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Tax and accounts

If you are self-employed, as a sole trader or in partnership, the profits from your business are treated as part of your income for Income Tax and self-employed National Insurance purposes. As a consequence, the amount of tax payable on your self-employment is difficult to define in isolation and is why your trading accounts do not include a calculation of Income Tax and NIC payable.

Accordingly, if you are self-employed, any balance on your capital account (the amount of money you have introduced plus profits less any drawings made) is most likely overstated as you will need to pay any taxes due as increased drawings in the following accounting period.

Contrast this with limited companies.

Companies pay Corporation Tax (CT) on company profits. Company profits are not added to shareholders’ income to determine tax due. Which is why company accounts do include a charge for CT in the year end accounts.

In most cases, this computation of CT is made annually, at the end of each trading year, but it is perfectly possible to estimate CT monthly and include those estimates in your management accounts. In this way you can keep an eye on CT liabilities and how they affect your company retained profits position.

You can also use the estimates to consider how you will pay these future CT liabilities.

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VAT changes for the Construction Industry delayed again

HMRC has announced a second delay to the introduction of the domestic reverse charge for construction sector due to the impact of the coronavirus.
The scheme was due to come in on 1 October 2020 have been delayed for a further 5 months until 1 March 2021.
The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector.
From 1 March 2021, sub-contractors will no longer add VAT to their supplies to most building customers, instead, contractors will be obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers. This is known as the Domestic Reverse Charge.
Please note!! Contractors will be responsible for paying the deemed output tax, on their VAT return they can usually claim back the same amount as input VAT.
The new rules were originally expected to come into force from 1 October 2019. The initial 12 month delay was announced following intense lobbying by the construction industry who had argued that many businesses in the sector were unprepared for the change. HMRC have confirmed, that even with this additional delay, they remain committed to the implementation of the Domestic Reverse Charge.
There will also be an amendment to the original legislation, which was laid in April 2019, to make it a requirement that for businesses to be excluded from the reverse charge because they are end users or intermediary suppliers, they must inform their sub-contractors in writing that they are end users or intermediary suppliers.

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