Tag Archives: HMRC

HMRC Clamping Down on Hobby Businesses

Second income from hobby or small business

UPDATED 29/03/2016: The government have recently announced some relief for smaller hobby businesses trading online with a new £1,000 tax allowance starting in 2017.

Research released by RBS in January claimed that 1 in 5 UK adults are ‘hidden entrepreneurs’. These are defined as people who are running small businesses in their spare time or who are using their spare time to plan a new business venture. 38% of these people reported that they earned extra money from their hobby.

HM Revenue & Customs have launched a new campaign today aimed at people with this kind of ‘Second Income’. They define ‘Second Incomes’ as people who are employed and are paid wages through PAYE for their main job but who earn extra money from activities such as:

  • consultancy or other services such as public speaking or providing training
  • organising parties and events or providing entertainment
  • activities such as taxi driving, hairdressing, providing fitness training or landscape gardening
  • making and selling craft items
  • buying and selling goods, for example regular market stalls, boot sales etc

What to do if you have this kind of Second Income?

The ‘Second Income’ campaign is one of the regular campaigns that HMRC run targeting different groups (recent ones have targeted eBay sellers and electrician). With these campaigns HMRC offer a kind of amnesty. If you have a second income which you have not been telling HMRC about you can declare it now. You will still have to pay any tax you owe but any potential fines will be reduced (or waived) and HMRC are less likely to take criminal action against you.

If you declare your second income voluntarily they will normally limit the declaration to 6 years. If they find out about your second income without you declaring it then HMRC can go through all of your tax affairs for the last 20 years.

You can notify HMRC of your second income by filling out a form online. If you want to find out more about how the scheme works there is a dedicated Second Incomes page on the main government website.

What to do if you plan to have a ‘Second Income’ in the future?

If you are planning to start a business in your spare time, or earn some money from your hobby, then you need to tell HMRC. The two most common ways to do this are:

Register as a sole trader – this tells HMRC you will be earning some extra money. They will then send you a Self Assessment Tax return to complete at the end of the year where you declare any income and profits. This is a very simple and cheap way to do things but it does mean that you are personally liable for any losses or problems with the business. You can register as a sole trader for free on our website.

Free Sole Trader Registration

Register a company – this is a more complicated option which will involve a lot more paperwork. However it can be a good option if you are starting a business with other people as it gives a formal structure through which you can share ownership and responsibilities. It can also be a good idea if you will be doing large deals or running big events as a limited company will offer some liability protection. If you form a company HMRC will be told automatically and will expect you to complete tax returns each year. You can register a company for free on our website.

Keeping track of your earnings

If you are earning extra money then you need to make sure you are keeping accurate records of your incomings and outgoings. HMRC will expect you to accurately complete tax returns at the end of each year using the records you have kept and can ask to see your information at any point.

If you are only doing a few transactions per month then a simple spreadsheet will be enough to get you going. As you start to get busier then it is worth investing in some specialist bookkeeping software which will let you manage your business finances more smoothly. You can get a free 1 month trial of specialist bookkeeping software by registering on The Company Warehouse website.


Not sure what you need to do?

Our team of business consultants can help. Simply give them a call on 01245 492777 or contact us through our website.

If you are an eBay trader and need to register your business our eBay Trader Company Formation will get your company formed and register your business for VAT. 

New RTI Exemption for Some Small Businesses

Real Time Information ExemptionsThe new Real Time Information (RTI) PAYE requirements are due to roll out to all PAYE registered business from April 6th. There have been worries about how small businesses will cope with this scheme as it brings major changes to way businesses do their payroll. These worries were increased by recent research conducted by the Federation of Small Businesses (FSB) which showed that 25% of small firms did not know what RTI was. Meanwhile research from Sage found that 72% of employers were not aware that payroll was changing and 23% of micro businesses (usually defined as having less than 10 employees) did not have any payroll software and would not be RTI compliant.

The introduction of RTI will not just impact businesses with traditional employees. It will also impact on a lot of small limited companies run by contractors or other ‘one man bands’. Directors of limited companies are technically seen as employees and as such are normally registered for payroll. Where a limited company has only one director, and therefore one employee, they will still have to comply with RTI and report their salary in real time. Even if no salary is taken from the business returns will still have to be sent to HMRC at least every quarter recording the lack of payment.

Because RTI is going to be such a big change, and because it is likely to catch a lot of people out, HMRC are being fairly lenient in their approach to fines and penalties. They have said that for the first year of RTI (tax year 2013 to 2014) they will not fine people for making late monthly submissions. In the main they will keep the same penalties in place as have applied for traditional PAYE while expecting people to report in real time.

Recently HM Revenue and Customs have also announced that some small businesses will not be expected to comply with RTI at all for the first six months. Businesses with less than 50 employees who pay their employees on a weekly or casual basis will not be expected to comply with RTI until 5th October 2013. While this will not impact a massive number of companies it does mean that those with complex arrangements will have some breathing space.

While HMRC are offering some exemptions and being lenient with people on initial compliance it is still a good idea for anyone involved in running a business to understand their exact requirements. There are various ways to comply with RTI including purchasing specialist software and outsourcing payroll services. One option which is now running out is to do the RTI payroll yourself using the HMRC’s free tools. In order to make use of the HMRC’s RTI tools you will need to register for one of the new government gateway passwords. Typically these are taking around 2 weeks to arrive at the moment which will put you beyond the RTI start date.

Our Free RTI How To Guide gives details of all of the options for complying with RTI as well as details of which businesses have to comply with the new rules. You can download it from our website or give us a call on 0800 0828 727 to make sure your business is RTI compliant.

Majority of UK Businesses are Sole Traders

When starting a new business many people choose to create a limited company. There are many reasons for doing this. Forming a limited company offers some protection for your business name and a lot of suppliers and potential customers prefer it. Being registered means you have to file your accounts every year with Companies House showing that the company’s level of debt and that it is not insolvent. This gives them some basic guarantee that the company will be able to pay its debts.

Record numbers of limited companies have been formed in the last year. According to the latest figures from Companies House around 426,500 companies were created in 2011/12. (However 267,200 companies also closed down in this period). Depending on whose figures you believe there are somewhere between 1.3 million and 2.6 million companies in the UK. The Department for Business and Office for National Statistics (ONS) use the lower figure while Companies House, who keep the register of limited companies, use the higher figure. Either way companies do not make up all of the 4.8 million businesses that the government thinks there are in the UK.

In fact the Department for Business and ONS say that limited companies only make up 28% of businesses in the UK. A further 9% are partnerships but the vast majority, 62.7% of UK businesses, are sole traders. It is quite hard to establish the exact number of Sole Traders as there is no central register for them. The only requirement for being a Sole Trader business is that you tell HMRC that you are self employed and HMRC do not publish the figures for the number of people who have done this. To complicate matters further being registered as self employed covers a wide range of scenarios. Someone registered as self employed could be working freelance or as a consultant. They may have a full time job and be doing some extra work in their spare time or they may be running multiple businesses. The number of sole trader businesses is therefore an educated guess.

Chart of UK Business Types

Proportion of UK Businesses by Legal Structure

The reason the majority of businesses choose to be sole traders is that it is a very simple way to set up and run your business. The registration with HMRC is simple to do and can be done for free. Once you are registered your only duty is to complete a tax return at the end of the year. You do not have to file the accounts and returns that come with a limited company, nor will you be obligated to employ auditors or have lots of legal drafting done. There is a potential bigger risk in operating as a sole trader in that you are personally liable for any debts the business runs up but as long as you can control this risk being a sole trader is by far the simplest way to run a business.

HMRC Changes to the VAT Registration Process

Quick online VAT registrationHM Revenue and Customs have recently made some changes to the way VAT applications are made. In the past there was a single online form which anyone could use to submit a VAT application. The new system adds an extra step which slows the process down considerably.

Applying for VAT Yourself

The first step in the new system is to sign new Government Gateway system and create an account. This is relatively simple and takes around 10 minutes. Once you have registered you will be given a User ID. At this point you can request a VAT application activation code. This will then be sent to you by post and takes up to 10 days to arrive.

Once you receive the activation code you can then log back on to the government gateway site and enter the code in. At this point you can start to do your VAT application. You do need to act relatively quickly though. If you fail to use your activation code with 28 days you have to start the process again.

Our VAT Application Process

Because we are already set up on the Government’s online systems as a VAT agent we can skip most of the steps described above. All you have to do is fill in a simple form which we will send you. Once this is done we will submit your application direct to HMRC. This process can normally happen on the same working day. Before we do the submission we will check it to make sure it has been filled out correctly. This reduces the chances of the application being rejected or delayed by mistakes.

Using our VAT application process rather than doing it yourself can easily save you one or two weeks. So if getting your application done quickly is important to you then we can help.

You can order your VAT registration online or speak to one of our Business Consultants for more details.

New Employers Expected to use RTI PAYE

RTI for all new employers from April 2013The introduction of Real Time Information (RTI) is part of a larger scheme being implemented by the government over the next couple of years. The idea is that employers will tell HMRC exactly how much everyone is getting paid every month. HMRC will then use this information to instantly calculate benefit and tax credit payments. The aim is to make the whole system much more responsive and to eliminate the lag and delays in payments which can currently be caused when people change jobs or get a pay rise.

RTI began to be implemented in October this year starting with a few very large employers. More companies are being encouraged to join the scheme every month. All new employers have been expected to use RTI since 6th November 2012. Every business in the UK is due to be on the RTI scheme from by April 2013. From that point HMRC will start fining businesses who provide inaccurate or late information.

For most big employers RTI will involve feeding payroll information direct from their payroll software into the HMRC’s computer systems. But obviously this involves using specialist payroll software which needs to be set-up correctly. HMRC suggest two ways for new employers to get RTI set-up. These are:

  • operate your payroll using payroll software to submit your PAYE returns – this can be commercial software or HMRC’s Basic PAYE Tools
  • use the services of a payroll bureau or agent who will submit these returns using software on your behalf

You can download HMRC’s Basic PAYE tool from their website. HMRC also have a list of commercial software suppliers who can provide RTI compatible products. For many small businesses setting up and running their own payroll systems can be a very expensive and time consuming activity. It may be easier for many start-ups to employ a payroll company, or their accountants, to do the work for them. Once of the benefits of doing things this way is that much of the responsibility and expense for implementing the RTI changes will fall onto them rather than having to take it all on in-house.

As HMRC point out you do not have to start using RTI yet, unless you are explicitly told to, but you will have to being doing it from April 2013. It therefore makes sense for new employers use RTI from the start rather than changing systems later on.

If you have not done so already we can help your business to register for PAYE and can provide fully managed Payroll services from £1.89 per employee per month.

HMRC Find 36% of Small Businesses not Keeping Proper Records

HMRC Bookkeeping checksHM Revenue and Customs have been testing out a new scheme known as BRC or Business Records Checks. Modelled around initiatives already in place in Canada and Australia HMRC have been trialling BRC since April 2011. The basic idea is to do spot checks on the way that SMEs do their bookkeeping. They have now ended their pilot and review programmes and will start with their new look BRC checks on 1st November 2012.

When HMRC began their trial of BRC they estimated that 40% of small businesses were not keeping proper records. The actual rate of 36% they found is only slightly better than this. HMRC state that their aim with BRC is to improve the way small businesses keep their financial records in order to get more accurate tax returns at the end of the year. They have estimated that by 2014/15 they can raise an extra £62 million per year by improving the way small businesses do their bookkeeping, and by extension making their tax returns more accurate.

When their pilot study ended earlier this year, HMRC considered various ways to proceed with BRC.  They already have the powers to fine businesses who do not do their bookkeeping properly but they have decided not to take this approach. Rather they have opted to “educate customers in the statutory requirements around record keeping” and “sign-post those who want help to the self-help or targeted-help options”. It is only if businesses fail to get their books in order after they have been ‘educated’ and ‘sign-posted’ that they will start levying fines on people. They have stated that their projected extra £62 million in revenue will come “wholly from the preventive and deterrent effects of the intervention”.

So how does BRC work?
As with a lot of HMRCs other tax compliance initiatives BRC will be targeted at ‘high risk’ industries. (People they have targeted recently have included eBay traders and electricians). Once an industry or market sector has been identified HMRC will begin to phone small businesses (defined as businesses with an annual turnover below £30 million who employ less than 250 people).

When they receive a phone call the business will have to complete a short questionnaire about how they do their bookkeeping. If HMRC do not like the answers then they will either send an inspector to see what you are doing or refer you for ‘education’.

HMRC are currently organising how they are going to do the BRC checks but plan to carry out 20,000 visits to small businesses per year in the next couple of years. As the visits are only going to happen after an initial phone assessment, the number of businesses being contacted by HMRC to investigate their bookkeeping procedures is likely to be many times higher than this. For most businesses a visit or a call shouldn’t be the end of the world. It will just be spending a bit of time with HMRC and identifying areas for improvement, but if you know your books are in a mess, now may be a good time to get them sorted.

You can download free bookkeeping software from our website. If you would like some help and advice on getting your books in order then we offer free accountancy advice with most of our formation packages or fixed fee accountancy starting from £14.99 per month.

HMRC Campaign Targets Direct Sellers

HMRC Target Direct SellersHM Revenue and Customs have periodic crackdowns on different industries who they believe may not be paying enough tax. Recently they have focussed on eBay sellers, electricians and hair dressers. Their newest target is on ‘direct sellers’. HMRC define direct selling as “when you sell directly to customers usually door to door or in customers’ homes or the workplace”. They go onto say that:

Your selling may involve demonstrating a product in a customers’ home, sometimes at a party, or you might sell door to door, using catalogues. You might only sell to your friends and relatives. As a direct seller you will usually take commission on the sales you make. You may be involved in direct selling as a full time business, to top up your income from another job or to fit around your caring commitments.

HMRC’s concern is because people are often doing this kind of selling on top of existing jobs, or view it as an easy way to earn a bit of extra money, they may not realise they have tax liabilities. This can be further complicated by the way that they are employed. Although they may be described as an agent, representative, distributor or consultant for a particular company they are usually actually self employed. As such they need to be registered with HMRC in the same way as a normal sole trader business would. They should potentially be making regular National Insurance and Tax contributions and be filling out self assessment tax returns at the end of the year. Because of the terminology used and the complexity of contracts it can sometimes be unclear whether a direct seller should consider themselves as self employed or as employed by the company they are contracted to. HMRC have made a video to help people work this out.

If you are a direct seller who is self employed and you have not been making the correct tax contributions then HMRC are giving you until 28th February 2013 to come clean. If you do own up within this time period then they may wave any penalties and allow you to pay what you owe in instalments. They are only making this offer to people who have been working as direct sellers since before 6th April 2011 though. Anyone who started work after this point has to register and pay tax as normal.

If you think that the HMRC Direct Seller scheme may apply to you then you can download a Disclosure Form from their website. If you are a direct seller and want to get registered then we offer free Sole Trader Registration which includes basic accountancy advice so you can get your tax affairs in order.

Why your business should not wait to register for VAT

Registering for VAT means that you become an unpaid tax collector on behalf of Her Majesty’s Revenue and Customs (HMRC). Once registered you have to give 20% of the price of any VATable goods or services you sell direct to the government. If you don’t register you get to keep this 20%. So why would anyone bother?

Well the first and most important reason people register is that once you reach the VAT threshold you have to. Currently the threshold is £77,000 of turnover on VATable goods and services in a year. Failure to register at this point means that once HMRC catch you, they will still make you pay the VAT but will also levy a penalty charge on top. This is normally a percentage of the VAT due. The current penalty is a premium on top of your VAT of between 5% and 15% depending on how late you are.

So your business is going to have to register for VAT at some point. You don’t have to wait until you reach the threshold though. You can do a voluntary VAT registration at any point. Many people choose to do this as soon as they start their business. There are a few reasons for this. The main ones are:

  • Being registered for VAT is the norm. All decent size companies have to be VAT registered so if you are not it makes people nervous.
  • As well as paying VAT, you can reclaim VAT if you are registered. So basically you can claim back 20% of anything you buy for your company.
  • Registering for VAT when you are already trading makes the process much more difficult.

The last one of these reasons is perhaps the most important, and most overlooked. To understand why registering while trading can be such an issue you just have to take a look at the official HMRC advice. HMRC say that as soon as you make the application to become VAT registered you have to start paying VAT but you aren’t allowed to charge it on invoices (or reclaim it on payments). Their solution is as follows:

you should increase your prices by an amount equivalent to the VAT rate relevant for your goods or services, and explain to your customers why you are doing so.

Once you receive your VAT registration number you can then reissue those invoices, amended to show your VAT registration number and the VAT charged. This will ensure that your VAT-registered customers may reclaim the VAT that they have paid.

So basically if you try to register for VAT while you are already trading the recommended way to do it is to put all of your prices up by 20%. HMRC currently quote a month for the VAT registration process to take place. Once this month is up you would then have to re-issue invoices for all the sales you have done showing your new high price less the VAT. If you are dealing with business customers who are VAT registered this won’t bother them too much as they will be able to claim back the VAT and will end up paying the same as they always have. However for ordinary retail customers, or non VAT registered businesses, you will effectively be giving them a 20% price rise.

It isn’t hard to imagine the effect that a sudden 20% price hike, and having to redo all of your sales invoices for a month, will have on a new business. As well as potentially hitting overall sales the extra paperwork could be a significant burden. Registering for VAT from the start of you business means that you can maintain your prices at a constant level and avoid the disruption of the registration paperwork.

If you would like to register for VAT you can do it yourself through HMRC or we can do your VAT registration for you.

Private Limited Companies, Tax, Celebrities, PR and HMRC.

Tax and Private Limited CompaniesThe way companies and company directors pay tax has been at the heart of several leading news stories over the last week. We have had debates over the morality of celebrities and politicians avoiding tax through loopholes involving offshore companies. Meanwhile the HMRC has been attacked by the Audit office for the way it deals with the tax arrangements of large companies. At the same time HMRC are being challenged in court over the ‘sweetheart’ deal it came to with Goldman Sachs.

At the centre of the Jimmy Carr case is the way in which company directors are taxed. The loophole he was using is a variation of one that 2000 senior civil servants have recently been investigated for employing. Essentially this boils down to having your pay fed through a private limited company rather than being paid direct as an employee. By being paid through a private company, which you are a director of, you can take advantage of the lower tax rate charged on director’s dividend payments. This can easily save an individual 10% on their tax liabilities. Another popular tactic is to have the company make a director’s loan to an individual which can be tax free. It would appear that Jimmy Carr was using the director’s loan tactic but feeding it through an offshore company in a tax haven. Both the director’s dividend payment and director’s loan payments are perfectly legal and in many cases are a legitimate way for individuals to be rewarded by the company they work for. The issue arises when people are setting up companies purely to take advantage of lower tax rates rather than because they are creating a new business.

Why all the fuss?

While the actions of celebrities and various large corporations in minimizing their tax bills may be legal it is not always popular. This is shown by the response to Jimmy Carr’s dealings and the current court case against HMRC and Goldman Sachs. Avoiding tax, legally or not, can turn into a PR disaster for individuals and companies. However there are more than the PR, and moral, considerations to take into account when considering using a private company to pay yourself.

Because the use of private companies as a tax reduction channel has become so widespread over recent years the HMRC has begun to specifically target it. They recently introduced their controversial IR35 test to assess when limited companies are being used as a tax dodge. IR35 tests whether a company is really a functioning and trading business entity or simply an entity created to channel pay and reduce tax. If HMRC find that the company is not really a trading business then they can begin prosecutions and proceedings to claw back any unpaid tax. This may not be a quick process either. Recent reports have claimed that at current rates, it would take HMRC 38 years to clear their current backlog of tax tribunal cases.

What can we learn from this?

So basically if you want to avoid being denounced by the Prime Minister on the news, spending the next several decades being investigated by HMRC and potential prosecution and fines make sure you pay your tax. More specifically if you are going to pay yourself through a private company make sure that you can pass the IR35 test. If you are in any doubt speak to a qualified accountant who can make sure that what you are doing is legal and above board.

HMRC IR35 Test: When is a company not a company?

New Business Tax TestIt recently emerged that about 2000 UK civil servants were being paid as contractors through companies in order to avoid paying income tax and National Insurance.

Whereas employees are liable to income tax, company owners can pay themselves dividends from their company which are liable to a much lower tax rate. Paying yourself through the dividends of a company also means that individuals can avoid paying National Insurance contributions. If you are running a legitimate company then this is not an issue. However HMRC have been concerned that many people who, like the 2000 civil servants, could be seen as employees were being paid as contractors through companies purely to avoid paying the full amount of tax.

As a result of the widespread abuse of company structures HMRC launched what became known as the IR35 forum with small business owners, tax experts and HMRC collaborating on new rules. The IR35 initiative was launched in 1999 and finally came up with a new points based “Business Entity Test” last week. This test looks at various business activities and assigns points as to the risk that a “company” is really just being used as a tax dodge for an employee. If a company is found to be in the “high risk” category then they could come under full investigation and potentially be lumped with quite a large tax bill.

Despite the collaborative consultation process the new test has been heavily criticised by some members of the IR35 forum who feel that HRMCs criteria are much too strict. Critics of the test say that manly legitimate UK companies would find themselves in the “high risk” category of the IR35 test and would be liable for investigation from HMRC. The new test looks at the following factors:

  • Does a company rent or own premises other than an individual’s home?
  • Does the company advertise?
  • Does the company have a business plan?
  • Does the company invoice for its work before getting paid?
  • Does the company sometimes not get paid?
  • Have the company’s contracts changed in the last year?
  • Does the company employ more than one person?
  • Could the company send an alternative person to do its normal job?

If the answer to most of these questions is no then a company could find itself at “high risk”. In other words it is likely that HMRC would not see them as a real company but as an employee using the pretence of a company to dodge tax.

As the new IR35 Business Entity Test has only been in existence for a week it is hard to know how HMRC will try to enforce it. However if you are a company whose contracts are largely with one other company, or if you are thinking of forming a company in such a situation it is worth thinking about what kind of points score you would accumulate.