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:

• A is the future value of the investment
• P is the present value of the investment
• r is the annual rate of compound interest (expressed as a decimal)
• n is the number of times the interest is compounded per year
• t is the length of time, in years, for which the investment is compounded

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:

• A = P(1 + r/n)^nt
• A = 1000(1 + 0.05/1)^3
• A = 1000(1.05)^3
• A = 1157.625

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.

• Holding your crypto assets for more than a year will lead to long-term capital gains or losses when you sell them. The tax rates on long-term capital gains are often lower than that of short-term tax rates. 

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

• Holding your crypto assets for less than a year will lead to short-term capital gains or losses when you sell them. The tax rates on short-term capital gains are often much higher than that of long-term tax rates. 

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:

• Is Bitcoin used in Russia?

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. 

• 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. 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.

• What is the new crypto legislation recommendation 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.

Back in 2017, Didi Taihuttu and his family liquidated all their assets, including their 2,500 square-foot house, and purchased bitcoin when it was trading at around $900. Since then, the Dutch family of five have safeguarded the majority of their crypto fortune in secret vaults across four different continents, with bitcoin currently trading at around $41,000.

Now, the “bitcoin family” has chosen to quit travelling the world and to settle down in Portugal instead due to its 0% tax on the world’ most popular cryptocurrency. 

“You don’t pay any capital gains tax or anything else in Portugal on cryptocurrency,” said Taihuttu. “If you earn cryptocurrency by providing services in Portugal, you need to pay tax on those cryptocurrencies, but I don’t earn anything, at the moment, in Portugal. So for me, it’s 0% tax.”

While the United States treats digital currencies such as bitcoin as property and taxes them similarly to stock or real estate, Portugal treats cryptocurrency as a form of payment. This is a game-changing distinction in terms of taxation, and will likely see Portugal attract more cryptocurrency investors in the future.

Analysis of Office for National Statistics data by the TaxPayers’ Alliance has revealed that the lifeline tax bill for the average household in the UK is equivalent to 18 years of work. Meanwhile, the study showed that the bottom 20% of households with an income of £19,171 will need 24 years of income to pay their lifetime bill. 

The findings come as Prime Minister Boris Johnson and the Chancellor of the Exchequer Rishi Sunak are urged to reconsider a planned increase in National Insurance set to go ahead in April this year. However, last week, Johnson and Sunak defended the tax hike, arguing that it is vital for the country’s Covid-19 recovery. 

The study revealed that, even before the planned hike, the average UK household is set to pay close to £180,000 in employer and employee National Insurance contributions over a lifetime. 

Chief executive of the TaxPayers’ Alliance, John O’Connell, said: “With the tax burden at a 70-year high, typical families are now tax millionaires.”

“Taxpayers already toiling half their working lives just to pay off the taxman cannot be asked to endure any further crippling tax hikes. Planned rises, like the national insurance hikes, must be scrapped.”

It’s important to remember that tax attorneys from a reputable law firm have a wealth of resources at their disposal to help you stay on top of your situation and ensure you receive the best possible outcome with minimal stress. If you’re having trouble with your taxes, it may be time to talk to an attorney about ways they can help you solve your tax issues or perhaps even avoid them altogether. Here are three ways a tax attorney can help with your tax problems.

1. Avoid Jail Time

If you're facing tax-related charges, your first thought is probably how you can keep from going to jail? Jail time for tax evasion is a real possibility if you are found guilty of breaking federal tax laws. However, you can use particular strategies to lessen your chance of being jailed. One of these strategies involves hiring an attorney immediately to help defend against these charges.

Regardless of your particular criminal charge, your attorney can go to bat for you in court and fight for leniency. Most people don't realise that federal law allows someone convicted of a misdemeanour or nonviolent felony to ask for probation instead of jail time. With a bit of luck and some clever legal manoeuvring, your attorney may be able to get you off without serving any time behind bars.

2. You Won’t Face Severe Penalties

If you’re facing an IRS audit or a criminal investigation, your life can quickly become unbearable. An attorney can help reduce your fines and even prevent you from being charged in court altogether.

Tax law can be complicated, but an experienced lawyer will ensure that every angle in your case is addressed and that you receive the best possible outcome based on your potential penalty. An attorney can also assess if you’re eligible for an IRS instalment plan, which allows you to pay off your debt over time. In some cases, they may even get some of your fines and penalties waived through negotiation.

3. Deal With Tax Authorities On Your Behalf

Many taxpayers feel confused, intimidated, or even hopeless when dealing with a government agency. You might not have all of the information you need to answer questions, and it's easy to feel that you don't know what you're doing. Additionally, it can be challenging to reach out and contact tax authorities by yourself.

If you’re being audited or under investigation, your tax attorney can communicate on your behalf. They have all of your financial records, and they can explain your situation more clearly than you can on paper. An experienced attorney will clear up any confusion or potential issues right away. The lawyer will also handle complex disagreements with a state or federal agency and negotiate a settlement.

Endnote

If you’re facing any tax trouble, you might not know where to turn. There are so many different types of taxes with diverse issues, and each one requires a particular form of solution to be adequately handled. If you're unable to resolve your tax issue with the IRS on your own, consider hiring an attorney to help you out. 

Alex Baulf, Senior Director of Indirect Tax at Avalara explains how e-invoicing is switching up the VAT gap game.

This latest difference recorded for 2019, equating to a total VAT revenue loss of 10.3% across the EU, is known as the VAT gap. A major concern for governments across the continent, it is typically caused by a combination of fraud and tax evasion, corporate insolvency, corporate bankruptcy, maladministration and legal tax optimisation, among other activities. But it is not a case of total doom and gloom. Indeed, a key headline from the latest VAT Gap Report is that the gap has been reducing between 2015 and 2019. Yet there is no avoiding the fact that €134 billion is still a mammoth loss.

To put it into real-world terms, such a sum could be used to pay for 250 state-of-the-art hospitals or 2,500 kilometres of high-speed railway. The VAT gap is still a major concern, particularly in view of the huge investment needs EU member states must address in the coming years.

Mandatory e-invoicing

So, how can the VAT gap be tackled effectively? There is a strong case to be made for mandatory e-invoicing (also known as electronic invoicing) - not just within the EU but worldwide. As its name would suggest, e-invoicing entails the exchange of an invoice document between supplier and buyer in an integrated electronic format.

It is essentially a more watertight way of enforcing tax laws and maximising VAT collection activities compared to traditional methods of ensuring VAT compliance that typically rely on the periodic reporting of aggregated summary data and rare tax audits.

Leveraging technology and standardised datasets instead allow governments to benefit from streamlined, accurate reporting and a reliable audit trail that can be used to identify fraudulent transactions with ease. In this sense, it is a modernised, drastically enhanced way of improving the transparency of VAT payments and recovery.

The legislation landscape

It should come as little surprise, therefore, that many European countries have already established, or are in the process of establishing, legislation that governs the use of e-invoicing and promotes its use due to unlocking such benefits.

Italy and Hungary stand as prime examples, both having successfully introduced compulsory e-invoicing already. Meanwhile, many other European nations including Germany, France and Poland have outlined their intention to instate mandatory e-invoicing in the coming years.

Interestingly, the European Commission itself is considering the creation of a harmonised framework for standardised e-invoicing that will ensure transparency across EU borders, as well as exploring the possibility of a gradual introduction of obligatory e-invoicing across its member states come 2023.

Such commitments are not limited to EU efforts either. Equally, looking beyond the continent, Saudi Arabia began its rollout of e-invoicing mandate in December 2021, set to be followed by Egypt in January 2022 and Vietnam in July 2022. The business case for companies

Governments aren’t the only party that stands to benefit from mandatory e-invoicing.

Indeed, the benefits for them are clear, yet there is a strong business case to be made for organisations adopting such modernised mechanisms as well. Indeed, there are a variety of benefits that can be realised by companies. Compared to physical processes, digital e-invoicing can be handled and archived in a streamlined manner, saving not only time but equally costs relating to printing and postage. Further, compared to PDF invoicing, e-invoicing could save companies as much as 70% in processing costs.

There’s also a reduced risk of human error, removing the need for manual data entry that is typically required for PDF or paper invoices. This not only prevents administrative issues that are a significant contributor to the current VAT gap, but will save potentially awkward conversations and improve business relations.

As a third example, e-invoicing can additionally improve security thanks to the integration of encryption technology, digital signatures and secure networks, making it not only the fastest but equally the safest way to send and receive invoices.

Embracing the transition

With many countries in the process of adopting mandatory e-invoicing legislation – if not already adopted - it is clear that this form of invoicing could become the norm globally as an effective tool in tackling the VAT gap.

It is therefore imperative that organisations start thinking about making the transition proactively in order to be well prepared for regulatory changes around the corner. Further, businesses trading across territories will need to think strategically and seek to implement an e-invoicing solution that is scalable across countries and regions, as opposed to purchasing multiple individual local solutions as and when new mandates appear.

In the same way that organisations are continuing to increasingly harness technologies to digitise their operations, e-invoicing can provide a stream of benefits to both company and country alike. Early and willing adopters will not only help reduce the tax gap, but will also experience more streamlined tax and business processes, and greater business agility to meet changing requirements as the e-invoicing trend continues to spread in the future.

This represents a record-breaking level of debt for HMRC to collect in a period of financial recovery, with the UK besieged by multiple macro and local economic challenges. Sushil Patel explores them over the next couple of pages.

Overdue Debt

Over the 13 years prior to the 2020-21 financial year, HMRC’s overdue debt averaged £18.1bn, peaking in 2008/09 following the financial crisis, where the debt level approached £26bn. As seen in the figure below, the current level of HMRC debt has increased by £38.5bn (203%) to £57.5bn.  Total overdue debt actually peaked at £72bn in August 2020, before falling to its year-end position of £57.5bn.

Overdue debt as a percentage of tax revenue, which since 2011/12 had stabilised at between 2% and 3%, has also risen to 9.4%.

There are several reasons for such alarming levels of HMRC debt and the primary reason being the support measures put in place throughout the COVID-19 pandemic, restrictions placed on HMRC’s ability to utilise its enforcement powers and HMRC changing their stance and overall approach on the collection of debt.

More than half of the £57.5bn overdue debt (£31.3bn) relates to VAT deferred through the coronavirus VAT Deferral Scheme/VAT New Payment Scheme. Here HMRC offered up to half a million businesses the option to defer VAT payments between 20 March 2020 and 30 June 2020 to the following tax year and gave the option to pay overdue VAT over smaller, interest-free instalments.

Revenue Losses

HMRC reported a decrease in revenue losses of £2.12bn from £4.08bn in 2019/20 to £1.96bn in 2020/21, this was due to the reduction in corporate insolvencies. Revenue losses occur when HMRC formally cease collection activity.

The reduction in insolvencies was partly caused by the government measures to financially support businesses during the COVID-19 pandemic and the introduction of temporary restrictions on the use of statutory demands and winding-up petitions.

For the period ended 31 March 2021, there were 9 cases (23 cases in 2019/20) where the loss exceeded £10 million, totalling £320 million (£634 million in 2019/20).

There were six write-offs (19 cases in 2019 to 2020) relating to Insolvency, totalling £126 million (£391 million in 2019 to 2020).

Although it is certain that large numbers of businesses would have failed had it not been for the introduction of government support measures, many of the measures have now ended, and HMRC will be facing pressure from the government to ensure the debts are collected.

TTP Debt Levels

Another reason for the debt levels increase is due to HMRC’s increased willingness to negotiate Time To Pay (TTP) arrangements with businesses. Due to the volume of cases, HMRC set up teams dedicated to dealing with specific types and amounts of HMRC arrears. The teams initially agreed deferrals of tax arrears on the condition that businesses either pay off the debt in full or contact HMRC in the future to negotiate a TTP (i.e.- an affordable repayment plan over an agreed period).

In the tax year 2020/21, HMRC negotiated approximately 864,000 (2019/20: 648,000) TTP arrangements, an increase of 33.3% from the tax year 2020/21. This increase has resulted in the quantum of debt under a TTP rising by 557% to £15.1 billion. The graph below highlights the significance of this increase when compared to the £2.78bn average debt level over the six years prior.

The coronavirus pandemic has presented HMRC with the extremely difficult task of assessing businesses future trading prospects in a period of unprecedented uncertainty. Key questions such as business viability and past compliance records will be at the forefront of HMRC’s collection process.

HMRC has been forced to take a much more open view on these questions, as many viable businesses have been plunged into extended periods of losses due to closures, national and regional lockdowns, along with sudden changes in consumer spending and habits.

Producing reliable forecasts has become much more difficult and something that management teams must revisit frequently. In many ways, HMRC’s greatest challenge is to find a somewhat unnatural equilibrium as a collector of taxes whilst simultaneously supporting UK businesses.

Ultimately HMRC will be responsible for deciding which options are best for the UK taxpayer in the orderly collection of overdue taxes while safeguarding employment and the ongoing recovery of the UK economy. The TTP scheme has been a resounding success since it was introduced in 2008/9, and it has facilitated the repayment of billions of pounds of overdue tax debts. What is clear is that the scheme is going to play a vital role in delivering the orderly repayment of overdue taxes over the next three years.

HMRC’s Future Outlook

The accumulation of unprecedented levels of overdue debt, debt tied up in TTP arrangements and the significant reduction in the numbers of insolvencies, puts HMRC in a difficult predicament. It is their responsibility to act in the UK Government’s best interests: to manage the levels of overdue debt whilst also ensuring enforcement action is taken against unviable businesses that are arguably trading to the detriment of UK taxpayers.

Some enforcement tactics against unviable businesses are therefore unavoidable, however, HMRC has shown throughout the pandemic that it is keen to support UK businesses. HMRC’s states in its latest accounts, that it has actively ‘reviewed and altered the tone of (their) communications, with different messaging determined by whether customers had experienced a high or low COVID-19 impact as well as offering ‘more flexible payment options such as longer TTP arrangements and extended review periods’.

Kroll expects this will continue to be the case and HMRC should be accommodating with businesses that submit strong proposals that warrant support and that include evidence of:

• An accurate schedule of arrears reconciled to HMRC’s statement of liabilities
• A summary of the background to the request, including specific impacts of COVID-19
• Mitigating actions that have been made and what future actions are being taken to ensure ongoing compliance with the TTP
• A summary of the support provided by other stakeholders (lenders, suppliers, shareholders).

From the meticulous levels of organisation to creating careful hiring strategies, there are a huge number of caveats to consider and decisions to navigate when trying to scale your business and ultimately, become successful.

One of the most important examples of this is your finances – the money your business has available - to not only get up and running but also sustain it throughout the initial period. Managing finances correctly is imperative to ensuring long-term success, and without taking the time to carefully think about how to correctly maintain the finances of your start-up, you could end up in trouble a lot sooner than you might think. So, to help stop this from happening to you, we thought we’d lend a helping hand. Join us as we run through some of the key things you should and shouldn’t do when trying to finance your start-up business.  

Do: Understand the tax implications involved

Regardless of the size or nature of your start-up business, there is one financial implication you simply can’t avoid: tax. From the income tax your employees pay to the national insurance contributions you make personally, it is vital to understand which types of tax you will be liable for – and why. Corporation tax, for example, is a form of tax payable on the profits your business makes as a limited company. This is typically charged at a single rate of 19% but can vary depending on where your company is registered. If, for example, you were registered overseas in Gibraltar, your corporation tax rate would be lower at 12.5%. Therefore, if you aren’t sure which types of tax you will owe, or how to work out what your tax liability will be, it could be worth getting clued up by speaking to a professional within the country you operate in. 

Don’t: Forget to reclaim your business expenses

Since money will most likely be fairly tight to begin with, the last thing you will want to do is miss out on being able to reclaim any expenses you incur while building up your business. There are, after all, a wide variety of things you can and can't claim for expenses on, so it's important to know the difference. Otherwise, you could unintentionally be leaving yourself vulnerable to committing tax fraud. 

Listed below are some of the key things to be wary about, helping you save those precious pennies during the early stages:

• Pre-setup costs. Did you know that you can claim relevant expenses for up to seven years before the business begins operations? That means things like computers, software, internet, travel and professional services may all be tax-deductible depending on, firstly, when you purchased/used them and, secondly, their exact intended use.
• Business insurance. Any business insurance policies you have can be claimed as limited company expenses, as long as they are strictly used for business purposes. This includes public liability insurance, employers’ liability insurance, professional indemnity insurance, contents insurance, and many others.
• Travel & accommodation. Any mileage, food, drink and accommodation costs associated with overnight business trips can typically be reclaimed, helping lower your total Corporation Tax bill. Likewise, parking costs, congestion charges and public transport fares can also be claimed as business expenses.

Do: Draw up a budget

A start-up business often spends more than it earns for the first two to three years. Therefore, the amount of financing you need may continue to increase even after you've finally broken even. As such, it's important to draw up a budget in line with your business plan, outlining your sales forecasts, potential expenditure and capital costs. This should be realistic and allow for contingency funding if the worst were to happen – whether that be your website being hacked or a product launch being delayed.

Similarly, this budget should identify the types of borrowing that suit your business model – both long-term and short-term. From sourcing loans to arranging overdrafts, it's imperative to know what you can and can't afford, only ever entering into financial arrangements that are practical.

Don't: Forget to check the small print

If something sounds a little too good to be true then, in all likelihood, it probably is. Therefore, it always pays to double-check the small print of any loan or financial agreements that you decide to sign up to.

Whether it be the overall term of the loan, the proposed APR after a set period of months or the total number of payments you're expected to make, the last thing you want is to be caught out by anyone you owe money to. 

About the author: Annie Button is a professional content writer and branding aficionado. 

Turning to Twitter, Musk said, “Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock. Do you support this?"

3.5 million Twitter users voted 57.9% in favour of the move by Musk, who launched the poll following criticism that he does not pay enough tax. 

"Note, I do not take a cash salary or bonus from anywhere. I only have stock, thus the only way for me to pay taxes personally is to sell stock," Musk also tweeted. The 10% stock is worth approximately $21 billion. 

Following Musk’s Twitter poll, shares in Tesla fell 7.6% in early trade on Germany’s Tradegate on Monday. In late October, Tesla passed a trillion dollars in market cap, joining several other big companies such as Amazon, Apple, and Microsoft. Around this time, some of Tesla’s board members chose to sell a large number of shares, including Elon Musk’s brother Kimbal Musk.  

While many deductions are commonly known, like mortgage interest and charitable contributions, you may be wondering if life insurance is tax deductible too. But before you go writing off life insurance premiums this tax season, here’s what you need to know.

What is a tax deduction?

Tax deductions are amounts that you can subtract from your taxable income to help you pay less in taxes. Some standard tax deductions are contributions to health savings accounts (HSAs) and what you pay in property taxes. That means when tax season rolls around, you’ll add up your taxable income, then subtract any deductions that you qualify for before determining how much you’re going to pay or receive in a refund. Since there are different eligibility rules for each deduction, it may be wise to consult with a tax professional if you’re unsure which specific ones apply to you.

Is life insurance tax deductible?

For the average person taking out a personal life insurance policy, the premiums you pay are typically not tax deductible. That’s because they’re considered a personal expense. And since life insurance isn’t required by the government, there’s no mandate that you must be insured, which means no government tax breaks. But that doesn’t mean there aren’t unique situations where you can deduct life insurance premiums from your taxes, like:

When you own a business

If you own a business and pay life insurance premiums for your employees, those premium payments may be deducted as a business expense. For most businesses offering a group term life policy to employees, the premiums are typically deductible up to the first $50,000 in coverage per employee.

When the beneficiary is a charity

If you take out a life insurance policy and name a charitable organisation as the beneficiary, you may be able to write off some of the premiums as a tax deduction. But in addition to naming the charity as the beneficiary, you’ll also need to transfer policy ownership. And that means there’s no changing your mind after the fact. So, if you’re debating making a charity the beneficiary of your life insurance policy, you may want to discuss tax deductions with a financial professional first.

How to determine if your life insurance is tax deductible

Working with a qualified tax planner or professional is a good idea if you’re unsure if your life insurance premiums are tax deductible. And it’s important to work with an expert if you’re a business owner that’s not 100% sure how to go about deducting the premiums. Plus, it’s worth noting that while your premiums may not be tax deductible, the death benefit paid out to your beneficiaries is often tax-free. You’ll also receive the benefit of tax-deferred growth if your life insurance policy has a cash value component. So, you can think of it as paying your dues on the front end so your loved ones can receive a higher benefit and lower tax burden down the line.

The bottom line

For many people, life insurance is not a tax-deductible expense. But the benefits of maintaining a policy far outweigh the downside of not receiving a tax break. If you think you may be eligible to deduct life insurance premiums, seek the advice of an expert financial or tax professional to confirm.

Some of the most successful businesses have come about because the founder was trying to solve a problem that they had experienced, often just for their own benefit. There is nothing wrong with setting up a money-making project as a hobby, and no need for a hobby to necessarily turn into a full-fledged business. But it is worth understanding your own motivations and being clear with yourself about what you want to achieve.

What is the difference between a hobby and a business?

There are no hard and fast rules that distinguish between a hobby and a business. For me, it is a state of mind – what are you trying to achieve? Is this a project to fill time, or are you single-minded in your desire to set up a successful business? It’s an important point as businesses take time and devotion. Many businesses fail because their founders aren’t prepared to make the sacrifices necessary to make the business a success. 

What business structure should I use?

There are a large number of potential legal structures available for people setting up a profit-making enterprise. However, in most cases, only two are relevant: sole trader and limited company. 

A sole trader is when an individual begins to trade in their own name. For example, I decided to set up a coffee shop, and call it “Beans Coffee”: the business would be “Michael Buckworth trading as Beans Coffee”. Setting up as a sole trader is a quick and easy way to get up and running: all you have to do is notify HMRC that you are now self-employed. You can find out how to do that here. 

Limited companies are separate legal persons meaning that they exist separately from their owners. They can enter contracts, borrow money, and are liable to pay tax on their profits. You can register a company easily by filling in an online form and paying £12. One of the most important differences between a sole trader and a limited company is that a limited company has limited liability whereas a sole trader doesn’t. With a sole trader, if something goes wrong, you are personally liable for all the debts of the business, whereas (in most cases) if a limited company can’t pay its debts, it goes bust, but the assets of its owners and directors are protected. 

Which one to choose? As a rule of thumb, it is fine to operate a (low risk) hobby via a sole trader. However, if you are planning to grow and scale a business, I would suggest incorporating a company from the get-go. There is one footnote to this advice: once you incorporate a limited company you have to make an annual filing with Companies House and file accounts each year, so there is a cost associated with it. It isn’t a problem if your business is going to grow and scale, but it could be an unwelcome cost if you don’t intend to generate more than modest amounts of revenue. 

Are any profits I make on a hobby tax-free?

There are two certainties in life: death and taxes. However, there is a small allowance for people making modest amounts of money from hobbies and side hustles. If you have earned less than £1,000 from your hobby (and any other side hustles you may have in play) during a tax year, you don’t need to declare that to HMRC as income. However, any more than that must be declared, and you have an obligation to keep track of your earnings to make sure that you don’t exceed the limit. 

Do I need to worry about contracts and insurance for my hobby?

In my view, any business should have in place contracts with its customers as soon as it starts to trade. Contracts are hugely important as they limit your liability if something goes wrong and protect your revenue stream (as well as providing protection in a number of other important areas as described in detail in my book, Built on Rock, an entrepreneur’s legal guide to start-up success.) Most businesses will also want to have in place insurance to provide protection if something goes wrong. 

Whether you need insurance for your hobby depends on what you are doing, and the likelihood of you becoming liable if something goes wrong. Imagine you sell face creams online: you would want insurance in case a customer suffered an allergic reaction to your cream and sued you for personal injury. By contrast, if you are selling birthday cards online: you probably don’t need to bother with insurance as the risks are minimal and can be covered off in a simple customer contract. The key questions for you to consider are “what can go wrong?” and “what is my likely exposure if something does go wrong?”

What happens if I change my mind and want to flip my hobby into a business idea?

If your hobby really takes off and you realise that this is something that could make a viable business, congratulations! It probably makes sense to flip the business into a limited company sooner rather than later. Why? Firstly you can’t raise investment from third party investors as a sole trader – you need a limited company to do that so that you can issue them with shares. Secondly, you probably want the protection of limited liability if you are going to try to scale up your idea: the more customers you sell to, the greater the risk. Thirdly you want to make sure that the intellectual property rights in your business idea (the intangible stuff that you create as you develop your business such as your logo, the design of your product and the source code in any software you create) are created in and belong to your company, as this optimises the chances that you will later be able to qualify for a bunch of tax reliefs for start-ups. 

I have no business experience: can I really set up a business?

Over the years, as founder of Buckworths, I have spoken to many would-be entrepreneurs who worry that they don’t have any business experience, or the skills to be able to run a business. The good news is that it generally doesn’t matter. You can figure out the answers to most problems through research and  by speaking to people who have already figured it out. It doesn’t matter if you are a student, a stay-at-home mum, a retiree or a person working a 9 to 5 job. You have a uniquely personal experience that has led you to come up with your idea; you have a set of skills that can be harnessed to get your idea off the ground, and you have as good a chance as anyone else of making a success of it. Grab the bull by the horns, launch yourself onto its back and enjoy the ride.