FD Works x Yena: Making Tax Digital Webinar

10 May 2019

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Here at FD Works we recently teamed up with Yena, the Bristol-based startup accelerator to discuss Making Tax Digital (MTD) and what it means for startups and scaleups across the UK.

Here at FD Works we recently teamed up with Yena, the Bristol-based startup accelerator to discuss Making Tax Digital (MTD) and what it means for startups and scaleups across the UK.

Senior Business Partner at FD Works Simon Williams, joined Ash Phillips founder of Yena for this 15 minute webinar. During which time the two discussed the practical implications of MTD as well as a number of questions about dividends and R&D tax credits.

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Webinar transcript

Ash – ‘Welcome everybody, to the webinar with FD Works.

We’ve got Simon Williams today joining us to talk about Making Tax Digital and everything else that’s super confusing about accounting for startups and the things that we probably all do wrong, but we don’t know we do wrong and it’s costing us money.

So welcome Simon tell us a little bit more about you and FD Works in a nutshell.’

Simon – ‘Hello, thanks Ash, my name’s Simon Williams I am a Business Partner at FD Works. We’re an accountancy firm based in Bristol and Bath that work with companies across the UK. We specialize in working with startups and scale ups and trying to help them grow.

Our team consists of some bookkeepers, business planners and accountants. We’re here

to help people out who are starting out and also and help them scale when they

get to that point.

We’ll be really brief today, but I just want to quickly touch on Making Tax Digital.

Introducing Making Tax Digital

Introduce myself, I used to work in a big accounting company which was great. So what is Making Tax Digital? Basically if you are a company that has an annual turnover of over 85,000 pounds you have to start to submit your VAT returns with the detail behind it.

If you’ve ever done this before in the past there’s a portal on HMRC where you type in some

numbers and you click go. From now on you won’t be able to do that. You have to also submit the evidence behind the numbers. Generally the best way to get around that is to sign up to a cloud accounting software, as an accountancy practice we use Xero. It’s good for small businesses and it does a lot of the and annoying things that you probably don’t have time to do, while making sure you’re compliant.

If you don’t want to do something like Xero and if you are above about threshold you can use some bridging software which takes Excel sheets and puts them into a certain format which links to HMRC and you can submit them. But if I’m completely honest it’s probably easier to use a cloud accounting software package.

Why is it being introduced?

To touch on why they’re doing it. There’s a seven billion pound gap from tax that’s not paid in the UK from businesses and they think that by getting some of the data behind the transactions they’ll be able to start reclaiming some of that difference. So they’re doing it so people become more efficient and so that they can work out what’s going on.

What does it actually mean?

From the 1st April all transactions after that date if you’re VAT registered will have to you have to submit by this system. What it actually means in practice is that you have to set up

a new login through the government gateway on HMRC. So if you go to HMRC and type in Making Tax Digital you’ll go to a page with a login and you can request your new number. That new number will be your access into the site and then you can use the cloud accounting software with that new login and to get into there.

Generally businesses are on quarterly VAT periods, so say my VAT period was from

the 1st April to 30th June, that’ll be the first submission you need to make. In terms of what you need to do now anything that happens from the 1st of April onwards from a transaction point of view you either need to be on a cloud accounting software or be aware that your information will need to be submitted for HMRC and the information behind that needs to be correct.

For example if you are buying something from Amazon and it is VAT-able, you need to be marking that as 20% VAT or as Xero rated. Generally that’s all done within the accountancy software.’

Ash – ‘Can I just jump in their quickly and just say there are lots accountancy software services available. You guys are partnered with Xero and recommend them, anybody looking for high-level accountancy support can use you.

Now the only reason why they can’t find Xero in our toolbox is because there’s actually a publicly available deal for startups that lots of people don’t know about. They can get a

better deal if they do it through you guys and you become their accountant which I wholly recommend because it’s been incredible.

But there is a six months 50% off Xero (that may not be valid at the time of viewing this) but that’s I think available now and people could just Google ‘Xero for startups’ and it should

come up. Sorry I jumped in I just thought it was worth saying at this point.’  

Simon – ‘Definitely and there are other ones, if you’re very early stages something like Free Agent might be good as well because it’s a little bit simpler. That also has the capability to do VAT Returns if you need to do them.

If you’re VAT registered and have a turnover below 85 grand you don’t have to sign up to MTD, Making Tax Digital, until 2020. If you do sign up, you can’t not sign. So once you jump into it you have to go you’re still paying for it and so that’s just a little nuance.

So only 57% of businesses are ready, so if you’re not ready yet, don’t worry. If you have any questions give us a shout and as Ash mentioned, we’re brand partners with Yena and we love working with Ash and his community. Hopefully in the not-too-distant future we’ll have a more content which will help you navigate finances and accountancy and from a start-up perspective. I won’t touch on much of that today, but that’s something to watch out for in the Future.’

Ash – ‘Lots more to come for sure. Whilst we still Have you Simon, there are two questions our community asked and that we were hoping to answer today, but a couple of teething problems with the live recording, so we I thought I’d asked them and then they can be answered in this video.

The first one was around, and these are slightly separate, so short and sweet answers will be good and we can kind of cover these in later content, but how directors pay works, how much is the best, what are the tax and national insurance implications and dividends.

Obviously quite an open-ended question I imagine you could call it and go on about it for

quite a while but I suppose most people are thinking about what’s the most tax efficient way.’

Simon – ‘Yeah, so directors pay is an amount you can pay yourself which is below the threshold for National Insurance and below the threshold for PAYE. Basically it’s amount

you can take out of business as a salary every month and you have to pay no tax

on it. Quite often what a lot of directors do is they take out that amount as in salary every month, it’s around £700 per month, so it’s around eight thousand pounds a year, in the UK.

‘The reason it’s at that value is because you pay no tax whatsoever on top of that. What some people do is take the rest as dividends – depending on the state of the business. The reason for that the basic rate for dividends, which is the amount you can earn, is up to thirty five thousand pounds is at lower rate than if you if you’re paying yourself through a salary. So it can be a more tax efficient way of doing that.

There’s lots of other things to consider, so it might not be as straightforward. For

Example, if you’re a company who does a lot of research development and want to claim back R&D; you can’t claim back R&D; on dividends you can only claim it back on salary.

If you want a really straightforward answer, there’s an amount in this tax year which is NO2 that’s going to change a little bit in 1920 tax year, which is from April onwards. I think that’s the ballpark and if you pay yourself that amount for salary, there will be no tax whatever.

Then what you do with the rest of the money, if you’re lucky enough to clear dividends, depends on the situation with your company.’

Ash – ‘Really great advice and you lightly touched on R&D tax credits there, which we won’t delve into today. Probably a whole can of worms in itself but it’s a great way for people that have mostly technical products to claim back money for the time and in cash that they’ve spent on building those things.

It’ll probably cover that in a later session with you guys and likes of Forest Brown for example to be able to give people more information on that.

I know a number of members have came back between tens and hundreds of thousands of pounds worth of R&D tax credits so it’s certainly worth looking into it. We’re certainly looking into it ourselves at the moment.

Final question before we wrap up which was around how you can track, and this is actually a really good segue into this question based on what we’re just talking about, so how you can track dividends in Xero and how does this impact the bottom line?

Simon – ‘So Xero is not the best tracking dividends. The way that this will generally work is that as a company, you should declare dividends on a periodic basis throughout the year a periodic basis throughout the year.

If you looked at a large public company, you might hear stuff saying they’ve got interim dividends and they have final dividends. Basically, what that means is they pay out dividends generally every quarter. So they will look at how much money they’ve made and then they’ll say right we think we can pay out this amount of money every quarter. In Xero, generally what you do is if you’re paying yourself a salary, that’ll go straight into your profit and loss account.

But if you’ve taken money out of the business and hadn’t declared dividends, so for example let’s say I have a business, I’ll pay myself a director salary which might be £702 a month, but actually I take an additional thousand pounds out the business every month because I need to pay my bills or whatever it might be, that is deemed as a drawing. You are basically borrowing money off the business so what happens in that sense is that it becomes a liability. You owe the business money and this goes onto your balance sheet.

What generally happens at that point of time is when you prepare a dividend, you say actually the business owes me money because, even though I’ve taken some money off the business I’m now going to declare a dividend.

What you do is say I don’t actually owe the business that money, that money is a dividend. You push it through Xero as an adjustment between your directors loan account as one side of it and the other side of it will be a dividend account code.

Generally in Xero that dividend account code will be in your profit and loss as an expense but it should be below your net profit line, because your dividend is after net profit. Not that simplistic, but trying to explain it as simply as possible.’

Ash – ‘No I think it was really comprehensive in the short amount of time that we’ve got. The good news is that question came from Ryan Vaughn from Lightbulb who I know is actually one of your clients so he’s looking anyway and obviously good testament to the fact that members starting to use you guys because frankly they should.

I’m not just saying this because you’re brand partners we always say this about our partners the reason my brand partners are our partners is because we’ve been use them and we think that bring in anyway not just because it’s a partnership that’s why there’s a partnership in place.

I think as I said to you before and it’s a soundbite I think you’re gonna takeaway is that the accounting meetings that I’ve had with you guys are the first time I’ve been excited about my accounts. So it’s obviously a really powerful thing but the insight given today’s been really

really helpful, Making Tax Digital is a bit of an unknown quantity to most of us unless you are a qualified accountant like you are so this video will hopefully help the whole community if they have any further questions obviously we can definitely put them in touch with you and get those questions answered.’

Who are FD Works?

Our accountants and business advisors will help you embrace your numbers and achieve your business (and personal) goals. From our Bristol and Bath offices we work with aspiring startups, ambitious scaleups and established firms across the UK.

Keen to find out how Making Tax Digital is affecting your business?

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