Content from this article was originally posted by XERO.
While there are many advantages of being your own boss and running your own small business it isn’t always easy and it can come with hurdles you didn’t even know existed. Then throw in 12 months of restrictions, lockdowns and uncertainty. The scale of the impact felt by the self-employed is abundantly clear in research by simply business. They found Covid-19 will cost SMEs an estimated £126.6 billion – double what owners predicted it would cost them. With six million SMEs in the UK – accounting for over 99% of all businesses, 33% of employment and 21% of all turnover – this £126.6 billion hole in the books of small businesses is a huge blow to the economy.
It’s been a lean time for small businesses, and especially the families supporting them.
Xero’s small business trends report shows that 60% of small business owners are worried about their household finances running low. So while 2022 will hopefully be a year of rebounding sales and revenue, owners really need that to carry through to the business’s bottom line.
What the experts say
“Businesses must analyse margins and focus on the products and services that generate actual profits as they try to restore cash to the business,” says Ya Wen How, an accountant at AccountServe, who participated in the report.
While there will be a temptation to withdraw any spare cash from the business as ‘owner’s drawings’, experts say it’s important to be mindful of upcoming and potentially unknown expenses.
“Owners often overlook upcoming business expenses when taking drawings, which creates cash flow issues later,” says David Stephens, an accountant at Stephens Financial Services. These cash flow issues create further disruption to the household budget because money has to be put back into the business.
“Rather than clearing out the business bank account, owners are better off paying themselves a modest amount at regular intervals,” Stephens advises.
Takeaways for small businesses
There are a few things small businesses can do to help support their recovery according to Xero’s small business trends report:
Analyse your business margins and focus on products that generate the most profit
Create a ‘rainy day fund’ within the business so you’re not constantly loaning it money from your personal savings
Schedule regular, sustainable drawings to ease home budgeting
Keep your regular drawings modest, as you can always give yourself a bonus payment at the end of a good year
Over the past few years, it has been difficult to keep up with the ever-changing landscape that is, business finance. There have been several schemes announced by the UK Government to support both businesses and their employees but staying on top of all the changes and keeping everybody informed hasn’t always been easy. There have been several changes that come into effect this year, from the end of the Coronavirus working from home tax concessions to the commencement of tax digital and an increase in HMRC’s late payments interest rates. Not to mention 2021 IR35 announcements. We have discussed some of these changes before but we thought as we are hitting a busy time of the year for accounting, it might be useful to share information and resources about these upcoming changes.
Coronavirus working from home tax concession to stop in April 2022 If you or your teams have spent some time working from home since the start of the pandemic, you probably already know about the Coronavirus working from home tax concessions. From April 6 2020 employees have been able to claim some tax relief if they have needed to work from home because of the pandemic. The tax relief is worth between £62 and £125 pa. This is based on 20% of £312 pa or 40% of £312, depending on whether the employee was a basic rate or higher rate taxpayer in the tax year. The allowance can be claimed in both tax years 2020-21 and 2021/22 if an employee was required to work from home at some point during each of the two tax years. By concession, whilst the amount is defined as £6 per week, it allows the full £312 pa to be claimed for the full tax even if the employee only spent a single day working from home. If an employee chooses voluntarily to work from home then they are not entitled to the concession allowance.
As the UK government are no longer recommending businesses to ask their staff to work from home, the scheme will be ending on 6 April 2022. After 5 April 2022, if an employee wishes to claim tax relief for employment-related expenses they will need to comply with the well-established strict traditional tax rules, and only if they have to work from home. Furthermore, claims can only be made for the actual time they have to work from home and the concession that even working from home for one day permits a whole year’s claim will stop.
HMRC says that to be able to claim tax relief, if applicable, an employee can only consider costs like gas and electricity, metered water business phone calls, including dial-up internet access etc.
HMRC say that you cannot claim for the whole bill, just the part that relates to your work i.e. the extra costs incurred by working from home and that you’ll need evidence, such as receipts, bills or contracts, to be able to claim tax relief.
Making Tax Digital for VAT affected companies From 1st April 2022, all VAT-registered businesses will have to submit their financial accounts information via software that is compliant with the UK governments Making Tax Digital scheme. Since 2019 only businesses which exceeded the VAT threshold of £85,000 have needed to submit their tax details in this way. From next year, however, an additional 7,000 registered VAT businesses will be eligible.
To comply with the new HMRC Making Tax Digital rules, these businesses must have a cloud computer software package – one which is compliant with the government’s Application Programming Interface (API) system. It will no longer be possible for VAT-eligible businesses to submit via the HMRC website.
You are probably wondering whether the government is recommending a particular piece of software, they are not. But businesses that don’t have an accountant will be required to find their own third-party provider to provide the appropriate software and meet the new regulations. The majority of current desktop accounting software won’t be compatible with the government’s system and will likely need to be updated. The same applies to older accounting software packages. Cloud-based software packages should automatically update for HMRC’s Making Tax Digital system. At Designated Medical we are already helping our clients transition to Tax Digital. If you would like accountancy and compliance support, please don’t hesitate to get in touch with our friendly team at Designated Medical.
The changes to IR35 and how it could affect you or your employees
Not necessarily a change for 2022, however, it is something we are still being asked about and something people are still getting their heads around. IR35 is tax legislation that ensures that contractors who are knowingly or not working as ‘disguised employees’ pay the correct tax.
You may have applied for contract jobs in the past where the company said they wanted to pay you under an ‘umbrella company,’ i.e., an agency. This is because it is more tax-efficient for them to do so. You become what is termed a ‘disguised employee’, and the company doesn’t have to pay your National Insurance contributions, nor do they have to offer sick pay or holiday leave. That’s because the agency pays it.
Equally, when you’re a contractor working as a limited company, you can pay corporation tax at 20 per cent on your profits, claim business costs against your tax bill and avoid making National Insurance Contributions (NIC) by paying yourself through dividends.
Gordon Brown introduced IR35 back in 2000 when he was Chancellor of the Exchequer. That’s because when working as it should, HMRC IR35 tax can protect both the contractor and company. Crucially for the government, it also means HMRC won’t lose out on tax. This year though, changes to the rule have come into place.
When you are determining whether or not IR35 applies to you, you will either be found to be ‘inside IR35’ or ‘outside IR35’. These phrases are crucial to defining and understanding your status, and considering whether or not the legislation will impact your future contractual work.
At Designated Medical, our objective is to allow you to focus on growing your business whilst we provide the business support services you need. We offer a full range of services including Medical PA, marketing, accountancy HR and Recruitment.
We provide you with the expert financial support you need for your business, flexibly and cost-effectively, so that you can ensure you deliver the greatest client experience. Our team of Designated Medical Accountants are fully qualified and licenced and will take responsibility for the professional management of your finances. They will be supported daily by our team of qualified bookkeepers who will handle the day-to-day transactions.
If you would like to know more about our Accountancy services, please don’t hesitate to reach out to our friendly finance team who will be more than happy to answer any enquiries you may have.
Send us an email at email@example.com or call us on +44 (0) 207 952 1008.