Electric Trainer

Some IR35 clarifications

Working out whether you can be self-employed (as opposed to being paid as an employee) can be tricky for some media freelances.
HMRC are due to publish some clarifications of its IR35 legislation in May 2012.
Just to be clear: the law hasn't changed, just the way HMRC are trying to explain it.
More here if you're interested: http://www.freelanceuk.com/news/4069.shtml

Taxable Redundancy Pay - a big tweak

Although I focus on business skills in my workshops, I inevitably meet a lot of people who are thinking of setting up on their own after receiving some sort of redundancy package.

Everyone seems to know that the first £30K of a redundancy package is tax-free. What happens to any amount over the £30K is not nearly so easily understood.

A recent change to the rules has caught out at least one of my trainees, so I thought I'd try to clarify what's going to happen if you are lucky enough to be the recipient of more than £30K in redundancy pay.

It used to be the case that any extra (over £30K) was taxed at the basic rate of income tax (20%). This was good and bad.  Good: because you had less taken away at first, even if you owed more later (because you might actually have been a higher rate tax payer). Bad: because some people forgot that they would owe tax on what they received, and spent it all before this became clear to them.

The change that's just come in is to do with the rate of tax for the extra pay - the amount above the tax-free £30K. The extra is now usually taxed at the top rates of income tax - i.e. 40% or 50%. In effect the 'good' vs 'bad' scenario has been reversed. 

It's now 'good' because you can't forget to pay tax on the extra pay which you might owe at the end of the tax year. But it's 'bad' because they take it away from you up front.

You can't invest it yourself to earn some interest. And presuming you are a lower rate tax payer you will have to wait till the end of the tax year until you can get it back.

So that's improved cash flow for HMRC, and much less cash flow for the person trying to get a new business off the ground.

It's a bit rubbish if you ask me. But then no one did. In fact I don't remember seeing this anywhere before they introduced it.

It seems particularly harsh as only a tiny percentage of earners in the UK are actually 50% tax payers.

And I know of at least one person who was badly advised in advance of the change, being told that his taxable redundancy pay would be taxed at 20% when in fact it was taxed at 50%.

There's a transcript of a BBC Moneybox interview about this in February. Sorry I didn't spot it then.

You can read the transcript on the Moneybox website. The relevant item is towards the end of the programme. (Hat tip to Geoff Adams-Spink for spotting.)

For more info, Direct Gov also has details of the redundancy payments helpline.

Another year, another tweak

So here we are again at the start of the new financial year. Happy New Year!

You've probably noticed stuff about changes to tax and national insurance thresholds.

Apart from sounding very dull, most of this involves tweaks to a creaking system which makes little sense to right minded people.

Mr Osborne says he's going to have a good look at how the Treasury collects our money, possibly putting tax and national insurance into one big tax to make it simpler. A bit like the the simplifying approach they've proposed for the state pension and universal credit.

We'll see.

Meanwhile are there any changes which make a difference on a daily basis to small businesses and freelances like you and me?

Well if you've been following my tweets over the last two weeks you'll have spotted a few small ones.

The car mileage allowance for business trips goes up to 45p per mile. It's been 40p per mile since 2002, so not exactly generous, but hey....

The motorbike (24p) and cycle (20p) mileage rates are not being changed it seems.

If you are trying to avoid VAT, the new level at which you have to be VAT registered is £73,000 turnover. That applies to sole traders as well as limited companies, remember. And it's turnover, not profit.

Things for freelances to look out for in the longer term include a possible re-vamping of IR35 legislation (which stops people pretending to be self-employed when they're really acting like an employee). But that probably won't happen until tax and national insurance are re-invented.

If you're a former trainee, all your handouts and downloads are now updated with new info for 2011-12.

And will this be the year where you starting keeping your expenses records from day one as you go along? Put aside 5 minutes every week to do it and you'll have pretty well completed your tax return by this time next year. 

Enjoy!

OMG- Not ANOTHER change to VAT!

Yes - you can't fail to have noticed that VAT's on the rise again. From 4 Jan 2011 the standard rate is 20% (up from 17.5%).

While the papers are talking about the cost to us as real people who buy stuff, it's worth pausing a moment to work out what it might mean for you as a small business, or freelance, or whatever you call yourself.

If you're not VAT registered it will just mean things you buy for the business are 2.5% more expensive.

[For some this might be the point at which they take the plunge - especially as getting a 5th of the cost back from purchases is not insignificant. Just don't take the plunge without considering the implications for your business.] 

If you are VAT registered, there are a couple of issues to be aware of:

1/ Any invoice with a tax point of 4 Jan 2011 or later will have to include VAT at the new higher rate. Invoices up to 3 Jan 2011 will charge VAT at the old rate of 17.5%, regardless of when you are paid.

2/ If you're in the flat rate scheme for small businesses (aka "VAT for lazy people"), the flat rate that you use to calculate how much you give to the VAT people will go up.

For example the 'Film,radio TV and video production' flat rate goes up from 10.5% to 13%.

Personally I will be ensuring that I have no invoices dated 1st-3rd Jan 2011, just so that it keeps the calculations simple. It will mean my Jan-Feb-Mar VAT quarter will be all at the new rate.

It might be a bit more complicated for you if you have a VAT quarter that runs, for example, Dec-Jan-Feb. In this case you'll have a mixture of rates across the quarter. Don't panic about this. Just do calculations up to 3rd Jan, and a separate calculation for the period from 4th Jan.

HMRC have some helpful documents here:

about the change in the standard rate
about the change to the flat rate percentages if you're in that scheme

Finally, if you are VAT registered and you use one of David Thomas Media's old income and expense spreadsheets, bear in mind that changing the VAT figure on the summary sheet will change the VAT calculation all the way through the sheet - in all the category tabs.

Ditto the VAT and flat rate figures on our cash flow spreadsheet.

Solutions? You can overtype the relevant parts of your records from 4 Jan, or do calculations manually until your next financial year.

Of course you could also do something clever with the formulae if you know how.

Let's hope it'll be a while before they fiddle with it all again. Anyone want to bet that the rate comes back down again just before the next general election?

'Small business mentioned in budget' shock!

Well Mr Osborne has spoken. There's plenty of analysis of the coalition's emergency budget elsewhere. Nick Robinson says 'age of austerity' and Robert Peston says...well, something I didn't quite catch.

As promised, I've been listening to it all and reading the press releases, so you don't have to.

Here are some of the areas I think will affect small businesses like you and me.

Value Added Tax

VAT up to 20% (from 17.5%): - the rise from 4th Jan 2011 (after the New Year bank holiday) may persuade some to register for VAT. Getting 20% back off business purchases is a pretty attractive proposition with a rate this high.

VAT Flat Rate Scheme: - because the standard rate is going up, so is the flat rate. For example the Film, radio, TV and video category is currently 10.5%. This will go up in January to 13%. Read more about the flat rate changes: http://www.hmrc.gov.uk/budget2010/bn45.htm

(The reduced rate of VAT will be unchanged at 5%, by the way. And exempt items like kids' clothing and newspapers will remain exempt.)

Income tax and National Insurance

Personal allowance:- individuals and sole traders will be allowed to have an income of £7,475 before paying any tax (up from £6,475). The rates of income tax stay the same.

National Insurance: sole traders' class 2 NI contributions might be unchanged at £2.40 per week. They'll come to a view about it in the autumn. But class 4 NI will be 9% (up from 8%) and the top rate will be 2% (up from 1%). Both from April 2011.

If you're operating as a limited company, class 1 NI on an employee's salary is 12% (up from 11%) and the employer's contribution is 13.8% (up from 12.8%), but with a 'tax holiday' on the latter if you set up from today, and if you employ fewer than 10 people, and set up outside London and south-east. (I'm still checking thresholds and other details on this...so don't quote me...will post again on this.)

Corporation tax for small businesses

Also for limited companies - the small business rate of corporation tax will be reduced to 20% (from 21%). In fact this is the first time I remember a Chancellor talking about the small business rate in a budget speech. He also said he recognised the importance of helping the smallest of businesses. Collectively they (we) are a significant force.

Capital allowances

This year you've been able to put up to £100,000 of capital equipment against your turnover to reduce your tax bill. This is called the Annual Investment Allowance. 

The cap has been reduced to £25,000 from next year - a reduction of 75%. This seems draconian, but most people I work with will not spend that much on capital equipment in a year. And even if you did you can spread the costs above that cap at a rate of (typically) 20% until April 2012, when it will go down to 18%.

Still checking the small print. If you want to have a look yourself (with a stiff drink close at hand*) try the treasury website:
http://www.hm-treasury.gov.uk/junebudget

Let me know how you feel the budget will affect you and your business. And feel free to point out anything I've missed.

Now - time to go out and enjoy the sunshine!

*I suggest cider or perry - the planned increase in duty has now officially been abolished

Tip: Getting organised starts right now

Happy new year!

The start of another tax year is customarily greeted by a) daffs, and b) groans from the vast majority of self-employed people.  Where are those train receipts?  Who was the person I took out to lunch 8 months ago...and why? What is that PC World receipt for? Why can I only find half my invoices?

The one certainty is that you have a tax return to do and that you weren't as organised as you should have been for the last 12 months.

The worst of it is the knowledge that you have till the end of January to sort out the mess. Great! You can leave it, and leave it, and leave it....

But it doesn't have to be like that. 

Here are a few ideas we've kicked about on our business skills workshops:

1. Buy a concertina file (or just a box file) and put it next to your computer - or wherever you usually do your paperwork
2. Label it 'Receipts for tax year 2010-11' - and the time of the week you're going to sort receipts (see point 4)
3. Download one of our free spreadsheets for keeping track of everything and save it somewhere really obvious on your computer
4. Set aside 10 minutes at the same time every week to put any receipts in the file you just bought, and fill in the details on the spreadsheet you have downloaded

You won't need more than 10 minutes a week if you do this regularly. I find keeping all my receipts in the same place in my wallet works well. The wallet gets too bulky to close properly after about a week, so I'm forced to sort it.

The beauty of it is that by the end of this tax year you will have effectively done your tax return without even realising it.

If you have an accountant they should even charge you less.

So don't put it off. Get organised today. Think of it as a new year's resolution. 

And have a very, very happy new year.

"Calm man does something sensible" - a budget for small businesses?

Well there's a turn up for the books. A budget that was largely welcomed by the Federation of Small Businesses (FSB), and even described as 'clever' in an FT headline - though this was subsequently re-written to sound more wary.

The 'clever' epithet originally came from the CBI who also described Mr Darling's last budget before the election as 'modest but helpful'. Gosh.

You knew he'd done something clever when the British Bankers' Association tweeted that they were "not convinced on the "small business credit adjudicator"". So one of the most hated organisations in the UK is unconvinced by something that's going to threaten their hold on business lending. Excellent.

But what about all that nitty gritty stuff we cover on our workshops for freelances and small businesses?

We've known about the one major change to income tax since December - the new 50% tax rate for income over £150K. This will affect 1% of earners in the UK, so let's not dwell.

Away from the headlines about first time buyers and cider you can find some nods in the right direction for self-employed people and small businesses.

If you're wanting to buy a lot of kit for your new business, Mr D doubled the annual investment allowance to £100K. So this new-ish allowance is now even more attractive.

If you have a shop front or business premises paying business rates, you may be one of 345,000 that won't have to pay them for one year from October. (It's based on rateable value.)

The one threshold which seems to be going up is VAT. You can now wait until you have an annual turnover of £70,000 before you have to register for VAT.

On the down side, the upper limit for using the VAT flat rate scheme has now been stuck at £150,000 for three years.

Lots of small businesses have been complaining about the lack of access to loans, with the suspicion that the banks are hoarding money unnecessarily. The Chancellor seems to have lost patience - hence this idea of a "small business credit adjudicator".

Goodness knows how this will work, but speaking as someone who runs a small business, this is the first budget I can remember where there's an acknowledgement that small businesses actually exist.

Tucked away in the Treasury's budget documents is a description of better online support for SMEs, a personalised version of Business Link, and ways of "providing better access to relevant tax guidance and flexible tax payment plans to help businesses manage their cash flow". 

It almost sounds, well...sensible.

Before we get too carried away, it's worth reminding ourselves that lots might be undone with a change of government.

And yes - we might have another budget in June/July.

So if you're one of our trainees you know where to go for the updated handouts. If you're not, there's always the free stuff.

I nearly forgot...prize for the best budget headline? The Guardian's "The Good, The Bad and the Scrumpy".  

Allowable expenses and the naked presenter

We often have a long discussion during "finance for freelance" workshops and "setting up as a sole trader" courses about what's allowed as a business expense.

People who have only ever been employed are frequently dismayed that there appear to be no 'rules' - just guidelines.

I've never had a problem with this. Every business is different, and there needs to be flexibility in the system.

Once in a while a test case appears which suddenly brings the guidelines into focus. This week we have had one of those moments - of interest to everyone in the media industry who has asked me if they could put their clothes and hair-dos against tax.

Well you can't. Except perhaps to keep especially warm and cozy.

You probably spotted this already, thanks to the incendiary use of the word 'naked' in the story tags. Search engines seem to love that.

If you want to read about the tribunal ruling try the Times or the Indy or the Daily Mail.

Or Wales Online (yes folks - Sian Williams is Welsh.)

Of elections and budgets

As we head towards the end of another financial year it's time to consider what's on the horizon for small businesses like you and me, and how much Ryman's makes on those portable metal file holders we keep all our paperwork in.

First off, there's a budget coming up, which always means a flurry of activity for me as I update all the handouts for our business skills training. 

This year promises to be handout hell, as this budget will also be the last before a general election. The chances of some kind of emergency budget afterwards are high. Two budgets! Will my laser printer be able to cope?

Recent trainees will know I've been trying to re-invent my 'tax bathtub'® - the graphic disaster that is my attempt to show income tax in visual form.

The bathtub for 2010-11 has needed re-plumbing to allow for the new top rate of 50% for income over £150,000. But it also needs to spring a leak at the right moment to start wiping out the personal allowance once you have over £100,000 of taxable income. 

Tax Bathtub 2010 11

View more presentations from David Thomas.

It's not pretty, graphic-wise. (And all this just to represent the top 2% of UK earners.)

We've known about this for months now. So is there likely to be anything new in the pre-election budget?

Probably no more surprises. Mr Darling has no money to play around with and won't want to frighten the horses before we all go to the polls.

So what might happen when we've had the election and frightening horses is back on the agenda?

One view is that VAT may go up - to 19% or 20%. This is because VAT is one of the two main ways the Treasury collects our money, the other being income tax.

The 50% top rate of tax will probably stay for a while, whoever gets in. Watch someone reduce it just before the election after this one, in a vote-attracting gesture.

More likely: the point at which people pay taxes will not move up in line with inflation. In other words the thresholds will stay much the same, slowly putting more people into higher tax bands as their income rises slightly.

For those of us who are limited companies the Tories say they would reduce the small biz rate from 21% to 20%, and the mainstream rate from 28% to 25%. Keep an eye out for any pronouncements from other parties, but don't hold your breath.

Whatever happens, you'll get all the latest on forthcoming courses, and via the accompanying downloads on our site. And don't forget there is free stuff on the site as well if we don't see you on one of our workshops.

Happy Easter!

Mr Darling, self-employment, flat rates and other VAT musings

Survivors of my redundancy or 'sole trader' courses will know we have a bundle of fun with VAT.  Remember all that info I gave you?  Well it's all changing!

Following the Pre-Budget Report on 24 Nov 08 I've been updating and improving all the downloads and handouts which trainees can access through our secure website. The spreadsheets now cope with VAT much better, and I'm just redoing the relevant tip sheets. They'll be ready to roll by Monday.

The main change (for the moment) is the reduction in VAT,  so that's only really going to affect people who are VAT registered. The change in the standard rate from 17.5% to 15% from Monday 1 Dec 08 will have been noticed by anyone who's not been living under a rock.

What you may not have noticed is the reduction in the flat rates for anyone who uses the Flat Rate Scheme for Small Businesses.

There is a note hidden away on the HMRC website at this link (PDF file, 384 KB - Look at Annex E for the new rates).

You'll see that Film, TV and Media production is down from 10.5% to 9.5% from 1 Dec 08 until VAT goes back up again, probably in Jan 2010.

Incidentally I have a theory about why Mr Darling reduced VAT rather than, say, reducing income tax. There's been a lot of moaning in the papers about a 2.5% reduction being tiny in the scheme of things. And if you consider the saving to you and me when we buy a flat screen TV it is indeed just a couple of quid.

However, reducing VAT allows retail businesses to either pass on the reduction to customers in full or keep price tickets nearer their old level, and increase their own cashflow. Cash is king in a recession, so this may be a better way to stop the wheels falling off some struggling businesses.

In other words, reducing VAT allows retail businesses to make business choices. The fact that it sounds like a benefit to customers is politically expedient because it makes the headlines, but it's not quite so relevant to the economy as a whole.