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February 2017

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Compliant firms at risk from VAT crackdownThe Chartered Institute of Taxation has warned that HMRC's new measure to crack down on abuse of a VAT simplification scheme may have unwelcome consequences for tax-compliant small businesses.

The VAT Flat Rate Scheme (FRS) is a simplification measure for small businesses which enables them to pay HMRC a fixed rate of VAT, determined by their type of business, rather than keep detailed records of input and output VAT. HMRC estimates that 411,000 businesses use FRS.

The Chartered Institute of Taxation (CIOT) accepts that the Government must tackle abuse of this scheme, but it says changes to the proposed measure are needed to avoid excessive damage to compliant small traders.

Peter Dylewski, chairman of the CIOT's indirect taxes sub-committee, said: "Targeted action against abuse of the FRS … is preferable to such wholesale changes. We are concerned that HMRC has significantly underestimated the collateral impact of these changes, both in terms of the number of businesses affected and the financial impact."

At the 2016 Autumn Statement, the Chancellor announced changes to the FRS which mean that a business defined as a "limited cost trader" during an accounting period will pay a higher 16.5% rate.If the changes go ahead, businesses using or thinking of joining the FRS will need to determine, typically quarterly, whether they are also a limited cost trader. Small firms could be caught out as they fluctuate in and out of the 16.5% rate, warns the CIOT.

The changes are likely to cause administrative problems for FRS users; any business which might fall within the definition of a limited cost trader will need to check its position for each VAT accounting period using a planned online tool on the Government website.

Dylewski said: "The proposed changes add a significant level of complexity on small business owners who will need considerable guidance from HMRC. Many will have to pay for additional accounting advice."

The CIOT has urged HMRC to rethink its view that existing legislation and legal principles cannot tackle the VAT abuse.

Two-thirds of SMEs not ready for digital tax schemeAs Government plans for digitising tax reporting take shape, a new survey reveals just how unprepared many of the UK's small businesses are.

The poll has been conducted by the UK 200 Group - representing independent chartered accountancy and law firms which together service around 150,000 SME clients.

The findings show that the preferred book-keeping methods of small firms in the UK are:

  • 16% use a shoebox for paperwork and just give it to their accountants to sort out;
  • 23% use manual records;
  • 27% use spreadsheets on a computer;
  • 35% use accounting software.

By 2018, small businesses and the self-employed will have to use software to comply with HMRC's Making Tax Digital project. Only 35% of those polled already use appropriate software, such as Xero. Although they are not yet reporting tax quarterly - as they will have to do by 2018 - the transition should not be too difficult for these businesses.

However, the remaining 65% of SMEs - using spreadsheets, manual paperwork or who just have a shoebox that they give to their accountant every year - could face a significant challenge.

Richard McNeilly, chair of the UK 200 Group digitalisation taskforce and managing partner of Dains, said: "Making Tax Digital represents the single most significant change to the UK's system of taxation in recent times, and many of our smaller business clients are simply not ready for it … small businesses have only a short period of time to update their systems and many are still unaware that Making Tax Digital is underway."

Those that have been using the most basic systems will face the biggest hurdle, McNeilly warns. "Businesses using software are almost there … Those using Excel spreadsheets will need to upgrade their systems, but already have experience of computer input. Even if a business is still keeping manual records, that experience of record-keeping will be transferrable, although digitalisation may cause some pain. For any business owner relying on the 'shoebox method', our advice is to take the next step and start using software."

High flyers are driving self-employment boomNew research reveals that the rise in self-employment in the UK has been driven mainly by workers in high-skilled, high-paying sectors rather than the so-called gig economy.

New analysis by the Resolution Foundation shows that the recent rise in self-employment is being led by workers in what it calls "relatively privileged high-skilled, higher-paying sectors" such as advertising and banking. It is the attraction of "considerable tax advantages" that is mainly driving the growth in self-employment, rather than new technology and the gig economy, it concludes.

Self-employed workers in the larger but slower-growing "precarious" sectors enjoy much lower tax advantages over employees, and also miss out on important pay and employment rights.

The analysis shows that 60% of the growth in self-employment since 2009 has been in "privileged" sectors, despite them making up just 40% of the self-employed. The fastest growing sectors have been advertising (100% growth), public administration (90%) and banking (60%).

The remaining 40% of the growth in self-employment has come in more "precarious" sectors, such as construction and cleaning. The Resolution Foundation notes that despite the focus on Uber in recent years, the sector that includes taxis is actually only up 7% since 2009 - compared to an overall rise in self-employment of 22%.

The sharp rise in high-paying "privileged" sectors is due to the big tax advantages of self-employment, says the Resolution Foundation. It says a high-earning self-employed worker costing a firm £100,000 enjoys more than £7,000 in tax advantages over a similarly expensive employee. But a self-employed worker costing a firm £10,000 enjoys a minimal tax advantage of just £200 and still misses out on important employment rights and benefits.

The key reason behind the tax advantages enjoyed by the self-employed is their exemption from employer National Insurance contributions. Nearly 60% of that tax benefit goes to the "privileged" sectors.

The Foundation says the Taylor Review of Modern Employment must "look again at the tax regime for self-employment". It argues that Government should reduce the incentive for people to be self-employed given the risks to the public finances, to productivity and to those who may not want such precarious work.

Adam Corlett, economic analyst at the Resolution Foundation, said: "With the number of self-employed workers approaching five million, we need to start addressing some of the challenges it brings. This should include more security for workers at the bottom end of the market, but reforms should also reduce the unfair tax advantages that the wealthy self-employed particularly benefit from."

UK self-employed in A global study of the savings habits of self-employed people has found that freelancers in the UK are woefully unprepared for retirement.

The research, carried out by Aegon in 15 countries across the Americas, Europe, Asia and Australia, highlights significant differences in attitudes to saving for retirement.

The findings show that the UK (with 4.6 million self-employed workers) is lagging behind compared to other countries when it comes to pension savings. 75% of the self-employed are not regularly saving for retirement, and only 15% of UK respondents saying they are "very optimistic" about having money to live on in retirement.

This puts the UK in 14th place out of 15 countries when it comes to self-employed people saving for retirement.

However, the poll also shows that British self-employed people say they enjoy greater freedom than employed workers, and half of those surveyed were optimistic about the timing of their retirement. Although 53% said they'd still be working after age 65, they cited positive reasons for doing so, such as keeping their brain active or because they enjoyed their career. Only one in ten (9%) said they would never retire.

But self-employed people are living in "la la land", according to the report. They are also missing out when it comes to the introduction of auto-enrolment workplace pensions. These reforms "come with a further sting in the tail", says Aegon. "As well as missing out on valuable employer and Government contributions, those self-employed business owners who employ staff have to pay for their employees' pension contributions."

Kate Smith, head of pensions at Aegon, said: "Against a backdrop of rapidly increasing numbers of self-employed in the UK, there's a growing concern that this group are increasingly likely to struggle with inadequate retirement income when they eventually give up working.

"The self-employed face unique challenges when it comes to saving for retirement. As well as missing out on a lifetime of employer contributions, a variable income means many don't have certainty of how much they'll earn from one month to the next, making saving difficult."

A global study of the savings habits of self-employed people has found that freelancers in the UK are woefully unprepared for retirement.

Telephone manners

A simple "Hello" when answering the phone at work could be damaging your business, according to new research. A survey by Moneypenny has found that a quarter of small business owners (26%) answer their business calls with "Hello"; however, survey respondents said this was "unprofessional", "off-putting" and even "rude". The most common telephone greeting for small businesses is "Good morning, company name" - 46% of small businesses answer the phone this way, and this greeting was considered the most professional by those surveyed.

A nation of entrepreneurs

Many more people could be running their own business in the UK by 2018 according to a new survey by Idinvest Partners. Its UK Entrepreneurship Barometer has found that more than half the UK population is keen to start their own business, and 16% have plans to do so in the next year. The survey found that 62% of respondents believe uncertainty over the Brexit timetable is a constraint to starting a business in the UK. However, 57% are optimistic about the outlook for the British economy.

There's no place like home…

New research has identified some of the less well-documented reasons that employees ask for flexible working arrangements that allow them to work from home. A poll by Regus found that 35% of UK professionals agreed that "flexible working means I don't have to put up with colleagues' unpleasant personal habits", and 31% said it allows them to avoid "boring colleagues". In addition, 41% said flexible working would enable them to eat more healthily.

May promises business rates relief for those in need

After weeks of lobbying by business groups, this week's Prime Minister's questions saw PM Theresa May acknowledge that some businesses would be "particularly adversely affected" by the rates changes. She has asked the Chancellor and Business Secretary to provide additional help for those firms worst affected and to make sure there was "appropriate relief" for them. Mike Cherry, chairman of the Federation of Small Businesses (FSB), said: "I am reassured to hear that the prime minister has personally intervened in this extremely worrying situation for many small businesses."

CIPD warns that skills shortages are loomingThe latest labour market data indicates that the UK jobs market is in good health but there are warning signs that skills shortages could become a problem as the supply of EU nationals falls.

The latest Labour Force Survey from the Office for National Statistics (ONS) shows that the employment rate reached a record 74.6% at the end of 2016 - the highest employment rate since records began in 1971.

Suren Thiru, head of economics at the British Chambers of Commerce (BCC), said: "The latest figures confirm that the UK jobs market is in good health. It remains likely that even if economic conditions become more subdued over the near-term, the underlying resilience of the UK's jobs market will help ensure that we don't see a marked deterioration in recruitment."

However, Thiru said the Chambers' own survey data suggests that while "hiring expectations have improved … firms continue to report considerable difficulties in recruiting the right staff."

The Chartered Institute of Personnel and Development (CIPD) has raised concerns about the falling supply of EU nationals. The latest Labour Market Outlook from the CIPD and the Adecco Group has found that "labour and skills shortages are starting to bite in UK sectors that employ a high number of EU nationals."

It reports that "despite a near record number of vacancies … UK employers are struggling to fill roles with the right candidates as a result of both labour and skills shortages."

The CIPD said: "Low-skilled sectors that typically employ a large number of non-UK nationals from the European Union are facing particular recruitment challenges with vacancies in retail and wholesale, manufacturing, health and accommodation and food services."

The CIPD report also says one in four employers (27%) have seen evidence to suggest that non-UK nationals from the European Union are considering leaving their organisation and/or the UK in 2017.

Gerwyn Davies, CIPD labour market adviser, said: "This is creating significant recruitment challenges in sectors that have historically relied on non-UK labour to fill roles and who are particularly vulnerable to the prospect of future changes to EU immigration policy."

UK small firms lead the way on exportsAs the UK trade gap narrows, new research shows that small businesses are taking advantage of export opportunities.

The latest FedEx SMEs Export Report finds that more than 63% of UK SMEs are exporting and making a significant contribution to rising international trade by taking advantage of declines in the value of the pound. It finds that 86% of exporting British SMEs trade within Europe while 63% export outside of Europe.

Exporting revenues contribute 59% of these SMEs' total revenues; and a third of those polled also predict revenue growth to increase over the next twelve months.

The report concludes that the digital economy - and ecommerce in particular - is driving growth; more than eight in ten (81%) of UK exporting SMEs generate revenue through this platform and almost a third (30%) have reported increased revenues over the past 12 months.

"It's promising to see exports could be having a positive impact on the UK economy," said Ed Clarke, managing director, UK ground operations, FedEx Express. "To continue this upward momentum, governments and businesses across the world should play an increasingly important role to align SMEs exporting ambitions with the digital economy - providing more opportunities to reach new markets and customers."

It is not just UK SMEs who have cause for optimism according to the report. Exporting SMEs across Europe are thriving, with 53% of them exporting to other continents, up from 29% in 2015.

The latest trade figures from the Office for National Statistics (ONS) show that the UK's total trade deficit shrank in December 2016 and UK exports and imports reached record highs.

Mike Spicer, director of economics at the British Chambers of Commerce (BCC), said: "The narrowing in the UK's trade deficit in the final months of last year is a welcome improvement from the weaker performance in the previous quarter, and reflects a growing number of goods being exported to non-EU countries. As Brexit dominates the headlines, the results are an important reminder that UK companies take advantage of trading opportunities in every part of the world."

IoD calls for new deal for self-employed and SMEsThe Institute of Directors (IoD) is calling on the Government to do more to address the changing nature of employment in the UK and level the playing field for freelancers and small businesses.

The Government has already commissioned an Employment Review, led by chair Matthew Taylor, to focus on modern employment practices.

The IoD says the review needs to be "broader" and it is now calling for a new Tax Commission "to keep the tax system up-to-date with changes to the economy including the growth of self-employment and the so-called platform economy".

It says the investigation should look into how the tax applied to the self-employed could be brought in line with employees. It should also investigate how online stores could be taxed fairly in relation to high street shops.

Stephen Martin, IoD director general, said: "The Government must take action to relieve some of the pressure on the small businesses facing hikes in business rates … we should also look to the future, launching a new Tax Commission to look at what the growth of self-employment and online business mean for the tax system. The goal must be a much more level playing field."

Many shops and pubs will be faced with big increases in their business rates bills this year. The IoD said "It is an anomaly in the system that online businesses can operate large warehouses and pay less in rates than businesses with small premises in the middle of town … the IoD is calling for small businesses in properties worth up to £100,000 to be granted further reliefs from business rates."

Also this week, the self-employed and freelancer association IPSE welcomed comments made by the Employment Review chair Matthew Taylor highlighting the need to distinguish between vulnerable and career freelancers.

Simon McVicker, IPSE director of policy and external affairs, said: "Some unscrupulous business are exploiting self-employed workers to deny them the employment protections they deserve. This review should explore how Government can clamp down on these companies, which are giving self-employment a bad name."

He added: "It's essential that Government refines its own definitions of self-employment, so everybody's thinking is aligned. Policymakers must then put the Taylor Review's recommendations into action. The Government-commissioned Deane Review on self-employment, which made a number of suggestions for better policy last year, has thus far been ignored. The Taylor Review has to be different."

Small businesses hit hardest by cyber threatNew research into the impact of cyber crime has found that the financial impact of cyber attacks is disproportionally higher for smaller companies.

A study of 3,000 businesses in the UK, USA and Germany by insurer Hiscox has found that more than half of all businesses (53%) are "ill-prepared" to deal with cyber attacks.

The Hiscox Cyber Readiness Report 2017 assessed firms according to their readiness in four key areas - strategy, resourcing, technology and process - and ranked them accordingly. While most companies scored well for technology, fewer than a third (30%) qualified as "expert" in their overall cyber readiness.

The key findings show that:

  • 57% of companies surveyed said they have been the target of at least one cyber attack in the past 12 months;
  • One in four (26%) companies has been targeted three times or more in the past year;
  • 35% of UK businesses targeted in a cyber-attack in the past 12 months admit they have taken no extra measures to protect themselves in the future.

The average cost per incident to UK businesses is estimated to be £42,779; the impact of cyber-attacks is disproportionally higher for smaller companies.

Steve Langan, chief executive of Hiscox Insurance, said: "Our study reveals a worrying absence of cyber security readiness among business consumers. By surveying those directly involved in the business battle against cyber crime, this study provides new perspective on the challenges they face and the steps they are taking to protect themselves."

The Hiscox report also includes a series of practical recommendations for businesses.

Also this week, Mimecast has released new findings into the extent of email security breaches affecting businesses. Its research reveals that millions of email attacks - from opportunistic spam to targeted impersonation attacks - are getting through email security systems. It found that 64% of organisations believe they will suffer a negative business impact from cyber criminals in 2017; and 56% think malicious emails or URLs will be the likely mode of attack.

The new pound coin is coming

It's just six weeks until the new 12-sided pound coin enters circulation. This is the first time the £1 coin has been changed in over 30 years. It also means that the demise of the existing pound coin later this year is getting closer. Baroness Neville Rolfe said: "The introduction of a new pound coin, the most secure coin in the world, is an historic event. Our message is clear: if you have a round one pound coin sitting at home or in your wallet, you need to spend it or return it to your bank before 15 October."

Wanted: new small business commissioner

The Government has opened applications for the role of the UK's first Small Business Commissioner. The successful candidate will provide advice and information, handle complaints about payment issues and direct small businesses to dispute resolution services. Small business minister Margot James said: "We are looking for an exceptional individual to help smaller firms resolve payment disputes and champion a culture change in how businesses work together … this appointment will play an integral role in ensuring small businesses have the support they need to thrive and grow."

FSB National Business Show

The Federation of Small Businesses National Business Show & Conference takes place in Torquay from 23 to 25 March. The event provides networking opportunities and access to advice and support for business owners and those thinking of setting up their own business. Headline speakers will include the business secretary of state Greg Clark and leader of the opposition Jeremy Corbyn. There will also be a keynote speech from TUC general secretary Frances O'Grady.

Employers that fail to pay the NMW are named and shamed

More than 350 employers have been fined for underpaying their workers the national minimum or living wage. The Department for Business, Energy and Industrial Strategy has named and shamed 360 businesses that underpaid over 15,000 workers a total of £995,233; employers in the hairdressing, hospitality and retail sectors were the most prolific offenders. The list includes national businesses as well as some small firms. HMRC is currently investigating more than 1,500 other cases.

SMEs show 'grit and resilience' despite Brexit uncertaintyA new survey of UK SMEs has found that despite concerns about rising costs and Brexit, many small business owners are positive about the year ahead and are planning to grow their business.

The poll, conducted by the Donut websites, has found that 47% of small business owners believe the economic outlook for 2017 is likely to be better for their business than 2016.

The study, Is the future bright for small businesses?, found that although 35% of business owners say they are unsure about how their business will fare in the coming year, only 18% believe the economic outlook is likely to be worse.

In addition, at least one in three small firms is making plans for growth - 39% of UK small business owners intend to increase spending in 2017, and 36% plan to recruit new staff. The data shows that 57% of respondents plan to spend more on sales and marketing in 2017. Other spending priorities include IT and technology (41%), equipment, plant and machinery (32%), and training and development (31%).

However, business owners remain concerned about rising costs and the outlook for the UK post-Brexit. Key findings include:

  • just 20% of business owners are "very confident" that the Government can deliver a good Brexit deal for SMEs;
  • 23% are worried about losing key EU staff;
  • 19% plan to make cuts in their business;
  • costs have risen "significantly" for one-third of businesses.

The introduction of the Living Wage and auto-enrolment pensions has affected many small firms, and only 2% said that being an employer has become cheaper in the past year.

The Donuts polled 664 small businesses in the UK. Most respondents were business owners (60%) or directors (21%), and were either sole traders (47%) or the owners of micro-businesses with four or fewer employees (25%).

"These results highlight the grit and resilience of the UK's small business community," said Rory MccGwire, chief executive of Atom Content Marketing which publishes the Donut sites. "As ever, business owners are not putting their heads in the sand in the face of uncertainty. They are determined to succeed, and it's encouraging to see so many business owners making plans to recruit, invest and grow."

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