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In the last Quarter of 2023, it was confirmed that the UK had fallen into recession. The picture of the UK over the last decade has been one of stagnation or decline. Productivity has grown by just 0.9% per year since 2008, and as per the Centre for Macroeconomics May 2022 Survey, it is believed that the UK will continue to suffer from low growth in the upcoming decade. This was considered to be a result of UK-specific structural issues, one of which being the UK's tax system, which has been described as “complicated, inefficient and beset with perverse incentives that do little to raise revenue” (Tetlow and Marshall 2019).

For some time now, there has been discussion about tax reform in the UK, whether they truly maximise the revenue the Government could bring in, and whether they are still fit for purpose, with some taxes not seeing true reform in decades. With an election looming, both parties looking to win will require additional revenue in order to enact their policies. With growth in the UK stagnant, it's likely that either party would currently have to rely on either borrowing money or cutting spending. Herein lies the argument for reforming the taxes we currently have in order to increase the revenues the government can earn whilst simultaneously making them less complicated.

Taxing Capital vs Taxing Labour

One of the key battlefields is where the balance of taxation falls in the UK. It can be argued that in the UK, labour is taxed far more aggressively than wealth. This can be best seen by the current Prime Minister Rishi Sunak. Mr Sunak recently published his tax returns in which we learned that he paid £508,308 in the financial year 2022-23 on overall earnings and gains of £2.23m. This is an effective rate of tax of 23%, which is far lower than the top rate of income tax, which is 45%. This is largely due to his earnings in the US being taxed at source, and capital gains tax is much lower at 20%.

Capital Gains Tax

This raises a good question, why is a millionaire able to pay less in tax than for example, a Doctor? The answer is that capital gains tax is very favourable to those with wealth. The capital gains tax is targeted at realised capital gains. Realised capital gains are the amount of profit made after selling an asset, usually real estate or stock investments. The ‘gain’ is the amount earned by the sale minus the original amount. A capital gains tax will then tax the seller on the profit made from the sale. 

For some time now, capital gains tax has been lower than income tax. This has resulted in those who earn in excess of the highest tax bands to re-characterise their income. As capital gains are taxed lower than income tax, a lot of business owners now take small salaries or in some cases no salaries and instead take money out of their company in the form of capital gains.

So, how can we reform this tax to make it more suitable? In 2023 the Economy 2030 Inquiry by the Resolution Foundation released a report suggesting the following reforms:

"The report proposes aligning the tax treatment of these different income sources by increasing tax rates on self-employment and rental income, enabling the rate of employer NICs to be cut by one per cent. Moving towards equal treatment would also mean increases in the rates of Capital Gains Tax, such as from 28 per cent to a top rate of 53 per cent for second homes, and a top rate of 37 per cent for shares. Crucially though, the report argues that this would be combined with a major tax cut, with no tax paid on gains that are merely in line with inflation. The result would be a net Capital Gains Tax cut for many, with anyone seeing an annual capital gain for shares of 8 per cent or less facing a lower net tax rate than the 28 per cent rate that George Osborne oversaw between 2010 and 2016."

National Insurance & Income Taxes

Another area for reform is income taxes. Both National Insurance contributions (NIC) & Income taxes are overly complicated. Both have a series of rules and exemptions that make it difficult to calculate. For example, Resolution Foundation's 2023 report provides the following example:

"A common example of this complexity is the ‘hidden’ 60% effective marginal tax rate that people must pay if their annual income falls between £100,000 and £125,140 due to the loss of personal allowance, despite a statutory income tax of 40%. Similarly, employees face different effective marginal tax rates depending on how their income is structured. For instance, the effective marginal tax rates for employees in the top income bracket (earning more than £125,140) can vary significantly, peaking at 53.4% when employer NICs are included or 54.5% paid on income from dividends, falling to 47% paid on self-employment income, 45% on rental income, 28% on gains from property, and as little as 0% if an employee keeps their income in a company and then emigrates".

In order to uncomplicate this tax, one solution is provided by Broome et al. (2023), who suggest equalising tax rates on different kinds of income and removing very high marginal rates, through higher dividend and capital gains taxes and higher top National Insurance rates for the self-employed, offset by indexing capital gains to inflation, a cut in employer National Insurance, reinstating the personal allowance above £100,000, and abolishing the High Income Child Benefit Charge.

Property Taxes

When we examine property taxes, we see further examples of poorly designed taxes that need updating or reform. Council tax, stamp duty, and business rates which bring in near 9% (£90 Billion) of the UK's tax revenues are all flawed in their own ways.

Council tax is a levy on properties, but it is based on house prices in 1991. In an article in the New Statesman entitled "Britain's Great Tax Con" Harry Lambert wrote:

"If you live in Burnley, where homes are cheaper than many other parts of the UK, you will on average pay 1.1 per cent of the value of your home in council tax every year. If you live in a typical property in Kensington and Chelsea, where council tax has scarcely risen but homes have rocketed in value since QE – leaping from 24 times earnings in 2010 to 38 times earnings in 2022 – you will pay 0.1 per cent. The burden of council tax is ten times as great in Britain’s poorest areas."

A fairer way to tax property would be to replace the tax with an annual proportional property value tax based on up-to-date house valuations. Harry Lambert noted that by setting a flat 0.5% tax on house valuations you would raise the same revenue whilst cutting taxes for 3 out of 4 people and eradicating the need for Stamp Duty Tax. So, whilst it would not increase tax revenue, it would simplify the property tax as well as reduce the increasing economic equality in the UK as well.

In Summary

In Summary, we've outlined several reasons why the UK needs tax reform. Currently, the inequality in wealth is part of the reason that growth and GDP are struggling. By using these tax reforms, the government could free up finances to invest in public services as well as reduce the load on those who rely on those services the most. 

 

 

Whether you are thinking about retirement or just starting to earn, knowing how your pension works, how to build one and how to withdraw your pension are all important.

Your pension is an important investment and you should know your options so you can begin planning your future.

State pension

When you are 66 years old, the government will provide you with a state pension, a monthly payment which comes from taxes to allow those who have retired to afford the necessities.

You will receive a letter from the government when you reach the suitable age with information on withdrawing your pension as regular payments.

The age at which you can withdraw your state pension is gradually increasing.

The state pension is determined from the amount of National Insurance contributions you have made throughout your working life. You will need at least 10 qualifying years on your National Insurance record to receive your state pension. You will be able to receive a state pension without National Insurance contributions if you have been on any type of benefits including, universal credits and a carer's allowance.

The Government aims to increase the state pension allowance to remain in line with the cost of living and inflation each year.

What are Qualifying years?

If you are employed and earning over a set amount you will be paying National Insurance tax which will build up and you will receive your state pension if you have been doing this for a minimum of 10 years. This does not have to be 10 years in a row, just 10 years throughout your working life.

 

Workplace Pension

You will be auto-enrolled by your workplace into a pension scheme where a percentage of your salary will be added to the pension pot. This will usually be 8% in total with 3% coming from your employer and the rest from your salary. You should receive a letter from the pension provider chosen by your workplace when they have set this up, you will be given details of the specific scheme in full.

You can choose to opt out of the workplace pension if you wish however this is a great way to start a pension pot without it affecting your take home salary too much. The money that goes into your pension is also tax-free.

Private pension

Setting up a personal pension scheme could be beneficial if you are not in a job that automatically enrols you on one, you want to start saving for your pension early or you want to have extra money for your retirement.

 

The state pension will only be enough to afford the basic necessities once you retire so it would be beneficial to choose another option as well. When you make payments into your pension pot you are investing into your future and ensuring you will be able to have a good life in retirement.

It is never too early to begin your pension pot!

With Chancellor of the Exchequer Jeremy Hunt set to announce his Spring Budget on March 6th, we look into what we can expect from the UK's Spring Budget.

Tax Cuts

Mr Hunt has hinted at a series of tax cuts for the Spring Budget. Mr Hunt believes that the UK needs to reduce taxes as they are at the highest level since The Second World War. Speaking at the annual World Economic Forum in Davos, Switzerland, he said that countries with lower taxes have more "dynamic, faster-growing economies".

A key part of the Spring budget then will be tax cuts, but the question is how can these be paid for? The latest figures from the Office of National Statistics (ONS) had marked inflation remaining at 4%, which is still double the Bank Of England's target of 2%. With interest rates unlikely to be dropped until the summer in an ongoing attempt to reduce inflation, the cost of borrowing remains high. 

Therefore, Mr Hunt is unlikely to borrow money to pay for the tax cuts as we would be forced to pay these back with a higher interest rate, not to mention that Hunt himself said: "It is not Conservative to cut taxes by increasing borrowing because all you're doing is cutting the taxes paid by people today in exchange for increasing the taxes paid by our children tomorrow."

Cutting Inheritance Tax

One of the taxes regularly brought up as being cut or even scrapped is the inheritance tax. Currently, only 4% of the population is impacted by inheritance tax, but as house prices rise, and with inheritance tax thresholds frozen, it means more people are likely to pay this tax.

This policy is likely to be very popular with well-off Conservatives throughout the country, who will be able to pass on their wealth and assets more freely to future generations. However, it's likely to be very unpopular to those who fall outside of this, which is the vast majority of the country, who will likely see this as a tax cut for the rich, whilst the poorest in the country remain under a heavy tax burden.

Cutting Income Tax

There is also the potential for Income Tax to be cut. This cut, as well as a further potential cut to the National Insurance tax, could save your average pay-as-you-earn (PAYE) workers as much as £450. As reported by The Times "A 2p cut to income tax for someone earning £35,000 would leave them £448 better off a year while someone earning £60,000 would have an extra £948, according to analysis from AJ Bell."

"Meanwhile, a further percentage point cut to NI would leave a worker earning £35,000 a year £673 better off while someone earning £60,000 would be £1,131 better off."

"It sounds good, but such cuts are wiped out by the impact of frozen tax thresholds, known as fiscal drag. "

Cutting Spending

It seems likely that to pay for tax cuts, Mr Hunt would be either forced to cut public spending or find taxes that can be low impact, but still reduce the tax burden. On the BBC's Political Thinking Podcast, Mr Hunt said: "It doesn't look to me like we will have the same scope for cutting taxes in the spring Budget that we had in the Autumn Statement". 

"And so I need to set people's expectations about the scale of what I'm doing because people need to know that when a Conservative government cuts taxes we will do so responsibly and sensibly."

He added: "But we also want to be clear that the direction of travel we want to go in is to lighten the tax burden."

According to the Financial Times, sources close to Hunt have said that Treasury officials are considering “reducing projected spending rises to about 0.75 per cent a year, releasing £5bn-£6bn for Budget tax cuts.” 

Politics at play

With a General Election looming Mr Hunt and the Conservatives will be reticent of their current low standing in the opinion polls and will likely see tax cuts as one of the only potential routes to victory. In light of the UK's recession, Mr Hunt will be eager to grow the economy again and stop the current stagnation occurring in the UK's economy, which was one of Prime Minister Rishi Sunak's five pledges. 

With that being the case, the economy will be one of the Prime Minister's best weapons in winning back voters. They'll be hoping that by using the spring budget, they can use a series of tax cuts to grow the economy and boost their flagging opinion polls, which put them somewhere between 15-20 points behind the Opposition Labour Party.

The full interview with Jeremy Hunt from Political Thinking with Nick Robinson is available on BBC Sounds.

How does the Inheritance tax work?

Inheritance tax was first introduced in 1984 and is tax paid on the estate, this includes property, money, and possessions of someone who has passed away. This tax must be paid on anything above the value of the £325,000 threshold. If everything above this threshold is left to a spouse, civil partner, charity, or a community amateur sports club there is no tax required to be paid.

The standard tax rate is 40% on what you inherit over the £325,000 threshold with £7 billion being raised annually through inheritance tax which is then spent on public services.

If the person passing away leaves their home to children or grandchildren the threshold can increase to £500,000 before being taxed.

If your estate is worth less than your threshold and you are married or in a civil partnership when you pass away, any unused threshold can then be added to your partner’s so the tax-free allowance increases for them.

In an interview with Clive Barwell, who has over 50 years of experience in the industry told us invaluable information about IHT, that the best and easiest way to save on IHT is to give your surplus wealth away as gifts.

“At the point of making a cash gift, there are no tax implications for either the Donor or the Donee, regardless of the amount given away. However, for the gift to be fully effective for IHT purposes, the Donor must survive for 7 years from the date of the gift. If they don’t, the value of the gift is added back into the IHT calculation upon death.”

Clive Barwell emphasises the significance of planning ahead and believes that “Failing to plan is planning to fail.”

Why does the Conservative Party want to cut Inheritance tax?

Towards the end of 2023, there was speculation that the conservative government would be getting rid of inheritance tax due to their plans for a 'gear change' on tax. Those in favour at this time were warned of the backlash from the public as this change focused on tax cuts for the rich rather than helping ordinary families in a time of economic uncertainty.

Then on December 27th, 2023, The Telegraph reported that several conservative MPs favoured cutting inheritance tax and the change could happen in the Spring budget.

The conservative party are said to be behind Labour in the polls and looking for ways to boost their numbers. The Independent stated that members of the conservative party believed that this could be a “game changer.”

Who will this benefit?

The Institute for Fiscal Studies notes that 1% of people in the UK would receive almost half of the benefits. Only the wealthiest in the UK will come out of this change with a positive outcome.

As inheritance tax is only paid by 4% of households, that’s 1 in 25 paying this tax.

A YouGov survey tells us that 54% of voters considered the tax ‘very unfair’ or ‘unfair.’ With a high proportion of people feeling the tax is unfair, the Conservative Party feel this gives them an advantage in upcoming elections.

How likely is it to be abandoned?

Although there are rumours that many MPs are in favour of the inheritance tax cut there are also some expressing their distaste for this cut. Jonathan Gullis, former Education Minister has said he would rather see “the higher rate income tax threshold raised, or the basic rate of income tax cut now.”

Additionally, Neil O’Brien, the former Health Minister has said, “People most want to cut taxes that fall on low- to middle-earners and council tax and VAT.” The Guardian brings an Ipsos poll to our attention that showed the public preference for a tax cut was one on low-income tax (44%), followed by 36% hoping for council tax cuts.

It is largely felt that IHT being cut is just a speculation as some conservative members are highlighting other, more pressing matters that are important to the public. The MPs are also aware of the likelihood of backlash with this change causing the delay and second thoughts.

The cutting of inheritance tax could likely become a manifesto pledge rather than a set-in-stone policy.

From VAT to Corporation Tax, there are a few to remember. Streamlining your tax and auditing process will help to keep you compliant in the eyes of the law and minimise the amount of time you have to spend on it.

Digital recordkeeping

Many of the tax systems are changing and digital recordkeeping is becoming part of being compliant. Using accounting software does make taxes and recordkeeping easier, as it is all stored online and in one place. Long gone are the days when filing cabinets needed their rooms for business records.

Using accounting software can also help to reduce errors as any calculations will be done by the software, although you will need to be careful when entering the data manually.

Regular financial health checks

Although there is no definitive way to define financial health, there are several factors you can regularly look at. You may find it easier to incorporate this as part of your quarterly or yearly review, as you will have all the information to hand already.

Liquidity is a major factor to consider for financial health. The more money or assets you can cash in easily, the better your liquidity. Essentially, your business will be able to meet its debt obligations.

Collaboration with tax professionals

When it comes to financial and legal compliance, it is always beneficial to utilise accounting services. Having a team of professionals scrutinise your records will help to prevent you from making a step wrong.

The right accounting team will work with you to make sure you file any returns on time, make the correct payments, and pay your staff’s taxes appropriately. This will prevent you from being slapped with any late filing penalties or non-compliance fines.

The fines for non-compliance can be large. For Corporation Tax, you can be fined £100 if it is a day late, increasing to £300. HMRC will estimate your bill and add a 10% fine if you are late by 6 months. For repeat offenders, the initial fines will start at £500.

Employee training and awareness

Taxes and auditing are a team effort, so your whole company must be aware of any requirements or processes you have. When hiring new staff, make it part of their induction training so that they are set up for success from day one.

With existing staff, you may want to offer periodic compliance training as a refresher. You should always implement these sessions if you change a process or your legal responsibility changes as well.

By ensuring everyone is on the same page you will reduce the chance of inadvertent errors occurring, and therefore non-compliance.

By Bruce Martin, CEO at Tax Systems

 

Yet, within this important movement, a key aspect of finance – tax – can often be neglected, with many organisations missing significant opportunities to boost effectiveness as a result.

 

In reality, this is not surprising. As a constituent part of the overall finance function, tax may not be viewed as a priority area when organisations come to implement digital transformation projects. Moreover, tax is ultimately driven by compliance, so the effects of any changes implemented here are felt much less widely than those in other key areas of finance – which are more likely to have a significant impact across the business. As a result, the percentage of the overall finance budget dedicated to digital tax projects typically pales in comparison to other finance functions.

 

Think of it this way: in getting Environmental, Social, and Governance (ESG) planning and implementation initiatives off the ground, for instance, businesses tend to do the bare minimum until regulations or other pressures force more urgent change. The same idea can be applied to allocating time and resources to tax transformation. What’s more, the unique needs of each business, its position in the finance and tax lifecycle and the proficiency of the finance team play important roles in the budget allocation relating to digital transformation projects.

 

In this context, and with many CFOs coming from an accountancy rather than a tax background, it’s simply more likely that they will focus on areas more aligned with their roles and experiences.

 

Untapped potential

 

And herein lies a growing problem and an important opportunity for positive change. By overlooking tax transformation, many businesses are missing out on valuable insights and efficiencies. Often seen as a compliance box-ticking exercise, businesses do what's needed to remain tax efficient and compliant. Yet, beyond these core objectives, tax transformation holds immense potential.

 

In practical terms, what does this mean? Implementing tax transformation is all about enabling tax professionals to focus on their areas of expertise: evaluating tax positions and maximising efficiency, while automation assumes the role of handling repetitive tasks. While this could be unsettling for some, the objective is to use advanced tech tools to boost efficiency and productivity. It’s certainly not – as some people fear – about using AI to replace jobs, and for those people at the sharp end, tax transformation frees them to do the jobs that fit their expertise, not the jobs that automation can replace.

 

In this situation, tax professionals are empowered to focus on more value-add tasks that can make a material impact on business performance.

 

These are crucial considerations given that the general direction of travel is clearly in favour of greater digitalisation of the tax function at all levels. This includes HMRC, which is gradually integrating technology more deeply into its capabilities and processes. As they work towards building a “trusted, modern tax administration system,” changes they bring forward will inevitably be reflected in the way organisations interact with them.

 

Ultimately, using technology to deliver tax transformation can undoubtedly contribute positively to a company's cash flow and overall financial strategy. Organisations can only reap these benefits, however, if they adopt a mindset which sees the tax function as being driven by more than just regulatory compliance.

 

By viewing it as an integral part of a wider digital transformation strategy, it becomes possible to leverage the capabilities of both tax professionals and emerging technologies for maximum impact. In the future, those organisations that give tax transformation the investment and strategic insight it requires will be ideally placed to deliver on the capabilities and efficiencies that have become synonymous with the digital age.

 

 

 

 

 

 

 

 

 

 

 

 

 

New technologies and innovative solutions are introduced constantly – most notably, blockchain technology. Blockchain can change how all aspects of accounting and auditing processes take place. 

It not only has considerable benefits for current financial systems, but it also promises new ways of performing accounting tasks with a remarkable level of transparency and accuracy. 

In this article, we'll explore the basics of accounting systems, auditing processes, and how blockchain-based technologies (such as DeFis, DAOs, or dApps) revolutionize traditional approaches.

Accounting Systems

Accounting systems are the backbone of any business's financial management. They're responsible for keeping track of every financial transaction and record so that businesses can operate within legal guidelines, make data-driven decisions, and ensure the accuracy and maintain the integrity of their finances.

With blockchain technology, accounting systems have taken on a new dimension of transparency for businesses. Because blockchain enables decentralized storage and sharing of transactional data, all participants on the network can view these transactions in real-time, thus rendering traditional bookkeeping procedures nearly obsolete.

This feature is particularly crucial for auditing purposes where transparency is vital. With blockchain technology, auditors have a greater degree of visibility into transactions leading up to the accounts they're auditing than ever before. 

Moreover, with a more transparent ledger on which to base their analyses, auditors can perform such operations faster since it takes substantially less time for them to locate relevant information within an online ledger or database without manually searching through individual documents.

Accounting systems utilizing blockchain technologies offer increased transparency providing competitive advantages for those using these advanced systems while minimizing compliance risks - which ultimately will lead to better decision-making and higher profits.

Auditing

Auditing processes are vital in verifying financial statements and ensuring the accuracy of transaction records. Traditionally, the process is complex and often involves manual input systems that require a lot of time to review every individual document. 

With blockchain technology, however, auditing has become more efficient than ever before. Since financial data is stored on a distributed network of nodes, users view transactions in real-time and help eliminate inconsistencies between different ledgers.

The use of Vena as a financial consolidation software can further this process's simplification, bringing together financial information from multiple sources to quickly create a comprehensive view of an organization's finances. 

It securely automates the preparation and generation of consolidated financial statements that will allow companies to reduce operating costs and minimize human error while consolidating all data.

Smart contracts also provide predetermined rules where conditions agreed upon by multiple parties must be met before triggering specific transactions; this improves risk management as well. These factors contribute to higher efficiency through automation and systematization alongside reducing costs in operations.

Decentralization

Decentralization is a characteristic feature of blockchain technology that is transforming how we think about data storage and access. The concept behind decentralization is to eliminate the traditional centralized systems prone to single-point failures. For example, banks serve as intermediaries in most financial transactions, with the responsibility of recording transactions and storing data.

However, blockchain technology has replaced these intermediaries with smart contracts embedded within the transaction records of every participant on the network. The decentralized system eliminates fees associated with middlemen since value transfers occur directly between peers without reliance on trusted third parties.

In addition to eliminating middlemen from financial transactions, decentralized platforms like DeFis (decentralized finance), DAOs (decentralized autonomous organizations), and dApps (decentralized applications) offer unlimited opportunities for participants to use digital assets creatively. 

With DeFi solutions built on top of blockchain networks, people can obtain loans, trade stocks, or other securities without any intermediary or credit check needed - while retaining complete control over their underlying collateral.

Furthermore, DAOs enable users to vote on critical decisions collaboratively by communal voting mechanisms thus replacing traditional hierarchical structures. This mechanism creates a much more democratic and participative culture - reducing the influence few powerful individuals may have in corporations or governments.

Smart Contracts

Smart contracts represent one of the essential features of blockchain-based technologies that enhance business processes while reducing costs. They are digital contracts, designed to execute automatically based on predefined rules encoded within them.

For instance, companies can set up smart contracts that automate payment processing once specific conditions are met. This feature offers transparency and trust by displaying the smart contract's code publicly so that every participant can view it. 

Moreover, smart contracts eliminate traditional intermediaries such as lawyers and banks since they reduce the risk of human errors or biases involved in manual intervention. As a result, businesses save significantly on legal fees while maximizing transactional efficiency with instantaneous settlement.

Since DeFis leverages blockchain-based technologies to offer financial services without intermediaries such as loans, insurance, trading, collective investments, and others through tokens or cryptocurrencies, it paves the way for new investment opportunities beyond traditional fiat currencies.

Wrapping Up

In conclusion, whether you're an entrepreneur or an accountant, understanding these advancements can help you make more informed decisions, innovate on existing systems and take advantage of new opportunities, such as DeFis, DAOs, or dApps. So, keep exploring and experimenting with them!

What is the difference between being a sole trader and being self-employed?

There is very little difference between being a sole trader and being self-employed, so much so that to register as self-employed, you must register as a sole trader. You cannot register as one without the other.

The term sole trade describes a business structure, wherein a person is the exclusive owner of their business and is entitled to all profits after tax. Alternatively, being self-employed simply means that a person does not work for somebody else and that they run a business or trade goods and are responsible for all success or failure that their business may encounter.

If you are self-employed, in order to register to pay tax, you must register as a sole trader with HMRC. There are other ways to work for yourself, including a limited company wherein you run a business but earn a wage and are registered with companies house, or a business partnership.

If you've started your own business and you're looking into the financial side of things, you may well be wondering how to register as a sole trader. Or perhaps you're wondering: is it worth registering as a sole trader?

Why you should register as self-employed/a sole trader

Aside from the legal side, there are a few different reasons you should register as self-employed. For one, it is the simplest way to ensure you are paying the correct amount of tax for your business. Here we cover how to track your accounting/finances as a freelancer which would also be self-employed.

If you set up a limited company, you have to pay corporation tax which you may need an accountant for and you also earn money through wages as opposed to the profits your business makes. When you register as a sole trader, you only have to pay income tax based on a self-assessment tax return that you send in each year, and you are entitled to all of your profits after that.

What happens if you do not register as a sole trader

For those who don't register as a trader or limited company or business partnership, HMRC is likely to fine you. These fines can range from 30% of the tax you owe to 100% of the tax you owe, depending on whether or not a judge determines you purposefully failed to file your taxes or whether it was accidental. On top of the fine, there may well be daily fees and interest.

When do I need to register as a sole trader?

In terms of when in the year to register as a sole trader, you must register and then file for a self-assessment before October. This then allows you to fill out and send your self-assessment tax return by the end of January so that you can pay the correct income tax and national insurance contributions for the next tax year.

You must register as a sole trader as soon as your earnings from April to April exceed £1,000. You may also need to register to prove your status as self-employed or to help you qualify for benefits.

The easiest thing to do is to alert HMRC of your business as soon as you begin to earn profits. That way you don't risk receiving any fines for missed deadlines or incorrect tax.

How to register as a sole trader

The first step in registering as a sole trader is to register for the self-assessment process with HMRC. If you haven't registered for this before, they will send you a code in the post within 10 days to allow you to access the self-assessment. This activation code allows you to prove your identity and complete your self-assessment.

Once registered as a sole trader, you should make sure that all of your invoices and paperwork are in order. You may also want to plan ahead to ensure that you will have all the documents ready for your eventual self-assessment tax return.

What are the responsibilities of a sole trader?

When you decide to start your own business you gain a number of new responsibilities that you are unlikely to have had before. Many of these are tax-related. As a sole trader, you are responsible for:

What to do if you're not sure whether to register as a sole trader

If you're a self-employed person running a small business and you're not sure whether or not to register as a sole trader, there are other options.

As aforementioned, you can opt to register with companies house as a limited company. This is a different business structure to a sole trader, and you will earn a wage as opposed to profits. You will also have to pay corporation tax. However, your personal finances will be legally separate from your business income, whereas sole traders have personal liability for their business' debts.

Alternatively, you could set up a business partnership which is another business structure altogether. You and your partners all share responsibility for the business, unlike limited companies and sole traders. Each partner is entitled to a share of the profits, and each partner will pay tax on their share.

Anyone unsure whether to register as a limited company, sole trader or business partnership can speak to a financial and tax expert, or contact HMRC for advice on which of these categories their small business comes under.

If you’re finding it hard to factor VAT charges into your finances, then this article can help you to understand exactly when you need to start paying VAT, how much VAT you might have to pay, and why VAT return software is an essential part of the process.

What Is VAT?

VAT, or Value Added Tax, is a type of tax that’s charged on many goods and services. You’re probably already used to seeing VAT charges on invoices when you place orders online, usually as part of the breakdown of your order total alongside shipping costs. Most businesses include VAT in the price displayed on their website, but an invoice gives you extra insight into how much of that cost is actually VAT.

VAT Rates Explained

VAT rates can vary depending on the product or service you’re selling, as well as how it’s being sold, so it’s important to calculate VAT on a case-by-case basis if you’re selling lots of different products. Here is a brief overview of VAT rates and the categories they apply to:

Who Pays VAT?

Only businesses with an annual turnover of more than £85,000 have to register for and pay VAT. Businesses below this threshold can register to pay VAT voluntarily, but there’s no obligation to do so, even if they sell goods taxed at a standard or reduced rate.

Registering For VAT Voluntarily

Deciding whether you want to register for VAT early will depend on your business’s needs and whether the additional admin and paperwork are worth the rewards you may reap.

VAT registration can be a bonus for some businesses because while you will have to pay VAT to HMRC, you will also be able to claim it back on any eligible purchases. If you regularly buy a large number of business supplies from VAT-registered businesses, claiming back the VAT could save your business money.

However, claiming back VAT makes your bookkeeping process more complicated and you may need to seek assistance from an accountant. You will also have to consider whether your customer base will be happy to accept higher prices, especially if your goods and services are taxed at 20%.

How To Register For And Pay VAT

Before paying any VAT, you will have to register your business for VAT online. You’ll usually receive your registration number and certificate in around two weeks and won’t be able to charge your customers VAT until then. However, it’s a good idea to increase your prices to account for the extra charges while you wait. This is because you’ll be liable to pay VAT from the day your application is sent off, so make sure you keep careful records of invoices and receipts as soon as you start the registration process.

VAT Software

As of April 2022, all VAT-registered businesses must use accredited accounting software to file their tax returns. This is because of a new policy called Making Tax Digital, or MTD, which aims to make filing your VAT return a much smoother process. Not only will your software automate your VAT calculations, but it will also help you to keep careful records of invoices and expenses while staying up-to-date with any tax law changes and deadlines so you don’t have to.

Keeping Records For VAT

While it’s important for all businesses to record their income and outgoings, VAT-registered companies need to be extra vigilant. It’s important to keep your business transactions separate from your personal spending, which is why many entrepreneurs open separate bank accounts. Some of the records you will need to have for VAT purposes include:

It’s important to keep VAT records for six years, as HMRC could request to see them as part of an investigation.

Manage Your VAT More Effectively

Once you’ve decided whether VAT registration is necessary for your business, you can begin implementing processes that make managing your tax return a smoother process. This should include finding an accredited accounting software provider and gathering your financial records but could also involve hiring an accountant or advisor to assist in maintaining your books.

How Will Unincorporated Businesses Be Affected?

The basis period reform will impact those with unincorporated businesses, whether they are a sole trader or a member of a partnership, with accounting periods not ending on either 31 March or 5 April. In introducing the changes, HMRC is looking to prepare for the move to Making Tax Digital by creating a simpler system with a single set of rules for taxing profits and removing the complex rules relating to basis periods and overlap profits.

 The 2023/24 tax year will represent a transition period, where individuals will be taxed on profits for the 12 months to the accounting period which ends during the tax year, plus those from the end of the previous accounting period to 5 April 2024. In the transitional year, HMRC will require tax ‘up front’ on the profits arising in the period from the accounting year-end to the end of the tax year. In effect, this means that there are likely to be significant increases in an individual’s tax liability and careful cash flow planning will be important to ensure this can be funded.

Overlap profit

It's worth bearing in mind that individuals can relieve any overlap profit that they have brought forward. The profit for the 12 months to the accounting period ending in the tax year is referred to as the ‘standard profit’, while the profit from the end of the accounting period to 5 April 2024, is the ‘transitional profit’. The overlap relief is deducted from the latter.  This net profit or loss is then aggregated with the profit or loss realised in the standard period.

Individuals can mitigate the cash flow impact of the basis period reform by spreading the profits earned during the transition period. Where the transitional profits minus the overlap relief brought forward results in a taxable profit, the individual can spread it over a maximum of five years, beginning with the transitional year itself. The Finance Bill 2021-22 also introduced a facility to accelerate the recognition of profits spread in this way. This allows an election to be made for additional profit allocation to kick in at any point during the five-year period. The election must be made within 12 months of the self-assessment filing date for the tax year in which the taxpayer wishes to recognise the additional profits.

Effective tax forecasting

Effective tax forecasting is important for sole traders and members of partnerships; giving them a better understanding of when their tax liabilities will fall, so they can plan ahead. It’s important to be aware that individuals must continue to be self-employed in order to spread profits in this way.  As such, those planning to retire in the near future should seek advice.  Likewise, where the net position is a loss, advice should be sought at the earliest opportunity.

 From 2024/25, the profits of sole traders and members of partnerships will be taxed on a tax year basis. Although it may be simpler in the vast majority of cases, there will not be a requirement to change the accounting year-end.  For example, for those with an accounting period ending 30 June 2024, three months’ profits from the 30 June 2024 accounts and nine months’ profits from the 30 June 2025 accounts will be taxable in the 2024/25 tax year. This means that businesses will have to estimate their profits from the end of the previous accounting period to the following 5 April. Once the accounts to 30 June 2025 are complete, businesses will be required to amend the previous year and report the actual taxable profit that arose during the nine months to 5 April 2025. An amendment to the earlier year will be required for each tax year where the accounting period does not fall in line with the tax year. 

Final Thoughts

HMRC’s basis period reform could see some individuals calculating their tax liability based on almost two years’ worth of profits in one tax year, placing pressure on their cash flow position. By staying abreast of the new rules and planning ahead, unincorporated businesses can prepare to mitigate the cash flow impact of the new rules when they’re introduced. 

About the authors: Amy Cole is a director and Rachael Smith is an assistant manager at accountancy firm, Menzies LLP. 

When it comes to saving money, compound interest is the easiest way to make your money grow. If you're like most people, you probably dread the thought of doing your taxes. But what if there was an easy way to calculate compound interest? Well, there is! This article will teach you how to calculate compound interest so you can start making your money work for you. So read on for all the details!

Compound Interest 101

When you're investing money, you'll often hear the term "compound interest." Compound interest is one of the most important concepts to understand when it comes to investing, and it's also one of the easiest to calculate. It's especially easy if you use a compound interest calculator online. Compound interest is a type of interest that builds on top of itself over time. This means that the more money you have in your account, the more interest you'll earn on that money. For example, if you have $100 in an account that earns 5% compound interest per year, at the end of the first year you'll have $105. The next year, you'll earn 5% interest on the $105, which comes out to $5.25. This means that you now have a total of $110.25 in your account. As you can see, compound interest can add up over time! There are two main things to remember about compound interest:

  1. The more money you have in your account, the more interest you'll earn.
  2. Compound interest is calculated based on the account balance at the end of each year (or another period).

How Compound Interest Works

Here's a quick example to illustrate how compound interest works on a larger scale. Let's say you have a $1,000 investment that earns 10% compound interest per year. At the end of the first year, you'll have $1,100 in your account. The next year, you'll earn 10% interest on the $1,100, which comes out to $11. This means that you now have a total of $1,111 in your account. As you can see, your investment has grown by $11 over two years. And this growth will continue each year as long as the investment continues to earn 10% compound interest. Now imagine if you had started with a larger investment, like $10,000. At 10% compound interest, your investment would grow by $1,000 each year. In just 10 years, your investment would have doubled in size!

How To Calculate Compound Interest

If you're interested in calculating compound interest manually, here's the formula:

A = P(1 + r/n)^nt

Where:

For example, if you have an investment that earns 5% compound interest and you want to know how much money you'll have after 3 years, you would plug the following values into the formula:

This means that if you start with a $1,000 investment and earn 5% compound interest per year, you'll have $1,157.625 after 3 years. You can use this same formula to calculate compound interest for any period and interest rate. Just be sure to use the correct values for each variable in the formula. For example, if you're calculating compound interest for 10 years, be sure to use 10 as the value for t.

Benefits of Using A Calculator

If you don't want to do the math yourself, there's no need to worry. There are plenty of compound interest calculators available online that will do the work for you. All you need to do is enter the present value of your investment, the annual interest rate, and the number of years you plan to invest. The calculator will then give you the future value of your investment. For example, let's say you have a $5,000 investment that earns 6% compound interest per year. If you use a compound interest calculator, you'll see that after 10 years your investment will be worth $8,441. This means that your investment will have more than doubled in size over 10 years!

 

Compound interest is a powerful tool that can help you grow your money. By investing early and often, you can take advantage of compound interest and watch your money grow over time. Just be sure to use a calculator to figure out how much your investment will be worth in the future so that you can make informed financial decisions.

The yearly volume of bitcoin transactions in Russia is estimated by the central bank to be over $5 billion. But a recent legislative recommendation escalated a brewing disagreement between the Russian Ministry of Finance and the central bank. Let’s take a deeper look at what the fuss is all about and how this can affect how cryptocurrency is taxed in the USA and across the globe.

Russia’s Latest Crypto Regulation

The finance ministry published legislative recommendations that contrasted with the central bank's call for a blanket ban. This escalated a brewing disagreement over cryptocurrency regulation in Russia.

The proposed legislation to regulate cryptocurrencies in the country includes requirements that investors can no longer stay anonymous and that transactions be limited to a particular value, among many other things. In this context, it must be noted that enabling law enforcement, the ability to track money movements and transactions risks undermining one of the cryptocurrencies' key selling points: its anonymity.

However, to add to the complexity of the matter, a document obtained by Reuters states that the central bank opposes the ministry's plans. Also, it wants an official ban on the creation and distribution of cryptocurrencies.

In order to understand how this legislative recommendation affects the global crypto tax dynamics, let’s take a look at how cryptocurrency is taxed in the USA and in Russia.

How Is Cryptocurrency Taxed In Russia?

In the last month of 2020, the Russian Federation's government introduced Bill No. 1065710-7 to the State Duma, which includes measures that would control the circulation and possession of cryptocurrency and define liability for violations of the bill's laws.

The bill mandates residents, individuals, and legal companies operating in the Russian Federation to report their cryptocurrency holdings and imposes tax liability for illegal failure to submit information or declaring misleading information regarding cryptocurrency transactions. The bill's changes call for cryptocurrencies to be recognised as an "asset" and taxed appropriately.

How Is Cryptocurrency Taxed In The United States?

For tax purposes, the Internal Revenue Service considers cryptocurrencies as property and not currency. You must keep a record of the capital gains or the capital losses and incur the proper cryptocurrency tax rates, just like you would with stocks, bonds, or real estate. These crypto tax rates are determined by the holding period of the assets and your income tax bracket for the financial year.

Depending on your income tax bracket, long-term capital gains tax rates vary from 0% to 20%.

Depending on your income tax bracket, short-term capital gains tax rates vary from 10% to 37%.

What Is The Effect Of Russian Crypto Regulation On How Cryptocurrency Is Taxed In The USA?

The Russian government and the central bank have agreed to regulate cryptocurrencies and will treat them as foreign currency rather than a stock. Essentially, the plan states that transactions of $8,000 or more must be registered, and exchanges must be licensed.

With the change in crypto dynamics in Russia, the third-largest crypto mining country, the United States is now attempting to consider what its rules would look like. It is projected that crypto havens would spring up in either primarily island countries throughout the world that simply wants people to switch their bitcoin there to escape taxation. There will be a lot of amendments here from various nations across the globe.

The Bottom Line

These are all significant developments, even if they occur on a global scale, for how U.S. politicians may consider crypto, whether as a security or a currency.

FAQs:

Russia is the third-largest country in terms of mined cryptocurrencies. But officials have, for a very long time, questioned the crypto market, worrying about its volatility and risk of unlawful activities, and have demanded crypto rules be imposed. The yearly volume of bitcoin transactions in Russia is estimated by the central bank to be over $5 billion.

However, the Bitcoin sales in rubles have remained limited. Russians have purchased an average of 210 BTC each day with rubles. 

In the last month of 2020, the Russian Federation's government introduced Bill No. 1065710-7 to the State Duma. The bill mandates residents, individuals, and legal companies operating in the Russian Federation to report their cryptocurrency holdings and imposes tax liability for illegal failure to submit information or declaring misleading information regarding cryptocurrency transactions. The bill's changes call for cryptocurrencies to be recognized as an "asset" and taxed appropriately.

The proposed legislation to regulate cryptocurrencies in the country includes requirements that investors can no longer stay anonymous and that transactions be limited to a particular value, among many other things. In this context, it must be noted that enabling law enforcement, the ability to track money movements and transactions risks undermining one of the cryptocurrencies' key selling points: its anonymity.

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