Blog

Your filing and payment deadlines for Q4 2021

Posted on | by Jessica Weston | Leave a Comment on Your filing and payment deadlines for Q4 2021

Remembering all your company’s filing and payment deadlines can be a big task, whether you’re a new startup founder or an experienced managing director. 

To give you a headstart (and to prevent you missing any deadlines and facing a penalty) we’ve summarised all the key filing and payment deadlines coming up for Q4 of 2021.

Company-specific deadlines

Filing of accounts:

If your company was formed between 1 January 2020 and 31 March 2020, you need to file your first-year accounts with Companies House no later than 1 year and 9 months (to the specific day) after your company’s incorporation date. 

For example:

  • Date of incorporation 15/01/2020 – Filing deadline 15/10/2021
  • Date of incorporation 01/02/2020 – Filing deadline 01/11/2021
  • Date of incorporation 31/03/2020 – Filing deadline 31/12/2021

If your company has an accounting period that ends between 1 January 2021 and 31 March 2021, you need to file your annual accounts at Companies House 9 months after your company’s financial year-end. 

For example:

  • Period-end 31/01/2021 – Filing deadline 31/10/2021
  • Period-end 28/02/2021 – Filing deadline 30/11/2021
  • Period-end 31/03/2021 – Filing deadline 31/12/2021

Tax filing deadlines:

  • If your company has an accounting period ending between 31 December 2020 and 30 March 2021, you need to pay your Corporation Tax bill (or tell HMRC that you don’t owe any) 9 months and 1 day after your accounting period for Corporation Tax ends. For example, a company with a 28/02/2021 accounting period-end needs to pay Corporation Tax by 01/12/2021.
  • NOTE: if your accounting period is longer than 12 months, the first deadline is 21 months and 1 day after the accounting period started, and the second one is 9 months and 1 day after the accounting period ends. 
  • If your profits are more than £1.5 million, the tax is payable quarterly with two payments before the end of your accounting period and two after. The first payment is normally six months and 13 days after the start of the period, with the others paid three-monthly from that point onwards.
  • If your company has an accounting period ending between 1 October 2020 and 31 December 2020, you need to file a company tax return 12 months after your accounting period ends – so, the same month and day as your period-end but in 2021.
  • Your VAT returns for periods ending 31 August 2021 to 31 October 2021 need to be submitted 1 month and 7 days from the end of your VAT period, with payment normally due at the same time. If you pay by Direct Debit, you have an additional 3 days to make the payment.

General deadlines:

  • Self assessment – The deadline to submit paper self-assessment income tax returns for 2020/21 is 31 October 2021.
  • Christmas planning – Christmas falls on the weekend this year (Christmas Day is Saturday 25 December 2021). Monday 27 December and Tuesday 28 December will be bank holidays, so you need to factor these holidays into your business planning.
  • PAYE and NI – Pay-as-you-earn (PAYE) and National Insurance (NI) payments are due on the 19th calendar day of the month after the month-end or quarter end, as applicable (22nd for electronic payments)
    • NOTE: for example, people think that payroll month 7 is for October, but it actually runs up to 5 November. This makes a difference with weekly payrolls. PAYE will be due on 19/22 November.

Get in touch if you have any questions

Don’t worry, if our firm carries out the related activities (e.g. payroll processing), we’ll be monitoring your deadlines automatically. But it’s worth remembering that you, as a company, remain legally responsible.

Be sure to add these deadlines to your diary and business planning, so you’re on the ball when it comes to the key dates. And pay particular attention to any dates where we aren’t carrying out the work for you (and where you’re responsible for meeting the deadline).

Get in touch if you have any questions.

Making data meaningful in your business

Posted on | by Jessica Weston | Leave a Comment on Making data meaningful in your business

Three steps to ensuring data is meaningful for your business

Raw data describes the facts and figures that a business processes every day. Over time, every business hoards a certain amount of data and it only becomes meaningful to a business after it has been processed to add context, relevance and purpose.

For example, in a restaurant, every order will be recorded. However, a restaurant won’t learn much by looking at each one in isolation. However, analysis of the orders will reveal trends and patterns, such as peak dining days or biggest-selling menu or bar items. Knowledge of the business comes from the relationship between the singular pieces of information. That restaurant owner may know to do their biggest stock order on a Wednesday by analysing their covers and establishing that sales increase by 38% on Thursdays.

The pace of business in today’s technological times requires businesses to be able to react quickly to changing demands from customers and environmental conditions. The ability to be able to compile, analyse and act on data is increasingly important. In some instances, a high volume of data may need to be accumulated and analysed before trends and patterns emerge.

When you aren’t compiling accurate business data, you can only rely on gut feel and assumptions about past performance to inform your future business decisions.

If your business is already using cloud software for accountancy, project management system or CRM, it’s likely that you’re sitting on a goldmine of data. If properly utilised, this data can greatly aid running a successful business. You’ll have valuable insight into your sales, expenses, profit and staff efficiencies that can help you answer critical questions and drive smart business decisions.

Every business is unique, but here are three quick tips to help you drive data in your business.

1. Data is only powerful if there is context – can you stop to answer these questions?

  • What is your primary objective (business or personal)?
  • What is happening in the business?
  • What isn’t happening?
  • How can you influence what happens?

Figure out what you’re currently trying to achieve before anything else. It’s important to periodically go back and ask yourself these questions and what goals develop from the answers, as answers evolve over time. You may have started out with your primary objective as running the best restaurant in your area. However as time has passed, your primary objective might now be to take time away from the business to spend more time with your children.

2. The only way your data can help you drive your business is if it’s accurate and organised appropriately – ask yourself:

  • Are your financials up-to-date?
  • Do you have any unreconciled transactions?
  • Are you tax compliant?
  • Are your staff trained on what systems and processes to use for different parts of your business?
  • Are your cloud systems being correctly utilised?

The worst thing you can do is to attempt to analyse incorrect data and attempt to make decisions for the business based on it! Tools like Spotlight Reporting can help you with the reports you need for business decisions.

3. Understand what the data necessities are and what the niceties are.

  • What would you most like to understand about your business?
  • What figures pinpoint success for you?
  • What are your objectives over the next six to twelve months, and two to five years?

Remember, to focus on what truly matters and build from there. If you want help with the process, we can accumulate, analyse, report and advise on your data; or show you the tools to use.

7 Ways to Boost Cash Flow for Your Small Business

Posted on | by Jessica Weston | Leave a Comment on 7 Ways to Boost Cash Flow for Your Small Business

Cash flow management is one of the most difficult parts of owning a small business. Even if your business is profitable, cash flow problems can make you feel like you’re in a never-ending cycle of feast and famine. If it seems as though money is leaving your business faster than it’s coming in, read on for seven ways to boost your cash flow and escape the financial see-saw ride.

1) Stay on Top of Your Books

We’re willing to bet that bookkeeping is not your favourite task, but it can significantly improve your cash flow. Keeping your records up-to-date helps you to identify areas for improvement and get a handle on exactly where your money is going every month. Cloud accounting software such as Xero, Quickbooks or Freshbooks can make this process infinitely easier. You can upload your receipts, keep track of your invoices and create reports or projections to help you improve your money management. 

2) Reduce Outgoings

It may seem like obvious advice, but reducing your outgoings is important. Once you get a clear picture of your monthly expenditure, get creative and look for new ways to cut costs. This could be cancelling subscriptions, shopping around with utility suppliers or streamlining your workflows.

3) Equipment Leasing or Loans

Buying new equipment outright can put a serious dent in your bank balance and damage your cash flow. It may be worth considering leasing equipment or taking out an equipment loan instead. Both options are more expensive than making an outright purchase but are very helpful in terms of cash flow, so it may well be worth it.

Equipment leasing is ideal if you only need equipment for a short period of time, or if you anticipate you will soon need to upgrade it. You may also have the option to purchase the equipment at the end of the lease, giving you more time to build up the cash reserves to do so.

If you want to buy your equipment but are concerned about your cash flow, a loan could be a good option. Equipment loans function in a similar way to a traditional bank loan, but tend to be lower-risk. Rather than one big lump sum payment, you can pay for the equipment in manageable increments and you will own it once the loan is paid in full.. 

4) Keep an Eye on Inventory 

Holding onto large amounts of stock that isn’t moving ties up your capital, so it pays to manage your stock carefully. You should only purchase stock that you know you can sell. You should also keep a careful track of expiration dates so that you can move products before they become obsolete and regularly review sales figures so that you know which stock moves quickly, and which tends to stand still. 

5) Offer Discounts for Large Orders

If cash is tight, consider appealing to customers by offering attractive discounts for large orders. Not only does this create a big cash inflow that can help you to get moving again, it also helps to shift stock that may have been sitting in inventory for a while.

6) Better Invoice Management

In order to improve your cash flow, you need the money you’re owed to come in as quickly as possible. Sending invoices quickly and being diligent with payment reminders makes a big difference when it comes to getting paid on time; if you forget to chase up an invoice, you can’t blame your customers for forgetting too! 

If you struggle with late-paying customers, introduce a late fee to encourage them to pay you on time. You may also want to consider offering a discount as an incentive for early payment, as this will likely speed things along.

7) Use a Business Credit Card

A business credit card should not be used for long-term borrowing, but it can be a fantastic solution for short-term cash flow issues. This allows you to smooth over any issues and borrow interest free for a short period of time. Of course, it goes almost without saying that you should manage your card responsibly and aim to pay your balance in full each month.

Summary 

With a few common sense tips and carefully implemented strategies, you can boost your cash flow and ensure that your business always has enough gas in the tank to keep going. Cash is king in business and it is often worth making small concessions to profit in order to keep it flowing, for example with equipment leasing or offering discounts for early payments or large orders. When you stabilise your cash flow, you have more freedom to grow and invest, not to mention far less sleepless nights spent worrying about running out of funds. 

6 Reasons for Small Business Owners to Outsource CFO

Posted on | by Jessica Weston | Leave a Comment on 6 Reasons for Small Business Owners to Outsource CFO

As your small business grows, it will also encounter new and increasingly complex financial problems. In this day and age, a virtual CFO might just be the answer to your prayers. Let’s take a look at six key reasons why small business owners should outsource CFO services. 

1) Time 

As a small business owner, you constantly juggle many responsibilities. You are not only in charge of day-to-day operations and meeting customers’ needs; your time must also be spent on managing growth and developing strategy to increase profits. Outsourcing financial services can take a lot of work off your plate, ensuring that your business stays in good financial health whilst you focus on what’s most important: running and growing your company. 

2) Cost 

A full-time, in-house CFO is a costly hire and whilst your small business is in need of financial guidance, you may not yet be ready to cover that cost. A virtual CFO works part-time and remotely with your business, which saves you a significant amount of money. For the fraction of the price of a traditional in-house CFO, you will still gain access to top-level financial management services. You will also be able to scale these services up or down as your business changes and evolves. 

3) Flexibility 

Flexibility is the key to survival in today’s landscape. A single change can have a ripple effect on your entire company, and that means you need to be ready for anything. Outsourcing gives you the power to scale services according to your needs, whereas in-house hires leave much less room for flexibility. A quality CFO will be able to seamlessly scale services for their clients, which gives your business far greater organisational agility.

4) Quality Financial Guidance

A virtual CFO brings a wealth of experience, high-level training and in-depth industry knowledge to you. They function as a trusted member of your team who you can count on to tackle any financial problems your company is facing. An outsourced CFO has worked with many different kinds of businesses and thus be able to use their financial acumen to preserve and improve the financial health of your organisation. Their first-hand experience and top-level knowledge means that they are able to offer an impartial – and invaluable perspective when you have important decisions to make. After all, you can’t make smart choices for your business about matters you don’t truly understand. It’s like throwing darts in the dark, but with more expensive consequences! 

5) Stability 

The recent emergence of the covid-19 pandemic has left many companies across the world in a state of panic. A virtual CFO can help to prepare you for market shifts and tackle the problems that may arise in the ever-changing economic climate. If you’re worried about your company’s fate during and after this crisis, hiring an outsourced CFO could be just what you need to weather any storm that comes your way. 

6) New Opportunities 

Although we’re living in uncertain economic times, there are still opportunities for growth. The pandemic has seen a great deal of loss, but it has also provided many businesses with ample opportunity to grow. Yes, change is scary but it can also be used as fuel for your own success when you know how to spot untapped potential – which is precisely where a virtual CFO comes into play.

Summary

As your business expands, it will only encounter more complex financial issues. Outsourcing to a virtual CFO could be the answer for small businesses looking to save time and money while ensuring their company’s financial health over time. A great CFO will equip you for long-term success without being a drain on your resources; it’s a real win-win.

Get in touch with us today to discuss our virtual CFO services.

Understanding your revenue drivers

Posted on | by Jessica Weston | Leave a Comment on Understanding your revenue drivers

For your business to make money, you need to generate revenue.

You produce revenue through your usual business activity, by making sales, getting your invoices paid, or taking cash from paying customers. So, the better you are at selling your products/services and bringing money into the business, the higher your revenue levels will be.

But what actually drives these revenue levels? And how do you get in control of these drivers?

Knowing where your cash is coming from is more crucial than ever

As a trading company, you face the multiple challenges of a global recession, an increase in online consumer buying and a ‘new normal’ when it comes to trading, markets and buying expectations. The better you can understand the nature of your revenue and its drivers, the more you can flex, manage and control your ability to generate this income.

This helps your medium to long-term strategic thinking, and your decision-making, allowing you to be confident that you’re focusing on the business areas that deliver maximum revenue.

Import areas to consider will include:

  • Revenue channels – where does your revenue actually come from? Do you create income from online sales and ecommerce, through retail sales in bricks and mortar stores, or through wholesales to other businesses? You may focus on just one of these channels, or it could be that you use a mixture of two, three or more. 
  • Revenue streams – your total revenue will be made up of a number of different ‘streams’ So, you might be a coffee shop, whose revenue streams include coffee sales, cake and pastry sales and lunch sales. Knowing which revenue streams you rely on, which are most productive and what return they are delivering allows you to make decisions. If 80% of your income comes from 20% of your products, perhaps you need to tighten up your product range and ditch some of the poor sellers. If you’re selling more services to one particular industry, perhaps you should focus more marketing in this specific niche, or downscale your sales activity in less profitable niches.
  • Product/service split – Do you know which products/services are the most profitable in the business? Which products/services have been resilient to market changes (giving you some revenue stability) and which have adapted well to change? The more you can dive into your metrics and find the most productive and adaptable products and services, the greater your ability is to provide constant and evolving revenue for the business.
  • Value vs volume – Is your revenue based on selling a high volume of products/services at low margin, or low volume at a high margin? Based on this, can you move your margin down to create a more attractive price point (and more value for customers)? Or are their ways to push volume up, shifting more units and boosting total revenue? By diversifying into new channels, new streams or new products/services you can aim to balance value and volume to create brand new sales – and higher revenue levels. 

Talk to us about exploring your revenue drivers

If you want to boost revenue and increase your overall profitability, come and talk to us. We’ll review the numbers in your business, help you to understand your revenue drivers and will give you proactive advice on enhancing your total revenue as a company. 

Get in touch to kickstart your revenue generation.

What’s your money story?

Posted on | by Jessica Weston | Leave a Comment on What’s your money story?

What you believe about money and how you relate and interact with it affects every aspect of your life and business. A belief is simply a story that you have told yourself so many times that you think it’s the truth. So, for us all to live a vital, vibrant, and thriving life, the story we’re telling ourselves and choosing to believe about money needs to be uncovered, understood, and possibly re-written.

Let’s start by understanding what money means to you, what it represents, and what feelings it evokes. Of course, there can never be one right answer. For some, money can represent freedom, opportunities, or fun. For others, money can evoke feelings of stress, inferiority, and a lack of control. However, money doesn’t have to be any of those things.

The associations that we unconsciously attach to money are (like so many things) based on our understanding, experiences, and environment. Money is just paper, metal, coding, and digital numbers on a computer screen. 

2020 caused us all to pause and evaluate in a way most of us have never had to previously. We had to ask ourselves: 

  • What really matters in this world?
  • How does money fit in with our priorities? 
  • How do we ensure our money story does not interfere with being the person we want to be? 

Often, it’s not money that’s the challenge or problem we need to understand and change; it’s our association to it. This association involves the value we place on money and, more often than not, the value and worth we place on ourselves. We’ve allowed money to be the benchmark for the value of all things we hold dear. We assume that the more we have, spend, or save, the better we will be as people.

But should we always be in pursuit of more money, more growth, and more success? Taking a moment to understand what truly drives us is a powerful and thought-provoking reflection to have. Uncovering our own money story in the greater context of our business and personal goals could be critical to our success. 

While we love to help clients manage their money and grow their business, we believe all business owners should also have time and mind freedom. This means having time for family, friends and hobbies, and reducing the stress so many business owners face.

No matter what your goals are, we’ll help align your business and personal goals to ensure you have financial, time and mind freedom. Get in touch to find out more about how we can help.

“An investment in knowledge pays the best interest.” – Benjamin Franklin

Is your cost of sales affecting your gross profit?

Posted on | by Jessica Weston | Leave a Comment on Is your cost of sales affecting your gross profit?

Do you know how much it costs you to produce each product or service in your range? 

The better you can understand this cost of sales – or cost of goods sold (COGS), as it’s more commonly known – the more ability you have to control your company’s profitability. When you know your COGS, you can set the right price point, control your profit margins and ensure that you’re maximising your gross profit.

But to do this, you need to understand COGS and how it impacts on your financial management.

Understanding your COGS

To take one of your company’s products or services from inception to delivery, you will incur a number of costs. For example, if you’re a manufacturing business, these costs might include buying in raw materials, direct labour costs, the overheads for running the machinery in your factory, the costs of delivering the products and the sales and marketing expenses needed to sell the product to your target customers.

For you to manufacture a finished product and to generate a sale, all these costs are a necessary part of the process. They’re the direct costs of producing your goods for sale.

You calculate your COGS number for the period by looking at the value of your opening stock (or inventory), adding the cost you’ve incurred to produce the goods and then subtracting the value of the closing stock balance.

The COGS formula looks like this:

Opening Stock + Purchases – Closing Stock = COGS

So, if you started with an inventory of ￡10,000, this is how you’d calculate your COGS:

  • Opening Stock: ￡10,000
  • Purchases: ￡25,000
  • Closing Stock: ￡8,000
  • COGS: ￡27,000

Reducing your COGS to boost gross profits

The more sales you make at a given price, the higher your revenue (income) will be. Deducting your COGS number from your revenue figure gives you your gross profit – and gross profit is a key metric for tracking the health and profitability of your business.

A high COGS number reduces the size of your profit margin. And, in turn, a small margin will start to have a negative impact on your gross profit. Being able to control and manage your COGS, and its impact on your gross profit, is a vital skill for any product-based business.

Here are some ideas for improving the profit impact of your COGS:

  • Reduce your supplier costs – If you can reduce the size of the purchases made to produce your goods, that means less expenditure and less impact on your profit margins. Try shopping around for cheaper suppliers, or negotiating better prices with your existing suppliers to bring down costs. 
  • Streamline your production process – the more complex your production process is, the more overheads and production expenses there will be. Taking a lean approach helps you to continually evolve your processes and remove the extraneous elements – cutting costs while still delivering a quality product. 
  • Increase your prices to boost your margins – if your COGS number is eating into your profit margin, one way to resolve this is to increase your price point. This will help to increase income and boost your margin but does require caution. If prices get too high, this can damage existing customer relationships and make you uncompetitive in the market – so think carefully about any price increases before taking action.

Talk to us about improving your gross profit

If you want to boost your gross profit and get COGS under control, come and have a chat with us. We’ll look over your expenses and overheads, and will look for the opportunities to reduce your goods-related purchases and push for a better profit margin on your products.

What business taxes will your new company need to pay?

Posted on | by Jessica Weston | Leave a Comment on What business taxes will your new company need to pay?

As the founder of a company, there’s a long list of compliance tasks to get your head around – and one of the key tasks will be registering your company for business taxes.

Once you’ve registered as a limited company, you become liable for paying taxes on the profits you make. These taxes are collected by HM Revenue & Customs (HMRC) and provide the funds used by HM Treasury to pay for the running of the country. Paying your taxes isn’t just a compliance task – it’s part of your social and community responsibility as a business.

But what business taxes are there? And how do you know which of these taxes to pay? 

Understanding the main business taxes

Despite HMRC’s motto of ‘tax doesn’t have to be taxing’, the UK tax code can be a complex thing. 

If you’re not a trained accountant and have limited experience in financial management, understanding the rules around business taxes can be confusing. So, to start with, let’s look at the main business taxes you’re likely to register for.

Key business taxes include:

  • Corporation tax (CT) – corporation tax is a tax that’s levied on your profits as a limited company. At the end of your accounting period, you must submit a corporation tax return, and pay the CT that’s due. At present the CT rate is 19% but it’s worth noting that the UK CT rate will rise to 25% in 2023.
  • Value-added tax (VAT) – VAT is a consumption tax that’s levied on goods that have had value added at each stage of the supply chain. When you buy these goods, you’ll pay VAT. And when you sell these goods, you will collect VAT. At the end of each quarter, the VAT funds that you’ve collected must be paid to HMRC. You can also claim back the VAT you’ve spent on certain qualifying goods and services too. The standard rate of VAT is 20%, the reduced rate is 5% and certain goods can also be zero-rated.
  • Pay-as-you-earn (PAYE) – PAYE is a way to collect income tax and National Insurance Contributions (NICs) from your employees. If you have employees and run a payroll, then you’ll need to collect the required amounts of income tax and NICs from your employees’ wages as part of your payroll process. Then you must report on these deductions and pay the tax and NICs to HMRC, either monthly or quarterly after the pay period, depending on the amount involved. In addition to the income tax and NICs you deduct from your employees, the company may also have to pay Employer’s NICs as a business expense.

Get in touch if you have any questions about tax.

Back to Tax Basics: How does Corporation Tax work?

Posted on | by Jessica Weston | Leave a Comment on Back to Tax Basics: How does Corporation Tax work?

Corporation tax is a tax that’s levied on your company’s profits. 

When you operate your business through a limited company, that company is considered to be a separate entity from you as an individual. Among other things, this means you have to pay corporation tax (CT) on your company’s profits

But how does CT work? And what do you have to pay?

1. The basics of corporation tax

Paying your taxes is one of your key responsibilities as a new company, but it’s important to understand what’s required and how the CT process works. 

  • When you form a company, HM Revenue & Customs (HMRC) will issue you with a 10-digit Unique Taxpayer Reference (UTR). Within three months of you starting to trade, you’ll also need to advise HMRC that you have begun trading, the date you started and the date up to which you intend to produce your company accounts.
  • HMRC will send you a notice to complete a tax return. If your first accounting period is longer than 12 months, two returns will be required – no single return can cover more than 12 months. Unless you change your period end, after the first one, each accounting period is generally exactly 12 months long.
  • Each year, the company has to prepare a CT return, giving details of your profits and calculating the tax that’s payable.
  • The starting point is generally the profit shown in the company’s annual accounts. This is adjusted by adding back expenses which aren’t allowable for tax, and deducting costs which are allowable against tax but are not treated as an expense in the accounts.
  • Although there can be numerous adjustments between ‘accounting profit’ and ‘taxable profit’ the most common ones are to do with:
    • Fixed asset depreciation
    • Business entertaining
    • Research and development (R&D) expenditure

2. Fixed assets depreciation

When you buy things like plant and machinery, vehicles and computer equipment, these are shown in the company accounts as ‘fixed assets’, and the cost charged against profits over a number of years, equal to their anticipated life. The charge against profits is called depreciation.

  • Although depreciation appears as a line item in the company’s profit and loss account, it isn’t allowed when calculating tax, so the depreciation charge is added back. In its place, capital allowances, writing-down allowances and annual investment allowances may be claimed. The rates of these depend on the type of asset and can vary from year to year.
  • In many cases, this means that in the year when you purchase fixed assets, even though they may be depreciated over a number of years, the whole of the cost can be deducted from profits. Currently, there’s an additional ‘super-deduction’ scheme available where 130% of actual costs are deducted, which can greatly aid cash flow.
  • As an example of how this works, if you buy a van costing £20,000 for work purposes that you expect to last for 5 years before being scrapped, each year you will make a depreciation provision against profits of £4,000. For tax purposes the £4,000 charges aren’t allowed but, with super-deduction, you can take £26,000 off your taxable profits in the first year instead. And you can do that even if you’re buying the van on hire purchase, where you haven’t yet paid for the van in full!

3. Business entertaining

Although, in most cases, entertaining customers or prospective customers is a perfectly reasonable business expense, for tax purposes the cost incurred is added back to your profits. 

Because of this, it’s not allowed as a deduction when calculating your tax charge. It doesn’t mean you shouldn’t do it, or that it’s considered to be illegitimate in some way, it’s just not permitted as a cost when calculating corporation tax.

5. R&D allowances

When your company spends money on R&D activities, the cost that is deducted for calculating taxable profits can be up to £230 for every £100 actually spent.

To qualify for this enhanced deduction, the R&D activities have to be aimed at resolving ‘scientific or technological uncertainties’ that couldn’t be easily resolved by a professional working in the field. Even if your activity failed to resolve the issue, it still counts for the purposes of the scheme. So, if you’re in the process of carrying out R&D work, it makes great sense to claim any available R&D allowance.

  • To qualify, your project has to be related to an existing or proposed company trade, and can revolve around developing new or improving existing products, processes and services. The costs include staff costs, subcontractors, agency workers, utility costs, software costs and consumable materials.
  • R&D isn’t always the obvious things such as software development or inventions; it can be working out how to age construction materials so they can be used to repair listed buildings, or the development of eco-friendly packaging materials.
  • Claims can be made in respect of costs up to two accounting periods ago. So, if your company has a 31 December year-end, claims in respect of costs incurred in the year ended 31/12/2019 can still be submitted up to the end of 2021.
  • Unlike many tax benefits, R&D claims can be converted into cash by loss-making companies, with HMRC making payment of 14.5% of any losses surrendered. 
  • Theoretically, making a claim for R&D relief can be made by by simply completing the appropriate boxes on the CT600 tax return and the supplementary pages. In practice, unless a report is also attached describing the projects, explaining why they fall within the scheme and breaking down the costs, it is likely to be delayed while HMRC seeks further clarification.

6. Should I try compiling my own CT return?

Given the complexity of tax legislation, completing even a straightforward company tax return isn’t advisable as a ‘DIY’ job. If you want to minimise your tax bill, and maximise the available reliefs, that’s going to mean completing your CT accurately and in detail.

Talk to us about your corporation tax needs

We can help you become more tax-efficient by advising you on discretionary expenditures, such as company pension contributions, fringe benefits and so on. Often, it’s necessary to include a trade off between your company’s tax position and your personal tax outcomes.

In specialist areas, like R&D allowances, we can guide you through the claim process and even highlight eligible expenditure you may not have realised you were incurring. Most R&D projects aren’t carried out by people in lab coats, so this is a relief that’s open to many businesses.

Get in touch to talk through your corporation tax.

Posted in Tax

Back to Tax Basics: How does VAT work?

Posted on | by Jessica Weston | Leave a Comment on Back to Tax Basics: How does VAT work?

Value-added tax (VAT) is a consumption tax that’s levied on goods that have had value added at each stage of the supply chain.

Most businesses with annual sales of £85,000 or more have to register for VAT. And even if your sales are below that level, you can register on a voluntary basis. VAT can be confusing, though, with different rates, options and, in some cases, quite complex rules to consider.

So, is your business likely to be required to pay and collect VAT? And why do we have VAT in the first place?

1. The key requirements for a VAT-registered business 

In essence, VAT should be a simple form of taxation. As a VAT-registered business, you must:

  1. Charge VAT to your customers 
  2. Deduct VAT you have been charged by your suppliers
  3. Pay the difference over to HMRC (or claim it back if there’s a refund). 

In basic terms, your business is acting as an unpaid tax-collector, and the actual burden of the tax is on unregistered businesses and individuals who are charged VAT but can’t claim it back.

2. A short history of VAT

When VAT was first introduced in 1973 there was a single rate of 10% which applied to most goods and services. This kept things simple and straightforward across the board.

The first indication that the basic simplicity wouldn’t last came in July the following year, when a rate of 12.5% was introduced on petrol and luxury goods, and that ‘luxury’ rate was then doubled to 25% four months later. The luxury rate was abolished in 1979.

A reduced rate of 8% was introduced in April 1994 and applied to domestic fuel and power, which was previously 0%. The reduced rate now stands at 5%.

Without covering all aspects of the tax, here are some common queries.

3. When do I have to register?

As we’ve mentioned, it’s not mandatory to register for VAT until you reach the current VAT threshold of £85,000. But what should you do when this looks imminent?

If you believe your VAT taxable turnover will exceed £85,000 during the next 30 days, you need to register by the end of that month and start charging VAT from the 1st of the next month. 

Where you have a VAT taxable turnover of over £85,000 in the immediately preceding 12 months, you have to register by the end of the next month – and start charging by the 1st day of the second month after you went over the limit. This is a rolling 12-month period, not a calendar, tax or business year, so if you think you may be close to that point you should check each month.

4. When should I consider registering on a voluntary basis?

Even if you’re below the threshold for compulsory registration, you may want to register on a voluntary basis. There are two main reasons that businesses do this:

  1. Sometimes people believe that, cosmetically speaking, they appear bigger or more successful if they’re VAT registered, and that alone is enough to persuade some people.
  2. Secondly, if most of your customers are themselves VAT-registered, then the VAT you charge isn’t a real cost to them, and you can benefit from reclaiming VAT incurred on your own purchases. Because of this, you can make more profit as a VAT-registered business that otherwise would be lost to tax.

5. What’s the difference between the invoice basis and the cash basis?

VAT is accounted for on either a quarterly or (less common) monthly basis. There are two different ways that you can account for the VAT:

  • On an invoice basis, you include VAT on sales based on your invoice dates, and deduct VAT charged by your suppliers based on their invoice dates.
  • On the cash basis, the relevant dates are when your customer pays you, and when you pay your supplier.

If your customers pay immediately, but you purchase on credit, then the cash basis would suit you well. From a timing viewpoint, you would be reclaiming VAT on your purchases earlier. If, on the other hand, your customers typically take a while to pay, while you settle your supplier invoices quickly, then the invoice basis may be better.

6. What rates should I charge?

There are currently 3 VAT rates to choose from:

  • The standard rate of 20% applies to most goods and services.
  • The reduced rate of 5% applies to domestic gas and electricity, and to supplies in the construction industry, such as certain building renovations and alterations. It also applies to some energy-saving materials installed in residential properties, to child car seats and some mobility aids. The reduced rate has been temporarily extended to some aspects of the hospitality industry over the course of the pandemic.
  • Zero-rate (0%) applies mainly to everyday items, like basic foods, children’s clothing, books and newspapers etc.
  • There is another category, which is called ‘exempt’. This is where no VAT is charged, but the business supplying it cannot reclaim any VAT they incur in respect of such supplies. This includes items such as postal services and health services.

7. What VAT can I reclaim?

Presuming that you don’t make exempt supplies, then you can reclaim all VAT you incur in respect of your purchases. 

This includes:

  • Goods, services and materials to be incorporated into things you sell 
  • Expenses such as stationery and telephone charges
  • Most capital purchases, such as computer equipment and commercial vehicles. 

The main exception is if you buy company cars, where the VAT is not reclaimable, or items with mixed business and personal use where part or all of the VAT may be blocked.

8. What are these VAT schemes I’ve read about?

There are a number of VAT schemes which are available to businesses. 

Some, such as the second-hand margin schemes, apply to specific industries such as used motor vehicles, art and antiques. Others, such as the flat-rate scheme and the annual accounting scheme, aim to simplify the workings of the VAT system.

9. What impact will VAT have on your business?

Where you register for VAT, apart from handling the administration, there is no net VAT ‘cost’. 

When paying the quarterly VAT bill, it’s simply tax you’ve added on to your charges to your customers, less any additional amounts you’ve paid to your suppliers.

Where VAT can have a significant financial cost, though, is where you don’t follow what are increasingly complicated rules. So, for example, being prevented from claiming back costs on your purchases because you didn’t check that your suppliers’ invoices are valid, or charging the wrong rate – or not charging at all – to your customers.

Talk to us about giving your VAT the once-over

This overview is a basic primer to VAT but there are lots of detailed industry-specific rules that apply in various circumstances. So getting professional advice is always a good idea.

As tax specialists, we can help you:

  • Decide whether or not you should register voluntarily
  • Run a ‘health-check’ of your systems if you’re already VAT-registered
  • Make sure you’ve considered any of the applicable special VAT schemes.

Get in touch to talk about your VAT needs.

Posted in VAT