MTD (Making Tax Difficult) for Landlords

As all landlords will by now be aware, the income tax, Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) changes brought in by George Osbourne are starting to be felt across the market.

From 6th April 2017, tax relief on interest paid on borrowings by individuals on their property portfolios will start to be restricted to the basic rate of income tax, which is 20%. In the past, full tax relief at up to 45% has been available. This restriction in tax relief is being introduced gradually over the next 4 tax years, and will be fully in force by the tax year beginning on 6th April 2020. Those who will be hit the hardest will be those who are highly geared, with little equity in their properties.

Those buying rental properties either themselves or through companies are likely to be hit with the additional 3% rate of SDLT, which came into force in April 2016.

Those selling residential properties that are not their main residence will be subject to CGT at rates of 18% or 28%, depending on the level of their other income. The CGT rates on the sale of most other assets are 10% or 20%.

Not content with hitting landlords hard with the above tax changes, HMRC is pressing ahead with quarterly tax reporting from next year under the Making Tax Digital (MTD) programme. All landlords with rental turnover above £10,000pa will need to report their income quarterly to HMRC using approved software or spreadsheets, At the time of writing, the fine details are still being finalised, but this will be another onerous task for landlords to comply with. The operative date will be from 6th April 2018 for landlords with turnover above the VAT limit (£85,000), and 6th April 2019 if turnover is above £10,000 but below £85,000. Whilst income and expenses will have to be reported online on a quarterly basis, tax payment dates don’t change, nor does the requirement to submit an annual Tax Return, yet! Eventually, the Tax Return will disappear for most taxpayers, but there might be a lot of pain before we reach that point!

If you have any concerns, or would like more information about MTD, please contact us for further information.


Advantages of Using XERO

In the last week Rod Drury, CEO of Xero, announced that Xero has achieved a milestone, reaching one million subscribers worldwide, just 5 years after setting themselves this target. Ten years ago cloud accounting didn’t even exist. This does make me wonder what the next 5 years will bring in terms of added functionality and time saving using cloud based platforms. Cloud systems such as collaborative ‘to do’ lists and cash flow forecasting tools help to stream line and therefore speed up what used to seem like laborious and time consuming tasks which just didn’t fit into the already hectic daily task list.

One of the biggest advantages to us as business advisors, of cloud based platforms such as Xero, is that we can access and review our clients accounting records at any time, not just several months after the end of their accounting year. For example this has been particularly helpful at the end of the tax year when advising our incorporated clients on whether dividends should be voted and also assists with pension planning. We can ensure the company has sufficient reserves and also take into account the other income streams of the shareholders from a tax planning point of view.

The way we are able to interact with our clients has certainly changed during the growth of the use of Xero. Over that time we have seen constant development of the product, much of which is based on feedback from users. At a meeting to sign off the year end accounts we are also able to comment of the current year to date performance and assist more actively with planning. With the imminent implementation of Making Tax Digital this will be increasingly important and we hope that rather than seeing this as a burden it will help individuals see the value in maintaining up to date records to make sure their business is working for them.


The Big Squeeze

The cost of living has remained relatively flat over the last few years, but our wallets are starting to feel the squeeze again. We look at ways which could help you stay one step ahead of rising inflation.

Ever since the UK decided to leave the EU in June 2016, inflation has climbed almost month-on-month and in December last year, it reached 1.6% – the highest level since July 2014. The bad news is that it could be the beginning of a longer-term trend, with the Bank of England predicting that inflation will reach 2.7% by the end of 2017 and others suggesting it will climb higher. The National Institute for Economic and Social Research (NIESR) predict the UK’s CPI could nearly quadruple to about 4% in the second half of 2017, meaning the cost of most goods and services in the UK could rise by 4% over this calendar year. But as well as a significant impact on our day-to-day spending, inflation could also hurt our long-term financial ambitions.

Staying ahead of inflation

If you have money stored in savings accounts, you’ll already be dealing with the issue of record low interest rates offered by banks and building societies. Last August, the Bank of England reduced the base rate to 0.25%, and – according to Moneyfacts – average rates on some savings accounts have fallen by as much as 0.65%. In order to truly grow your money, it needs to be earning a rate of interest that is higher than the rate of inflation, otherwise the future buying power of your savings will be reduced. Yet with inflation at 1.6% at the end of 2016, Moneyfacts research found that – out of 669 available bank and building society savings accounts – just 44 offered a higher rate. And as inflation is forecasted to rise significantly, it’s highly likely this situation will worsen.

What are your options?

It’s always a good idea to have a pot of money stored in savings accounts for short-term or emergency use. Say an unexpected bill was to crop up – you’d want to know you have savings that are easily accessible, to cover it.

However, when it comes to your long-term financial ambitions and needs, the combination of low interest rates and rising inflation could mean you need to look for alternatives beyond savings, otherwise you run the risk of failing to achieve your goals.

Investing your money instead could prove a more rewarding option. It requires patience, commitment and an acceptance of some risk. At a minimum, you need to commit your savings for at least five years. Whilst there are no guarantees, investing opens up the possibility of achieving higher returns on your money, realising your goals and staying ahead of inflation.

As investing can be complex, it’s important to consider obtaining financial advice from an expert. They’ll be able to help you assess your feelings towards risk, and provide you with recommendations you’ll be comfortable considering.

 

Key factors to consider before investing:

Financial Fitness

Before you consider an investment account, do a fitness check on your finances. It doesn’t make sense to invest money if your living expenses are jeopardised.

Risk Tolerance

Different types of investments have different levels of risk. Investing in individual companies could pay off handsomely or help you lose money. If you are worried about the thought of losing any of your investment then consider a low risk investment strategy.

Goals

Determine your goals. How much can you invest each month and what do you hope your investment portfolio will total at the end of one year, two years, five years and 10 years? Consider that as your life changes your goals may change.

Diversification

All your eggs in one basket is a bad investment strategy. Diversify your investment portfolio, so that if one investment crashes, the others won’t be affected.

Time and Knowledge

Getting up to speed on what to invest in takes time and knowledge, so make sure you speak to your financial planner or adviser to get the best advice.


The underlying costs of the 2017 harvest

In the midst of the Brexit uncertainty, a new farming cycle has begun and the challenge faced by farmers to make a profit on these crops may be the one of the most difficult we have seen in recent years.

Farmers will always be price takers for their crops; beating the market involves a gamble that many are either not prepared or not able to take. The reality is therefore, that the profitability of farming pivots around management of cost.

To that end, the fall in the value of the pound since the Brexit decision is looking likely to start to have an impact on costs in 2017, so for arable famers to capitalise on the potentially higher world grain prices and increased BPS rate, there needs to be a firm control of the costs and a proper consideration of how much of an increase is needed in yield to break even from any additional spending.

We would encourage our clients to have at the very least a crude working of how much is being spent per acre as you go along. There are so many products now to control pests and diseases, but the effect on profit may only be marginal. Given the uncontrollable factors involved, the reality is that it may not actually be worth as much as you think to attempt to improve the yield in a patch of blackgrass.

We also advise our clients to look at their machinery spending and decisions carefully over the coming year. In Savills’s 2015 harvest research, the calculated cost of machinery was £34 per acre together with depreciation of £39 per acre. There have been incentives to purchase new machinery over recent years, bringing the benefit of generally reduced repair costs, but with it significantly higher depreciation charges than for second hand machinery. Depreciation may be written off as an accountant’s paper exercise, but the cost of the machinery must be considered against the profits.

Farm machinery technology has progressed alongside that of cars, with even the potential introduction of electric tractors by the end of the decade, but with this price has also increased, although the basic stats of the tractor are not significantly different from its predecessors. A 200 horsepower tractor in 1982 cost £30,000, today the equivalent would be likely to cost in the region of £90,000. In cost comparisons, while repair costs of second hand machinery may be almost double that of new machinery, the depreciation cost per year of new machinery is potentially 60% higher than that of second hand equipment. In numerical terms, new equipment with a cost of £1.5m may be compared to a second hand cost of £600,000. In an AHDB trial the new equipment cost £54 per acre to run in the accounts (repairs and depreciation) compared with £28 per acre for the second hand machinery.

As with every decision there are many other non-financial factors to consider such as down time while repairs are required and managing machine hours across the fleet of equipment to reduce the need for repair, not to speak of being able to purchase the machinery you want second hand. The reduction in the value of sterling has been a massive stimulus to the used machinery export market and is pushing up the prices in the UK and making it very hard to find the machinery you require.

Putting machinery cost into context, with a good price it may take 500 tonnes of wheat to buy a new tractor, making machinery decisions vital to the finances of a farming business, especially with a potential increase in the alternative.


Growing Your Business – Common Pitfalls

Many people running their own business want to grow and become more profitable. Why should this be a problem you may ask? Surely everyone is in business to make a profit? Very true, however a business can grow too fast and actually fail as a result of this. Cash (or lack of it) is one of the key causes of business failure.

Growing a business may require new equipment or capital investment. Where does this cash come from? There are many funding options available that will help to ease the cash flow burden. Your accountant should be able to assist in obtaining the right funding for your business, along with helping to prepare any forecasts and projections needed to obtain it.

Securing some large contracts may seem like a really good business plan, but ……….reliance on a handful of large customers can have a negative effect on your cash flow. Larger customers can often extend the terms over which they pay, hindering your cash cycle. You will have paid your suppliers but may have to wait a further period of time to receive the income owed to you.  Do you have a sufficient overdraft facility in place to cover this?

You may currently be below the VAT threshold, but growth may mean you must become VAT registered. How do you pass this cost on if you provide products or services to the general public or not another VAT registered business? Adding 20% onto you sales may result in you becoming less competitively priced. When your business starts to grow, you should speak to your accountant to help guide you through this.

Whilst it’s perfectly natural to want your business to grow and be as profitable as possible, be cautious and seek advice before leaping into the unknown.


Right level of warning

A recent case has shown the importance of ensuring that any warning imposed by an employer within disciplinary proceedings is pitched at the right level. This is particularly important in the case of final written warnings.

In a recent case an employee with 19 years’ service had 18 years unblemished record but started to receive performance related warnings in the 19th year. He received a final written warning and then after further incidents was dismissed.

He claimed unfair dismissal at the Employment Tribunal. The Tribunal concluded that the final written warning was too high a tariff and substituted an ordinary (first written) warning. It then went on to conclude that when added to the most recent incidents the dismissal was still fair.

However, the employee appealed to the Employment Appeal Tribunal who said that this approach was wrong. Where a warning, particularly a final written warning was ‘manifestly inappropriate’ then it was wrong to substitute an ordinary warning and the correct approach was to disregard the warning completely – and that made the dismissal unfair.

Further, there is case authority that where a final written warning is manifestly inappropriate that it might be open to the employee to resign and claim constructive unfair dismissal.

Note that the language used is strong; the decision on the level of warning must not just be wrong but it must be manifestly inappropriate, in other words so obviously wrong that it should never have been imposed by the employer, so this is not an easy way out for the employee. However, the lesson for employers is that great care is needed before a final written warning is imposed.

LAPSED WARNINGS

ACAS guidance is that warnings should have an expiry date and should be disregarded after that date. As is not unusual two cases provide different approaches to this guidance, one following the ACAS approach and another saying that there is no hard and fast rule and that it may still be reasonable to take into account the whole of an employee’s record.

In a recent rather extreme case, an employee with a large number of warnings was dismissed by reference to his entire record including old, lapsed warnings. The matter went to the Employment Appeal Tribunal who took the latter approach and concluded that it was reasonable for the employer in these unusual circumstances to look at the whole employment record.

The best and safest approach is still to follow the ACAS guidance but this most recent case does mean that in some cases it may be appropriate to look at the entirety of the employment record including lapsed warnings.


The Von Voyage

My 22 years at Nicholsons

I started working for Nicholsons in March 1995 at our Market Rasen office. I worked 3 days per week as a receptionist /administrator, and enjoyed being part of the small but busy team, headed by Derrick Grayson and Nigel Douglas.

In 2004, all our offices were amalgamated, and all the Team moved into new purpose-built premises just off the Lincoln by-pass. These were exciting times for everyone at Nicholsons, but were tinged with sadness for me at leaving our busy little office in Market Rasen.

I started working full-time in 2004, and moved into the secretarial team, mainly working for Senior Director Richard Grayson. I thoroughly enjoy my work at Nicholsons; it is far more interesting than you might imagine, for an office full of accountants! I particularly enjoy the way everyone works together as part of a big team in the interests of our clients. It is like one big happy family, as all Team Members are so friendly and helpful – I can’t imagine working anywhere else.

During my time at Nicholsons, there have been huge changes to the way we work, mainly driven by technology. Clients expect quicker responses and like to be kept up-to-date, because they can then make better decisions. We pride ourselves in being able to help them with all their needs, quickly and efficiently.

When I am not at work, I love socialising with friends and spending precious time with my family. I also enjoy walking and horse-riding in the local countryside, when time permits! Nicholsons sponsor Lincoln City FC, and I have been to the recent FA Cup games with my work colleagues, cheering the team on to success; I have really enjoyed this.

I am so pleased to have been part of the Nicholsons “family” for the past 22 years, and look forward to what will no doubt be an interesting future.

Author: Yvonne Walker


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