There has been a surge in new company formations in the last few years, as entrepreneurs develop new and exciting business ideas and bring them to market.

On top of this, there are a growing number of workers with ‘side hustles’, who are quickly scaling up their operations to deal with demand from their customers and clients.

While many businesses may initially rely solely on the work of their founder, there comes a time when operations grow so much that they need to consider hiring their first employee.

Hiring your first employee will lighten the workload, but it also brings with it new tax and payroll requirements.

If you have previously been one of the 4.2 million businesses in the UK with no employees, other than yourself, and you are looking to bring in a new worker here are our top tips to get you started.  

Inform HM Revenue & Customs

Before you can hire someone, you need to register as an employer with HMRC. Doing so will provide you with an employer PAYE reference number so you can manage your payroll.

This must be done within four weeks of your new employee’s first payday. The registration process is fairly quick, but receipt of your reference number can take up to five working days, so you must factor this in.

Set up effective payroll processes

You will need to manage your payroll online each month, report this information to HMRC and make the correct payments of tax and National Insurance, as well as paying into any benefit schemes or pensions offered to your employees.

As such you will need to implement processes and payroll software systems that allow you to do this.

You may already have existing systems in place that manage your personal payroll, but you should consider whether these are still sufficient when you hire your first employee.

Don’t forget, you may also need to deduct student loan repayments, pension contributions, Payroll Giving donations and child maintenance payments.

The weekly or monthly administration of your payroll can be time-consuming and is often complicated by regular changes to the rules surrounding pay, which is why many businesses choose to have their accountant manage it for them.

Create a basic workplace pension scheme

If any of the workers you hire are eligible for a workplace pension you will need to set up and manage a scheme for them.

You must automatically enrol your staff into a pension scheme and make contributions to their pensions if all of the following criteria apply:

• They are classed as a ‘worker’
• They are aged between 22 and the State Pension age
• They earn at least £10,000 per year
• They usually (‘ordinarily’) work in the UK.

You will also need to calculate and make an employer’s contribution of at least three per cent each month to the scheme and ensure that an overall minimum contribution of eight per cent is made.

The additional five per cent is usually made up of an employee contribution, but both you and an employee can offer to contribute more should you wish to.

Your employees can choose to opt out and leave the scheme, but you will still need to re-enrol them every three years.

Paying the National Minimum Wage

You are legally required to pay your employees at least the correct National Minimum Wage (NMW) or National Living Wage (NLW) for those aged 23 and above. Failing to do so could result in you being fined and publicly named and shamed.

The current NMW rates, as of April 2022, are as follows:

23 and over	21 to 22	18 to 20	Under 18	Apprentice
April 2022	£9.50	£9.18	£6.83	£4.81	£4.81

Be careful if you make deductions from pay, other than for tax, National Insurance or a small number of other exceptions, as these cannot normally reduce a worker’s pay below the National Minimum Wage – even if they agree to it.

Many employers have previously been caught out by this, as well as other important changes, such as a person’s birthday where it carries them into the next NMW band.

Protect your business

Although not directly related to tax or pay, businesses should take steps to protect their interests. This includes ensuring the new staff member has the correct legal status to work in the UK, producing clear, written employment contracts and policies, and taking out employer’s liability insurance in case of accident or injury at work.

Failing to take these steps could leave your business exposed to costly risks, including fines and potential compensation payments.

Seek help

These are only a few of the steps that you as a prospective or new employer may need to take and it is well worth seeking payroll and HR advice before hiring your first employee, both to protect yourself and to take away the administrative burden.

Link: Becoming an employer for the first time? What you need to know

HM Revenue & Customs (HMRC) has retained its online portal for claiming working from home tax relief for the 2022/23 tax year.

But, while the rules and value of the relief remain unchanged, unless there are any further lockdowns this year far fewer people are likely to be able to claim.

That is because only people instructed by their employers to work from home some or all the time can make a claim. The rules once again require that costs must have increased as a result of the arrangement.

With most hybrid workers free to work in the office if they wish, most people in this situation will not be eligible for the relief.

Relief worth £6 a week can be claimed through the online portal without needing to provide evidence of increased expenses. Taxpayers benefit according to the rate at which they pay income tax. A basic rate taxpayer will save 20 per cent of £6 a week (£1.20).

If you have been instructed to work from home and have incurred increased costs as result, you can check your eligibility and claim here.

HM Revenue & Customs (HMRC) is issuing fresh warnings to employers to ensure their payment reference numbers are correct so that payments are recognised.

Each payment reference number relates to a specific employer and covers a particular accounting period.

HMRC uses these reference numbers to allocate payments and to help process taxes related to PAYE payments as quickly as possible.

The tax authority has said that the use of the incorrect PAYE reference number could result in it issuing penalties and charges even if an employer has paid on time.

To complicate matters further, online banking services may also default to a previous payment reference, creating additional confusion, so employers must check this is right every time a payment is made to HMRC.

How to check if the payment reference number is correct?

Businesses need to make sure that they use the correct Accounts Office reference, which can be found on:

• The letter HMRC sent when they first registered as an employer
• The front of their payment booklet
• The letter from HMRC that replaced the booklet
• Their Business Tax Account if they’ve already added Employer PAYE enrolment to it.

Where an employer is not paying for the current period, they need to add four additional characters to the end of the reference number that indicates the year and the month or quarter the payment is for.

Each tax period has a different payment reference number, so it’s important to make separate payments for each period.

Ensuring you use the correct reference can be complicated. HMRC wants to make sure that employers get this right and avoid penalties, which is why it is encouraging businesses to use its ‘Pay now’ tool on GOV.UK to find the right reference number to use each time.

If this is a further admin burden you don’t need when you are trying to run a business, get in touch with us today to find out how we can take payroll headaches off your plate.  

Link: Support from HMRC

A phoenix company, as the name implies, refers to a phoenix rising from the ashes.

It describes a business that has been purchased out of a formal insolvency process, such as administration or liquidation, often by the existing directors seeking to avoid paying debts and tax liabilities.

Now HM Revenue & Customs (HMRC) has given the Insolvency Service the power to investigate directors who were suspected of the practice.

The Insolvency Service already had powers to investigate directors of companies that enter a form of insolvency, including administration and liquidation. 

The new powers complement the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act, designed to tackle directors who have dissolved their companies to avoid repaying government-backed loans, such as the Bounce Back Loan Scheme.

These powers have been extended to enable live companies to be investigated where there is evidence of wrongdoing.  If misconduct is found, directors can face sanctions including being disqualified as a company director for up to 15 years or, in the most serious of cases, prosecution.

It should go some way towards dealing with “phoenixism” where directors of dissolved companies set up a near-identical business after the dissolution, often leaving customers and other creditors, such as suppliers or HMRC, unpaid. 

These powers also focus on rogue directors seeking to avoid paying back their debts, including Government loans provided to support businesses and save jobs during the COVID-19 pandemic.

The Business Secretary, Kwasi Kwarteng, said: “The Government is committed to tackling those who seek to leave the British taxpayer out of pocket by abusing the COVID-19 financial support that has been so vital to businesses.”

For many companies dealing with problems in a legitimate way, and have debts that they cannot pay, the directors may wish to enter into a Creditors’ Voluntary Liquidation (CVL) and your financial adviser will be able to help.

For expert advice on related matters, contact our experts today.

It is always a challenge to keep costs down for businesses, particularly at a time of soaring inflation and steep rises in the cost of utility bills.

An expense report is designed to report on any business-related expenses an employee incurs, either by using a company credit card or by using their own funds.

This might include spending related to work activities, such as a business trip, travel and transportation, meals, training and workshops, accommodation, business supplies and tools.

The easiest way to manage expenses and process expense reports is to use expense management software, which automates the entire process for you.

Why it is critical to keep spending under control

Keeping expenses under control is vital to the long-term health of any business.

While some of the cost of expenses can be recovered via the tax system, much of it still falls on you and could reduce your profitability.

In implementing an expenses management system several steps need to be undertaken.

Manual expense management demands a lot of time, money and effort.

An automated expense management system with ready-made templates and cloud-connectedness streamlines the spending and employee reimbursement process and helps you to be more efficient.

Avoiding costly mistakes and duplicating

The best part about digital expense management systems is that they make it far easier for employees to follow the rules.

This eliminates most potential mistakes, such as overspending, double-entry and lost receipts.  

By employing some of the latest technology, businesses can track employee spending and determine how the business will reimburse staff.

What’s more, many of the apps out there can connect to existing cloud accounting software to automate much of the accounts process.

It also applies the procedures and policies used to control this type of spending. For example, if employees are given daily allowances for meals when travelling, then the expense management process accounts for those limits when generating reimbursements.

Make the system secure and compliant

These systems allow you to limit user access to the system and to configure the software so that it prohibits employees from entering claims that are clearly in breach of organisational policy or the expenses guidelines of HM Revenue & Customs.

You can set the system up so that disputed claims are easily moved up the chain to senior management once certain limits or rules have been breached.

Make sure that data is collected properly

One of the most common problems with employee expense claims is that not all of the information necessary to prove the validity of the claim is captured correctly.

The latest systems safely and securely store information on the cloud, often allowing staff to quickly take a picture of receipts or invoices so they don’t have to be processed manually or stored.

Publish analysis of the data

If a claim looks ridiculous or excessive, allowing the claimant to see might lead to more sensible claims and can allow you to reinforce your rules surrounding expenses.

In many instances, it is entirely appropriate for expenditure to pursue a new client or the management of an existing one.

Transparency of the spending involved ensures that everyone can see the true cost of client acquisition or retention.

Businesses without automated expense software should explore the options available to them to help them save time, and money and reduce the strain of managing expenses manually.

You have worked long and hard to get your business up and running and have put your heart and soul into making it successful.

The thought of losing it can be incredibly stressful, both for you and any employees who could lose their jobs.

Equally, if you have a customer who owes you money, you may want to take more immediate action if it looks like they may be in distress.

So, how do you avoid getting into difficulties and spot the signs of business failure? And begin firefighting potential problems?

The warning signs that a firm is struggling include:

Problems with cash flow

They say that money isn’t everything, but poor cash flow is a problem in business and is often a clear indication that the business is in trouble.

Cash flow issues can be identified with proper forecasting, which will identify the cash shortage problem areas or overspending.

Excessive debts

Interest rates are creeping up again after more than a decade of historically low rates and having too much debt within a company may place it at risk.

If you are seeking out additional funding and lenders are seeking stronger personal guarantees or security against any money they lend this could be an indication that your own business is in trouble.

It can be more challenging to spot debt issues in another business, but regular late payments from a customer can be an indication that they are struggling to manage their own money.

Defaulting on bills

We have all heard the phrase, “you will be paid by the end of the month,” often used to overcome short term shortages.

If this becomes a regular occurrence, it could suggest a business can’t pay its way.

When it comes to your own finances, defaults on tax payments to HMRC or other formal payment arrangements can be particularly damaging and lead to penalties.

It can also be bad for your reputation and that of your business if it becomes clear that you are struggling to make payments on time.

Chasing payments

A lot of businesses are reluctant to chase payment because they do not want to damage their relationship with customers or reduce the prospect of future work.

However, regularly allowing late payments can affect your own finances and prevent your own suppliers from being paid.

If you are dealing with late payment issues you should seek professional advice to improve your credit control processes and, if necessary, eliminate late-paying customers from your business.

If you are unable to effectively chase payment it may cause future cash flow problems.

Either way, sudden changes in these numbers should be investigated to see whether they are signs of something more serious.

Falling margins

High sales are great, but profit is the key to survival and growth.

Falling margins suggest that costs are too high, and prices or income are too low. This is not a sustainable position for any company.

Indications that this may be happening within a customer’s business are changes within its own operations, such as the cutting of service or product lines, redundancies or an overall poorer quality of goods or services.

Low morale

Reduced hours, contractual changes and pay freezes can all be signs of trouble within a business.

All of these indications may not necessarily mean the end, but they are a clear indication of money troubles.

With employment costs rising suddenly this month, you may start to notice this within more businesses that you deal with.

If you are concerned about your own financial health or that of a customer, you should seek professional advice as soon as you can.

HM Revenue & Customs (HMRC) is to launch a new mandatory P87 form from 7 May to create a consistent standard for the P87s it receives.

What is a P87 form?

Workers and their agents can use a P87 form to claim tax relief on work expenses. The form can only be used to claim tax rebates for an employee, not if you are self-employed as this is done via the Self-Assessment system.

Taxpayers need to submit a separate P87 for each job they are claiming a tax refund for.

What is changing?

At the moment claims for income tax relief on employment expenses can be made using:

• a self-assessment tax return
• online service available to taxpayers (but not agents)
• print, complete and post the P87 form available on GOV.UK
• by phone (subject to limits) if a claim has been made for a previous tax year
• substitute claim form or letter. Substitute claim forms are widely used by high volume repayment agents.

From 7 May 2022 claims for income tax relief on employment expenses can only be made on the standard P87 form, which can be found on GOV.UK.

HMRC will reject claims that are made on substitute claim forms, but the other options above will remain available.

Although this measure is due to be introduced later this year, the new P87 form is now live here.  

Links: HMRC to mandate the format of claims for employment expenses

National Insurance and Dividend Tax rates have increased by 1.25 percentage points as of 6 April, as part of the new Health and Social Care levy.

These changes have brought additional complications to the payments of National Insurance Contributions (NICs) and dividends that businesses are just getting to grips with.

How have NICs changed as a result of the increase?

The 1.25 percentage point increase in NI affects the contributions made by employees, employers and the majority of self-employed workers.

While the move will help to raise more than £12 billion for the NHS and social care system, it will mean that businesses face a sudden rise in their employment costs this month.

The increase in NICs will initially affect everyone over the age of 16, but below the state pension age, earning more than £190 per week through employment (rising to £242 from July 2022) or with profits of £9,880 or more a year in self-employment (rising to £12,570 from July 2022).

The 1.25 percentage point increase also applies to employer NICs, minus any reliefs that a business may be entitled to.

The increase will not apply to Class 2 NICs, which is the flat rate paid by the self-employed with profits above the Small Profits Threshold or Class 3 NICs, made up of voluntary contributions from taxpayers to fill in gaps in their contributions’ records to qualify for benefits.

How are dividends changing?

Most businesses have favoured a balanced pay strategy for directors, which saw a larger proportion of their income paid through dividends versus a regular salary, to reduce the amount of tax and NICs the business is liable for. 

Dividends are paid out of a company’s profits to its shareholders and every individual also benefits from a £2,000 tax-free allowance for dividend income.

Any dividends over this amount are taxed at different amounts depending on a person’s marginal rate.

Businesses do not pay any NICs on dividends, providing a clear benefit to the company.

Before the increase in the Dividend Tax rate, most people were taxed as follows:

• Basic rate – 7.5 per cent
• Higher rate – 32.5 per cent
• Additional rate – 38.1 per cent

However, as of the start of the new tax year, these rates are now as follows:

• Basic rate – 8.75 per cent
• Higher rate – 33.75 per cent
• Additional rate – 39.35 per cent

From an employer’s NIC perspective, paying out more in dividends may make more sense given the upcoming changes.

However, those in receipt of dividends may not be as happy as it could affect how their income is taxed.

What about the changes to the NIC thresholds?

To soften the blow of the increase to NI rates, the Chancellor announced in his Spring Statement that the Primary Threshold (PT) – the point at which employees start paying National Insurance – will increase by £3,000 from July to bring it in line with the personal tax allowance of £12,570, which is the rate at which workers begin to pay income tax. 

The change does not affect the Secondary Threshold, which is the point at which Employers start paying National Insurance Contributions (NIC). This will remain the same. 

However, the Chancellor has extended the annual Employment Allowance to eligible businesses (those with employers’ Class 1 National Insurance liabilities that are less than £100,000 in the previous tax year) by an additional £1,000 a year to £5,000.

The Treasury has said that the changes to thresholds will help cut up to £6 billion worth of NICs – cutting the NIC bill for the ‘typical employee’ by around £330 a year. 

Although this does represent a saving, in reality, much of this ‘tax cut’ is taken up by the rise in NI rates.

Links: Four things to know about National Insurance contributions and the April increase

Exactly two years since the first lockdown was announced, the eyes of the public were firmly fixed on the Chancellor, Rishi Sunak, as he rose to the despatch box in the House of Commons to deliver his Spring Statement.

Yet again, Mr Sunak found himself addressing MPs against a background of crisis, with the residual impact of COVID, the invasion of Ukraine and the cost-of-living crisis all affecting the economy in different ways.

The cost-of-living crisis will have been weighing especially heavily on the Chancellor’s mind. Just hours earlier, the Office for National Statistics (ONS) had confirmed that inflation had hit a 30-year high of 6.2 per cent. Meanwhile, petrol and diesel were averaging 166p and 178p a litre respectively, and anxiety is rising about the £693 increase to the energy price cap coming into effect on 1 April.

Compounding matters, a 1.25 percentage point increase in National Insurance Contributions (NICs) for employees and employers is set to take effect on 6 April.

Employers will also need to contend with substantial rises in the rates of the National Minimum Wage (NMW) and National Living Wage (NLW) from 1 April.

Individuals and businesses alike were hoping the Chancellor would announce further measures to address the cost-of-living crisis.

However, this was a Spring Statement. While they can morph into mini-Budgets, they typically contain little by way of concrete tax and spending measures.

Instead, the main purpose of a Spring Statement is to set out the latest economic forecasts prepared by the Office of Budget Responsibility (OBR), often followed by the launch of various consultations on the Government’s longer-term plans.

Mr Sunak and his allies had spent the days and weeks ahead of the Statement letting it be known that he wanted largely to stick to his existing plans and resist calls to make major changes.

Delivering the Mais Lecture at Bayes Business School last month, Mr Sunak said:

“And the impact of these trends on people is being exacerbated by high inflation. This is primarily a global problem, driven by higher energy and goods prices.

“The government is dealing with high inflation by helping people with those extra costs, and through the monetary policy framework.

“But over the longer-term, the most important thing we can do is rejuvenate our productivity.”

The suggestion was that Government assistance with the cost-of-living crisis should be limited and that dramatic interventions would not be on the cards.

But the scale of the crisis meant political pressure on the Chancellor from diverse quarters to take immediate action was increasing by the day.

In the event, the Chancellor bowed to pressure and pulled several rabbits from his hat with a focus on supporting workers.

• Economic Forecasts
• Cost of Living
• Tax Plan
• Conclusions

Economic Forecasts

As expected, the OBR’s forecasts for the economy painted a less optimistic picture than they did at the Autumn Budget.

Growth is now expected to be 3.8 per cent in 2022, down from the previous forecast of six per cent, 1.8 per cent in 2023 and 2.1 per cent in 2024.

Meanwhile, inflation is projected to reach 7.4 per cent this year with a peak of 8.7 per cent in Q4, 4 per cent in 2023 and 1.5 per cent in 2024.

The picture in relation to unemployment is generally more positive, with a forecast of four per cent in 2022, 4.2 per cent in 2023 and 4.1 per cent in 2024.

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Cost of Living

The Chancellor dedicated a substantial proportion of his speech to the invasion of Ukraine and stressed the impact of the crisis on the global economy and on the cost of living in the UK.

He began with one of the more eye-catching announcements of his speech, and one that hasn’t featured in even a full Budget for many years – a one-year temporary 5p a litre cut in fuel duty applying from 6pm on Wednesday 23 March 2022.

The Chancellor committed to cutting VAT for homeowners installing energy saving measures to 0 per cent.

He also reiterated his February announcement of a £9 billion package to help with rising energy bills following the increase in the price cap.

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Tax Plan

Shifting away from a direct focus on the immediate pressures on the cost of living, the Chancellor unveiled his Tax Plan, setting out his intentions for the remainder of this Parliament, which is due to last until 2024 and comprises three elements:

• Helping families with the cost of living
• Creating the conditions for private sector-led growth
• Letting people keep more of what they earn

As well as the temporary cut to fuel duty, the Chancellor said he will increase the annual Primary Threshold and Lower Profits Limit for National Insurance to £12,570 from July 2022, as part of the first commitment. Meanwhile, Class 2 NIC payments will be reduced to nil between the Small Profits Threshold and Lower Profits Limits.

He said that 70 per cent of workers would see their National Insurance payments fall, even after the addition of the Health and Social Care Levy, which comes into effect on 6 April as planned.

Next, he said that the Employment Allowance will rise from April 2022 from its current level of £4,000 to £5,000, saving businesses up to an additional £1,000 on Class 1 National Insurance contributions.

Moving to creating the conditions for private sector-led growth, the Chancellor said his focus would be on “capital, people and ideas”.

He announced his intention to cut and reform taxes on investing in businesses, building on the momentum of the super-deduction.

He also said the Treasury will engage with businesses on ways to cut taxes on investment and will confirm plans later this year at the Budget.

On people, the Chancellor said he would look at ways to offer more high-quality employee training.

On ideas, he said that further reforms to Research and Development Tax Reliefs would be announced at the next Budget, with the Government planning a boost worth £5 billion.

Moving to letting people keep more of what they earn, the Chancellor announced a surprise cut to the basic rate of income tax from 20 per cent to 19 per cent from April 2024.

He said that, alongside this, the Government will look to reform tax reliefs and allowances before 2024.

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Conclusions

The Spring Statement was a classic example of the Chancellor managing expectations downwards in order then to exceed them.

In this case, what had been billed as a rather vanilla financial statement containing little by way of substantive change transpired to include not only increases in the National Insurance thresholds for employees and the self-employed and cuts to fuel duty, but also plans to cut the basic rate of income tax in two years’ time.

While this will be good news for the finances of many individuals, notwithstanding the forecast that inflation will reach a peak of 8.7 per cent in the autumn, employers and business owners might be hoping there will be more for them at the Autumn Budget 2022.

Links:

Spring Statement

Tax Plan

Businesses across the UK are already benefitting from the temporary tax relief offered by the super-deduction but many more could still be missing out on this vital support.

The super-deduction scheme was introduced on 1 April 2021 and will run until 31 March 2023. It allows firms investing in qualifying plant and machinery assets to benefit from a 130 per cent first-year capital allowance.

This allows companies to cut their tax bill by up to 25p for every £1 they invest. Most companies also benefit from a 50 per cent first-year allowance for qualifying special rate (including long life) assets.

Thanks to the super-deduction, companies will be able to claim allowances of 130 per cent on most new plant and machinery investments that ordinarily qualify for main rate writing down allowances, such as:

• Compressors
• Computer equipment and servers
• Electric vehicle charge points
• Foundry equipment
• Ladders, drills, cranes
• Office chairs and desks
• Refrigeration units
• Solar panels
• Tractors, lorries and vans.

Businesses can claim a first-year allowance of 50 per cent on most new plant and machinery investments that ordinarily qualify for special rate writing down allowances. Special rate investments include:

• Parts of a building considered integral – known as ‘integral features’
• Items with a long life
• Thermal insulation of buildings.

To benefit from the relief, the assets purchased must be new and not second hand or refurbished equipment.

The relief is also only available to incorporated companies, but unincorporated businesses, such as partnerships and sole traders, can continue to benefit from the Annual Investment Allowance (AIA) which permits a deduction of 100 per cent for qualifying plant or machinery expenditure up to the threshold of £1 million until March 2023.

Here is an example provided by HM Revenue & Customs (HMRC) on how the super-deduction works:

• A company incurring £1 million of qualifying expenditure decides to claim the super-deduction
• Spending £1 million on qualifying investments will mean the company can deduct £1.3 million (130 per cent of the initial investment) when computing its taxable profits
• Deducting £1.3 million from taxable profits will save the company up to 19 per cent of that – or £247,000, which is 19 per cent of £1.3 million – on its Corporation Tax bill.

The AIA remains available alongside the super-deduction for incorporated businesses as well, so businesses must review how they use these schemes together to maximise the tax relief available.

Link: Super-deduction