Low Cost Trader (LCT)

In the autumn budget, the Chancellor snuck in a change to the calculation of the Flat Rate Scheme (FRS) which means the very people it helped most are now precluded.  All businesses using the FRS will have to perform an assessment to determine whether the new rules apply or not.

We’re still waiting for HMRC to issue the ready reckoner, so in the meantime, how do you figure out if a registered business needs to amend their VAT FRS percentage?

I suggest any business or contractor using the FRS should crunch the numbers to calculate their VAT liability.

There are two rules, if your VAT inclusive expenses are less than 2% of your VAT inclusive turnover you are a LCT and have to use 16.5% when calculating VAT liability.  If that doesn’t catch you, think about the second rule: if the 2% calculation is less than £1,000 then you too are caught.

So what are VAT inclusive expenses? The first thing you need to work out is where do you pay VAT? Start by looking at your invoices, but be aware that not all invoices have VAT numbers so they’re all out too. Public travel generally doesn’t have VAT so that’s another major expense for most traders, and out too. Help is on hand though - conveniently HMRC also say you have to exclude capital expenditure, food and drink and anything to do with your vehicle. So that leaves your agents’ fees, accountancy charges, phone, and maybe rent?

The HMRC website is silent on what period is used to complete the calculation. We use a recent 12 month period. It’s made more difficult if you’re not using real time accounting, so what about the last set of accounts? What if that’s not representative of your current business? Whatever method is used, we always recommend you keep a record in the event of a challenge by HMRC. As HMRC see how many self-employed they catch moving forwards, I’m sure there will be more refinements.


R&D Tax Credits - What are they all about?

SME limited companies may be missing a trick?

If it can be proved that you are working on R&D then you could be entitled to Corporation Tax relief using the SME R&D Tax Credit Scheme.

You may not know that you are conducting some form of R&D, making you eligible to claim the tax relief. With the current rate of relief being 230%, it is worthwhile making some time to see if you could claim.

 HMRC define a R&D project as one that “…seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty - and not simply an advance in its own state of knowledge or capability.”

 What this basically means is that if you’re working on a project that has the potential to improve an existing product, create a new product, develop prototypes or develop a piece of software, then it’s likely a claim could be made. You do not need to have successfully made a breakthrough to claim either.  

 Step one is to review your development program, to see if it meets the HMRC criteria.

 Step two, figure out what are the qualifying costs. These can include staff costs, Subcontractors/Externally Provided Workers, Consumables, Utilities, Software Licences and Clinical Trials.

 The final step is submitting the claim to HMRC. This is done at the same time as your Corporation Tax Return and requires not only a breakdown of the qualifying costs but a technical justification of why you believe them to be part of a R&D project. Although writing the technical justification may seem complicated, there are some guidelines as to what to include from HMRC which make the task much less daunting. Once submitted, the technical justification does not need to be submitted again but for each year that the project exists, you will need to submit a qualifying costs breakdown.