As announced in August 2016 and confirmed at Spring Budget 2017, the government will legislate in Finance Bill 2017 to allow most unincorporated property businesses (other than Limited Liability partnerships, trusts, partnerships with corporate partners or those with receipts of more than £150,000) to calculate their taxable profits using a cash basis of accounting. Landlords will continue to be able to opt to use Generally Accepted Accounting Principles (GAAP) to prepare their profits for tax purposes.
Note the wording carefully, Landlords will be automatically in Cash Accounting and have to Opt Out, normally, its the opposite way round you have to Opt into Cash Accounting if you are a Trading Business.
Under the cash basis, capital allowances, except on the provision of cars, are not available. Instead, landlords will be able to claim the upfront cost of capital items used in the business.
As for those who do opt to use GAAP, the initial cost of items used in a dwelling house is not an allowable expense under the cash basis. The existing ‘replacement of domestic items relief’ will continue to be available for the replacement of these items when the expenditure is paid.
Interest expense will be treated consistently between those using the cash basis and those using GAAP.
In theory it is simpler just reporting Cash In and Cash Out, but it doesn’t always work in your favour, for example:
Finance – if you buy equipment or furnishings on finance cash accounting restricts you the repayments rather than the full value under UK GAAP
Profits can be higher as there are no accruals or provisions
Will Cash Accounting work for your property business?
Assuming your employer or supplier or customer aren’t reimbursing your costs….
If you’ve got to make journeys for business purposes you can deduct your traveling expenses from your taxable income – so you’ll pay less tax. (If they pay and its ‘wholly and exclusively’ for business they get the tax deduction and its not a benefit in kind)
In addition, there is no restriction on the standard of travel and accommodation, provided the main purpose of the trip is that of business, you can travel first class and stay at the best hotels.
But what if the trip is partly business and partly pleasure, in this case you will need to apportion the costs and only claim for the business element.
The problem comes if the hotel bills somethings outside of the normal package for example a round of golf, this could well become a taxable benefit.
The criteria used to assess if an activity is a hobby or a business are:
The size and commerciality of the activity.
The frequency of the activity and transactions
The application of business principles.
Whether there is a genuine profit motive.
The amount of time devoted to the activities.
The existence of arm’s-length customers (as opposed to just selling your wares to family and friends).
HMRC have some great examples to help you decided, for example
Gail is a full-time employee working for a stationery company. She pays her PAYE tax on this employment every month.
In her free time Gail makes cushions and uses most of them in her home. Occasionally she sells them to friends and work colleagues for an amount that just covers the cost of materials of £15. Sometimes she makes a loss. Any money she does make goes towards her holiday fund.
She decides to make extra cash by selling cushions on an Internet auction site and starts auctioning three or four to see how they go. They all sell for more than £50, a profit of at least £35 each.
She uses this money to buy more materials and within a month she is selling around ten cushions a week, always at a profit, and is considering setting up her own website.
Gail’s initial sales of cushions to friends are not classed as trading. It lacks commerciality and she does not set out to make a profit. The occasional sales are a by-product of her hobby. Once she begins to auction her cushions, she has moved into the realms of commerciality.
She is systematically selling her goods to make a profit. She will need to inform HMRC about her trade, and keep records of all her transactions. On the level of sales shown in the example the potential turnover of around £26,000 is well below the VAT annual threshold so Gail does not need to register for VAT.
Last year HMRC sent 14,000 letters to traders suspected of running a business and failing to declare this on their tax returns.
Of these, 1,000 letters were sent to people where the taxman has already identified a shortfall on their self-assessment forms.
Some of those targeted make as little as £100 profit online.
From April 2017, there will be two new tax-free £1,000 allowances – one for selling goods or providing services, and one income from property you own.
People who make up to £1,000 from occasional jobs – such as sharing power tools, providing a lift share or selling goods they have made – will no longer need to pay tax on that income.
In the same way, the first £1,000 of income from property – such as renting a driveway or loft storage – will be tax free.
Under the new allowances, from April next year individuals with property or trading income won’t need to declare or pay tax on the first £1,000 they earn from each source per year. Should they earn more than that amount they will have to declare it, but they can still take advantage of the allowance.
Should you be declaring your Hobby (Business) to HMRC?
I think the most important changes for businesses are:
Corporation Tax
The main rate of Corporation Tax has already been cut from 28% in 2010 to 20%, the lowest in the G20. It will now be cut again to 17% in 2020, benefiting over 1 million businesses.
Business Rates
From April 2017, small businesses that occupy property with a rateable value of £12,000 or less will pay no business rates.
Currently, this 100% relief is available if you’re a business that occupies a property (e.g. a shop or office) with a value of £6,000 or less.
There will be a tapered rate of relief on properties worth up to £15,000. This means that 600,000 businesses will pay no rates.
Capital Gains Tax
From April 2016, the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10%.
There will be an additional 8 percentage point surcharge to be paid on residential property and carried interest (the share of profits or gains that is paid to asset managers).
Capital Gains Tax on residential property does not apply to your main home, only to additional properties (for example a flat that you let out).
Employers Allowance
The NICs Employment Allowance was introduced in April 2014, for the purpose of supporting businesses and charities in helping them to grow by cutting the cost of employment. Eligible employers can claim the allowance, which reduces their Employer NICs bill by up to £2,000 a year. This is an ongoing allowance. Once an employer has claimed the allowance, they will continue to enjoy it in future years, without needing to do anything further. Over a million employers have benefited from the allowance since its introduction.
This measure will increase the Employment Allowance by £1,000 to £3,000 from April 2016. This means eligible business and charities will be able to claim a greater reduction on their employer NICs liability.
This is fantastic news for employers, but there is a potential sting in the tail.
HMRC plan to exclude one person businesses!
But many believe that HMRC’s plan won’t work because all you need to do is employ a family member or friend and then the one person should qualify for the allowance.
John Cullinane, CIOT tax policy director, said: “The government may find its plan to be ineffective in reducing employment allowance claims because it is open to abuse. It will simply have the effect of penalising single director-employee limited companies that are unable to, or do not know that they could, appoint another person as director or employee to claim the allowance.”
Bournemouth is a fantastic place, 7 miles of lovely beaches, the UK’s largest shopping park – Castlepoint, close to Poole Harbour, the New Forest and Purbeck, what more could you want.
I love Bournemouth, I have lived here all my live.
According to the 2011 census, the town has a population of 183,491 making it the largest settlement in Dorset. The mid-2014 estimate was 191,400. It is predicted to reach 225,000 by 2037, according to the Office for National Statistics’ 2012 (ONS) projections.
It has quite a few accountants too, if you search for Accountant Bournemouth on Google you get a list of 80 practices to choose from, but there are probably many more. There are also hundreds who work in Businesses.
According to Manta there are 5,433 companies based in Bournemouth, there will be many more businesses when you include Sole Traders and Partnerships.
The Local Economy is dominated by
Finance
Banking, Finance and Insurance are the most valuable sectors in Bournemouth’s economy.
JP Morgan established their Global Technology Hub in Bournemouth in the 1980’s and during the late 1980’s I worked as an Assistant Management Accountant in their Financial Management Group. RIAS, McCarthy & Stone and Liverpool Victoria all have their Head Quarters in Bournemouth.
Bournemouth, coming from a very low base, has become the UK’s fastest-growing city in the digital economy
Bournemouth Council states that there are over 400 digital agencies across Bournemouth
These business are among the most suited to use Cloud Based Accounting for example Sage One and Debitoor.
Service Sector
Since 1991 there has been major growth in services up 25.6% in Public Administration, Education and Health.
Tourism
Bournemouth is famous as a seaside resort and 6.88 million visitors came to Bournemouth last year and spend £501 million in the town.
We also have the Bournemouth International Centre – BIC – run by BH Live – BH Live also runs a range of leisure facilities in Bournemouth.
With over 2.5 million visits a year and over £31 million turnover, BH Live is changing lives – placing it at the heart of the UK’s growing social economy. Last year, BH Live hosted 423 shows, sold over half a million cultural, sporting and entertainment tickets, clocked up 1.8 million leisure centre visits and welcomed 88,000 conference and exhibition delegates which contributed over £45 million to the local economy.
Over 600,000 people use our Airport which has flights to over 35 destinations
Bournemouth University
The University has 18,000 students and 2,000 staff
It’s great place for accountants to study and their courses are accredited by the relevant accounting professional bodies – Chartered Institute of Management Accountants (CIMA), Association of Chartered Certified Accountants (ACCA), Institute of Chartered Accountants in England and Wales (ICAEW), Association of International Accountants (AIA), Chartered Institute of Taxation (CIOT)
According to the local Recruitment Agencies, for example CMA, demand for accountants is high and so are salary levels, take a look at the 2014 CMA Salary Survey
So why is it good to be an accountant in Bournemouth?
Bournemouth is a dynamic and growing business hub, with a high demand for accountants, it’s a fantastic place to live and has endless opportunities for accountants both in business and practice.
Can you think of a reason why you wouldn’t want to be an accountant in Bournemouth?
According to Government figures, there has been a net increase of 146,000 businesses in the past year, taking into account all start-ups, closures, takeovers and mergers. It means more businesses have started than closed.
The Business Population Estimates also show the number of businesses that employ people has grown for the second year running, with 35,000 more at the start of 2015 than in 2014.
Small businesses continue to make up 99.3% of all businesses and generate over £1 trillion turnover for the UK’s economy.
Until April 2015 HMRC had been pursuing Landlords who owned multiple properties. HMRC tried to claim up to 6 years Class 2 NI from Landlords saying that owning multiple property investments was a business and therefore Class 2 NI was payable.
HMRC said…
The nature of property letting requires some activity to maintain the investment, but that is not enough to make it a business. For example, being a landlord normally involves:
undertaking or arranging for external and internal repairs
preparing the property between lets
advertising for tenants and arranging tenancy agreements
generally maintaining common areas in multi-occupancy properties; or
collecting rents.
In order for a property owner to be a self-employed earner, their property management activities must extend beyond those generally associated with being a landlord (which include, but are not limited to, the above).
For example, ownership of multiple properties, actively looking to acquire further properties to let, and the letting of property being the property owner’s main occupation could be pointers towards there being a business for NICs purposes.
Until the Summer Budget 2015 when you purchased a business (not its shares) into a limited company from an unrelated party you could write off the goodwill (Intangibles) against your corporation tax but that has now changed and you can’t, another tax relief bites the dust!
In accounting terms, purchased goodwill is the balancing figure between the purchase price of a business and the net value of the assets acquired. Goodwill can therefore be thought of as representing the value of a business’s reputation and customer relationships.
This measure removes the tax relief that is available when structuring a business acquisition as a business and asset purchase so that goodwill can be recognised. This advantage is not generally available to companies who purchase the shares of the target company. The current rules allow corporation tax profits to be reduced following a merger or acquisition of business assets and can distort commercial practices and lead to manipulation and avoidance. Removing the relief brings the UK regime in line with other major economies,reduces distortion and levels the playing field for merger and acquisition transactions.
Intangibles acquired before 8 July 2015 will continue to be treated under the old rules, so a corporation tax deduction will continue to be available for amortisation, and any loss on disposal will be treated as part of the company’s trading profit or loss for the year of disposal.
Almost a third of British workers run some kind of creative business outside their main job contributing an estimated £15bn to the UK economy, according to new research from Moo.com. Profitability among this group of enterprises has increased by 32% in the past year. One in ten part-time creative entrepreneurs plans to leave their job to focus on their business full-time within the next year. However, 60% said it was their passion for the business, and not making money, that motivated them. The most popular part-time creative ventures are in food and cooking, gardening, photography and knitting. (According to Law Donut)
So why are micro businesses taking off:
You can start off working at home
Your start up costs are low
You can do it part time when it suits you
With wages frozen and costs rising it can provide a useful additional income
Its easy to be price competitive with low overheads
The Internet makes it easy to sell your goods and services
Your social capital can be used to generate sales ie use your contacts and connections
There could tax advantages – employees generally pay more tax than sole traders
Some clients prefer the personal touch
It could be start of something big
Here are my top 20 home based business ideas:
Get a lodger – Under rent-a-room a taxpayer can be exempt from Income Tax on profits from furnished accommodation in their only or main home if the gross receipts they get (that is, before expenses) are £4,250 or less
Ironing and Laundry Services – Always popular and you can start with friends and family
E Bay Trading – as E Bay say… The first task is to sort through those bulging drawers and messy cupboards, finding stuff to flog. Get a big eBay box to stash your wares in, and systematically clear out wardrobes, DVD and CD piles, the loft and garage. Use the easy 12-month rule of thumb to help you decide what to offload: Haven’t used it for a year? Flog it.
Blogging – Blogging has taken off and many businesses are looking for people to write blogs for them
Candle Making – You can sell the candles on line and its easy to buy the wax and things you need to make the candles
Car Boot Sale – As with E Bay but without going on line
Cake Making – Make sure everything is labelled correctly and you comply with Health & Safety issues
Data Entry – The internet makes it easy to enter data from where ever you are
Social Media – Similar to blogging, businesses need help to manage Twitter, Facebook and Linked In
Website Design – If you have the expertise, go for it
Sales Parties – Cosmetics to Ann Summers, there is a long list of opportunities
Sewing and Clothes Alterations – Perfect before and after Christmas
Jewellery – Making and selling jewellery is always popular and great for Christmas presents
Car Repairs – Assuming you have the skills needed and comply with legal requirements
Pet Care – Walking dogs or grooming is popular
Virtual Assistant – Also personal organiser or personal shopper
Wedding Planner – You could start by creating a blog about your expertise
The criteria used to assess if an activity is a hobby or a business are:
The size and commerciality of the activity.
The frequency of the activity and transactions
The application of business principles.
Whether there is a genuine profit motive.
The amount of time devoted to the activities.
The existence of arm’s-length customers (as opposed to just selling your wares to family and friends).
HMRC have some great examples to help you decided, for example
Gail is a full-time employee working for a stationery company. She pays her PAYE tax on this employment every month.
In her free time Gail makes cushions and uses most of them in her home. Occasionally she sells them to friends and work colleagues for an amount that just covers the cost of materials of £15. Sometimes she makes a loss. Any money she does make goes towards her holiday fund.
She decides to make extra cash by selling cushions on an Internet auction site and starts auctioning three or four to see how they go. They all sell for more than £50, a profit of at least £35 each.
She uses this money to buy more materials and within a month she is selling around ten cushions a week, always at a profit, and is considering setting up her own website.
Gail’s initial sales of cushions to friends are not classed as trading. It lacks commerciality and she does not set out to make a profit. The occasional sales are a by-product of her hobby. Once she begins to auction her cushions, she has moved into the realms of commerciality.
She is systematically selling her goods to make a profit. She will need to inform HMRC about her trade, and keep records of all her transactions. On the level of sales shown in the example the potential turnover of around £26,000 is well below the VAT annual threshold so Gail does not need to register for VAT.
Many traders start off in a small way and don’t realise that they need to register with HMRC, they assume their activity will be treated as a hobby, but things can grow quickly.
You should register as Self Employed as soon as your hobby becomes a commercial venture, even if you are losing money!
If you don’t register, HMRC will be looking for you and if you have an online business it won’t be hard for them to find you.
Ebay say they work ‘hard to ensure that businesses that trade on the platform are aware of their tax obligations’.
It added: ‘We do not hesitate to share information with government agencies should there be evidence of wrongdoing. We require all sellers trading as a business on eBay to register for a business account.’
