Back to back interest rate rises

With prices rising across the board, the Bank of England has stepped in to try and cool the market announcing an increase in interest rates. The rise, which is the second in three months and the first back to back increase in almost two decades, means interest rates will increase from their current 0.25% to 0.5%.

The move by the Monetary Policy Committee (MPC) came as the Chancellor was taking to the floor of the house of commons to announce a series of measures designed to offset in part, the hike in energy prices that Ofgem had announced just hours before.

Perfect storm for cost of living

The much anticipated announcement by Ofgem, means that the energy price cap – the maximum amount customers can be charged by energy companies on their standard (non fixed) tariff – has increased by 54%, adding almost £700 a year to people’s bills.

Combined with planned increases in National Insurance and rising costs elsewhere caused by supply shortages, higher wages and Brexit; the increase in energy costs creates a perfect storm for the cost of living and is likely to hit low and middle income families hardest.

Pressure on interest rates

There was always going to be pressure on the Bank of England to increase rates, which have remained at historically low levels since 2009, as they can help to temper volatile markets and offer some inflationary control. With inflation (CPI) expected to hover around 6% across 2022, peaking in April at more than 7%, there was even pressure from within the Banks own ranks for a bigger rise now. When the MPC met on 3rd February, Four out of Nine of its members voted to increase the main rate by 0.5% to 0.75%, in a bid to stave off more sustained inflation and price rises.

Whilst the decision was a smaller increase now, news of the pressure for an injection of pace to proceeding within the MPC, will give the markets a clear signal of the direction of travel. A return to the 5% interest rate levels seen before the financial crisis in 2009 is some way off and guidance from the MPC remains around smaller incremental steps, but the reality is this is likely to be the first in a series of those steps. Some have suggested we may see decisions on rate rises taken outside of the planned meetings of the MPC over the coming months, but at the very least, don’t be surprised if we see successive increases when the MPC does meet in 2022.

Crack down on second home tax relief

Second home owners that make their properties available for holiday rentals are being targeted under new rules outlined by the Levelling Up Secretary, Michael Gove. The change to the rules will specifically target those whose second homes are registered for business rates as they are let out for holiday rentals.

By identifying the property as a lettings property, rather than a main residence, owners can avoid paying council tax and instead register for business rates. They can then in turn claim small business rates relief, in some cases meaning they end up paying no rates at all. However, it is suggested that that some owners are using this loop hole but not using the property for lettings, either using it purely as a second home, or simply leaving it empty.

West Sussex homes under the spotlight

The new rules, which are set to come into force in April 2023, will mean those hoping to register for business rates have to prove that they let their properties for at least 70 days in a year. At present they are allowed to pay business rates if they make their property ‘available for letting’ for 140 days a year but are not required to evidence the fact. In addition to proving lettings, the availability clause will remain and owners will need to prove that the house is available for 140 days a year and successfully let for 70 of those days, to access the relief.

In announcing the changes on 14th January, Mr Gove was clear that they are targeting people who take advantage of the system to avoid paying their fair share towards local services in popular destinations such as Cornwall, Devon, the Lake District, Suffolk, West Sussex and the Isles of Scilly.

Providing evidence of holiday lettings

In order to qualify for small business rates relief on holiday letting second homes the property owners will have to provide evidence as part of the application process. Evidence will consist of a mix of marketing materials such as the website or brochure used to advertise the property and letting details and receipts.

Mr Gove explained that this was not about targeting those small business owners that legitimately let second or multiple homes for holiday rentals. It is those using a loophole for purely financial gain and who enjoy the benefits of the local services without making a fair contribution.

What accounting records do I need to keep for my company/business?

As a business owner and/or company director, you have certain obligations around the proper collation and retention of company accounting records. Whilst HMRC and Companies House have changed their stance on digital copies compared to paper versions, the requirement to retain copies of key financial documentation remains.

There was a time whereby the traditional year ends (March and December) meant that we would see an influx of archive boxes with reams of paperwork in them in the months following. Some bigger firms of accountants would have had entire departments tasked with sorting and filing these papers in preparation for an accountant to begin the year end process. Some even had vans that they would use to go round and collect the paperwork from clients!

Six Plus One Years

The basic rule as required by law, for the retention of documents is based on the principal of 6 +1 years. This means six full financial years plus the current year. For safety, most people will simply work to a rule of seven years, making sure they have at least seven full years at any one time.

However, whilst this is the minimum period for retention there is no maximum and you are also required to keep records beyond the 6+1 rule if there are transactions that span multiple years and may therefore be required to show the entire lifetime of the transaction.

In terms of what you need to keep, the general rule is anything connected to the financial running of your business, showing monies being paid out, monies received or anything with a tax implication -either paid by you or collected by you. Typically, this means:

  • Purchase Invoices
  • Sales Invoices
  • Receipts
  • Expenses
  • Dividend certificates
  • Bank statements
  • Stock ledger

Again, there is no maximum extent to this and so best practice is to retain it all – best to have too much than not enough – especially when you could face a fine of £3,000 of being disqualified as a director for a failure to comply.

Going digital and cloud accounting

The most significant change to the policy around document retention came as a direct result of the move to electronic invoicing. When accounting systems could first produce digital invoices and email them, HMRC was initially hesitant around accepting them as legitimate copies. There were concerns around the chain of delivery and the ability to go in and alter the details. So even after the systems could offer efficiencies, HMRC still preferred printed and posted paper copies.

As more companies moved from paper based accounting to software, the more comfortable HMRC became with accepting digital documents, although initially only remittances and invoices. Fast forward to the present day and HMRC’s own plans for Making Tax Digital shows how far things have progressed in around 15 years. There is now a greater push to move to a digital format as these transactions are deemed to be easier to track and provide real time reporting. Today, the same rules around retention periods remain, but HMRC is even happy with photos of receipts being kept for expenses and most accounting systems provide you with the opportunity to append images or documents to individual transactions, creating a digital archive.