scheme will therefore need to be reviewed.
Businesses who are trading under the VAT threshold of £83,000 may want to deregister from VAT with effect from 1 April 2017. Businesses that are trading over that threshold may need to withdraw from the FRS from the same date.
Impact of Change in Accounting Standards to FRS 102:
During the course of 2015 and 2016 a major change is taking place concerning the accounting standards that govern the way a set of accounts is put together. This could change both the figures and the explanations in your accounts, including making retrospective changes to the prior year figures that are shown. There can also be taxation impacts in some situations.
Small companies are generally affected in the same way as larger companies, although there are a few differences which are highlighted below.
Without a full analysis of your accounts and a discussion with you regarding your choices of accounting policies and what are termed transitional exemptions, it is not possible (at this stage) to identify the precise areas of change. We would be happy however, to discuss completing this exercise with you and to carry out additional work that you may require with regard to accounting or tax as a result of these changes.
Summary of Key Changes
These might look a little different to your current accounts. There are some new choices for terminology, moving to more internationally used phrases such as property, plant and equipment instead of tangible fixed assets and inventories instead of stock. The primary statements required are now:
Statement of Financial Position (previously the Balance Sheet);
Statement of Comprehensive Income; or
Income statement (previously the Profit and Loss) and a separate
Statement of Comprehensive Income (previously the Statement of Total Recognised Gains and Losses)
A Statement of Changes in Equity (not required for a small entity)
A Statement of Cash Flows (not required for a small entity)
Cash Flow Statement
Small companies are not required to have a cash flow statement, but for others, the format of this has changed quite significantly. There are now just three main headings, operating, financing and investing activities.
For subsidiaries there is no automatic cash flow exemption, but there is a reduced disclosure regime which would permit the Statement of Cash Flows, together with other disclosures, to be omitted if certain conditions are met.
These include a wide range of assets and liabilities which are financial, rather than tangible or intangible in nature. For example, cash, debtors and creditors are all financial instruments. The main changes in respect of these items are that:
Investments in shares that are not group companies must be measured at fair value if possible, with any unrealised or realised gains or losses reflected in the profit or loss.
Derivatives, which includes items such as a forward currency contract, an interest rate swap, futures or options all need to be recognised in the balance sheet at their fair value with gains or losses in the profit or loss. In the past these were ignored until the contract was completed. The new treatment means that you will need to check if you have any such contracts and obtain a valuation for them, together with the valuation method used.
Loans that are not at a market rate need to be put into the accounts as if they are at market rate. This requires the calculation of notional interest at a market rate. (Public benefit entities, such as charities, do not need to do this though).
Foreign Currency Translation
The rules have changed so that where you have foreign currency transactions you will always need to translate the amounts at the rate ruling on the date of the transaction (the spot rate). In the past, you were able to use the rate of any related forward contract, or a contracted rate if one was agreed.
There is a requirement in FRS 102 to establish the functional currency of the entity. Normally this will be pounds sterling for a UK company, but if most of its cash flows are in another currency, or impacted by another currency then this may not be the case. We can discuss the impact of this if you think it might apply.
Because the impact of the changes described for foreign currency and financial instruments can be to increase the volatility in the profit and loss and not to match related transactions, there is the ability to use hedge accounting. This is a complex process but ensures close matching of related contracts, such as a foreign currency purchase and forward foreign exchange contract. If you think you may wish to use hedge accounting please discuss this with us.
Business Combinations, Associates and Joint Ventures
Acquisitions, or so called business combinations, are usually dealt with in the consolidated accounts if these are required (small groups are not required to prepare consolidated accounts). Under the new rules you are more likely to have to recognise intangible assets, such as customer lists, that you have purchased as part of the acquisition. Previously, these would often have just been part of the goodwill figure.
There are also some minor changes regarding associates, joint ventures and the accounting treatment of acquisitions or disposals achieved in stages.
Related Party Transactions
There have been some changes to the definitions and to the disclosure requirements, although these are fairly minor, unless you are a small company. Small companies will only need to disclose limited related party transactions and in particular only those which are not concluded under normal market conditions.
If you cannot reliably estimate the life of goodwill, there are new rules that require the maximum life to be 10 years (or in some cases in 2015 only, 5 years). This may mean that some adjustments are needed to the amortisation period and/or value of goodwill in your accounts.
If you hold investment property you will have to show it at fair value in the balance sheet, as now, but changes in value will go through the profit and loss for the year. Also, a property held by one company in a group and let to another group company will now meet the definition of an investment property. This means it will need to be at fair value, with changes in value recognised in the profit and loss account in the individual company accounts. On consolidation, if relevant, it will be treated as a normal item of property and depreciated over its useful life.
Property, Plant and Equipment
There are only minor changes to the rules here, although a transitional option exists which allows you to use a valuation of an asset as its deemed cost. This means you could, for example, value a property just once and then treat that value as if it were cost. This avoids having to continue valuing on a regular basis, which is required if you want to adopt the revaluation model. Instead, this transitional option allows a one-off uplift of the value of an asset.
If you are a lessee or lessor of an asset under an operating lease then any lease incentives, such as rent free periods, will now need to be spread over the whole lease term. Currently they are just spread over the period to the first rent review. The lease term is now defined as the period over which there is reasonable certainty that the lease will continue, even if there is a break clause before that. This can have taxation implications, so you may wish to discuss this with us, as there are various options on transition.
The rules for this have now been tightened up, meaning that deferred tax is required on some items that were previously exempt. This means that deferred tax will need to be recognised on all revaluations and also sometimes on unremitted earnings from a subsidiary. This will generally mean that your deferred tax figure will be higher than before.
The new rules mean that it will be necessary to consider whether you need an accrual for holiday pay, where holiday is due at the year-end but has not been taken. If this amount is material it will need to be calculated each year and put into your accounts. It is usually only material if the holiday year and the accounting year are different, or if you allow staff to carry over significant amounts of holiday into the next year.
There have been some changes to the accounting for defined benefit pension schemes, but as these are rare please ask for further information if this affects you.
FRSSE companies have been exempt from the requirement to account for equity settled share-based payments. However, under FRS 102 they will now need to be accounted for. For other companies, the requirements for these are essentially the same as under the current rules.
The general rule when dealing with the move to FRS 102 is that all the changes are applied retrospectively, through the calculation of what is termed a prior year adjustment. However, as this would sometimes be very onerous there are a number of transitional exemptions, enabling the new rules to be applied only in the future. These do not cover all the changes though, so in the first year there will probably be adjustments made to reserves and disclosures will be needed to explain the impact on the balance sheet and profit and loss. (Small companies are not required to give these disclosures although they are likely to be helpful to anyone using the accounts).
Practical Impacts of the Changes
There are some areas of your business that could be impacted adversely by the changes in the accounting rules if you do not consider the issues. Broadly speaking they include any contract, covenant or other agreement which is based on or refers to your accounts or specific figures in them. In particular, because the profit can be more volatile and include items such as gains on investment properties that are not yet realised, you should consider the following:
Is there likely to be an impact in meeting any bank covenant requirements?
Do I need to change any bonus or profit related pay agreements to exclude gains on items not yet realised?
Are there any earn-out agreements, on for example a business acquisition, which are based on profit in the accounts, but have not taken account of the changes due to FRS 102?
Do I need to make any tax elections in connection with financial instruments, so that tax is only charged when the final transaction takes place?
Do I need to consider the impact of tax on my cash flow forecasts?
We appreciate that these changes are wide-ranging and complex and we will, of course, be happy to advise and provide additional services to ensure that the transition to FRS 102 is dealt with as smoothly as possible. Please do call if you wish to discuss these matters further or to arrange for a quote to be provided for any additional services that you might require in connection with the transition to FRS 102.