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What is the IR35 Tax Legislation?

A lot of us struggle to understand what IR35 means.  Can you be a Sole Trader or set up a Limited Company if you only have one contract or one client?

In a nut shell, IR35 started in April 2000 with HM Revenue & Customs are checking to ensure that an individual or company, a contractor or an employer, is not avoiding paying the correct and due National Insurance payment.  Called IR35 as that was the number of the original press release announcing the intention to bring in the new rules.

Wikipedia currently defines IR35 as a ‘tax legislation designed to tax “disguised employment” at a rate similar to employment.’  In this context, “disguised employees” means workers who receive payments from a client by way of an intermediary and whose relationship with their client is such that had they been paid directly they would be employees of the client.

If you are a contractor who trades through a Limited Company you must be aware of IR35 as it could affect your tax efficiency and prevent you from taking dividends.

Whilst this blog can be used to help you determine how compliant your contractual agreement is, it is intended for guidance purposes only and should not be used in place of a professional contract assessment.

There is a great deal of uncertainty regarding IR35, in attempting to determine employment status and there are many factors to consider. If HM Revenue & Customs were to investigate a contract and decide that it is ‘caught’ by IR35 they will calculate a deemed payment, treating all income received as salary and demanding all tax and national insurance contributions on payments originally paid out as dividends.

The interpretation of IR35, and the defining of status, is reliant on case law and as a result, the determining factors surrounding IR35 change over time and certain issues become more prominent following each significant case. To determine whether you are caught by IR35 HM Revenue & Customs will look at both the written contract between your Limited Company and the agency/or client along with your actual working practices, i.e. the way the work is performed on a daily basis. In the event of an IR35 enquiry, whilst your contract will be checked, your working practices will always tend to carry more weight than the written terms themselves. If you have a compliant contract in place it is essential that your actual working arrangements mirror the contracted terms.

A basic questionnaire to know whether you fall within IR35 is as follows:

1. If you were unable to provide the services personally, would your company be able to send a substitute with equivalent skills, qualifications and experience?

2. Have you ever actually provided a substitute?

3. Do you carry out any of the services from your own office?

4. Does your company have to work set hours stipulated by your client?

5. Other than observing client specifications, are you told how to do the work?

6. Do you need to seek permission from your client to take time off?

7. Are you obliged to carry out tasks not covered within the scope of your contract?

8. Does your notice period exceed 30 days?

9. Does your company carry any business insurances?

10. Is your company financially liable to correct any faulty work?

11. Were you ever a permanent employee of your end client?

12. Do you have any line management responsibilities over client staff – appraisals, disciplinary etc?

13. Do you have an ‘office holder’ position within the client’s organisation (director, chairman) with high level managerial responsibilities, such as control over budgets etc?

There are many other factors which would be taken into account when looking at IR35 status, such as, whether or not you provide your own equipment, financial risk, and basis of payment, whether or not you provide your services exclusively, and business-like trading. All of these factors would help HM Revenue & Customs to draw up a ‘hypothetical’ picture of your relationship with the end client, ultimately to establish whether or not you are a disguised employee.

The general idea of IR35 is to stop those who act like and are treated like employees pretending that they aren’t, therefore having the right to all the tax breaks that those working under limited companies receive. This is the core idea behind the term, a ‘disguised employee’.

Contact us with your answers for a quick chat and we can advise as to whether you fall within IR35

2014 Up and Running

Belated Happy New Year – Yes it’s already March!  As the spring slowly approaches, it seems that there is some positivity is in the air with many businesses looking forward to a successful year ahead.

News shows that we have had a drop in unemployment, but this is not currently leading to a rise in interest rates, as the Bank of England awaits more investment from business.

Mark Carney, Governor of the Bank of England, has proclaimed that there will be no change to interest rates in the near future, despite previous expectations.

The initial guide set out for interest rates indicated that an increase could be considered if unemployment rates fell to 7%. This level has now been reached, despite predictions that it would not happen until 2016, prompting Mr Carney to speak out.  The current Bank of England interest rate is likely to remain at 0.5% for the foreseeable future. ‘It’s part of the reason why we’re trying to provide as much clarity to business,’ Mr Carney said. ‘The path of monetary policy is going to be calibrated very carefully to ensure that only when we see sustainable growth in jobs, in incomes and in spending, will we make adjustments’.

Martin Weale, a policy maker for the Bank of England’s Monetary Policy Committee, recently commented that ‘the most likely path’ would be an interest rate rise in the spring of 2015.

Meanwhile, numerous sources have shown there is increased faith in the economy, with business groups and think tanks all displaying higher levels of confidence and more determination to succeed.

In a survey of retail chairmen, including Tesco, Sainsbury’s and Marks & Spencer, carried out by Headhunting organisation Korn Ferry, 73% of those questioned said they are optimistic about the UK’s economic outlook. This reaction is significantly different from the same survey last year, in which only 15% of those questioned were optimistic.

In a similar survey, the Forum of Private Business (FPB) found that 85% of its members were positive about 2014 and intended to develop their businesses in the coming year.  The main challenges facing small businesses were cited as time, expertise and money – despite better access to finance. The cost of doing business remains a key concern, with 46% of members claiming that business rates continue to be a difficulty, coupled with the rising cost of utilities.

The findings came as the National Institute of Economic and Social Research (NIESR) announced that it expects the UK economy to grow by 2.5% in 2014, adding that the economic recovery was now ‘entrenched’.

With these improved figures, the UK recovery is finally taking a turn for the better and the Government has outlined its intention to reform business rates to ensure that the tax paid is ‘in line with the state of the economy.’

With the 2014 Budget in just over 2 weeks (Wednesday 19 March), we are waiting to see what new measures will be listed by the Chancellor. I will be tweeting ‘@adjbusiness’ throughout with important bits so follow me for the up-to-date information that is relevant to you.

Autumn 2013 Statement

The Chancellor presented his 2013 Autumn Statement to the House of Commons in relatively cheerful form. He announced that economic growth forecasts for this year have more than doubled from 0.6% to 1.4%, but emphasised the importance of achieving a ‘responsible recovery’ by sticking to his austerity plan.

Despite borrowing also seeing significant downward revisions, with the underlying deficit revised down to 6.8%, the Chancellor warned that ‘difficult decisions remain’ and confirmed that an increase in the State Pension Age to 68 will take place earlier than previously planned. Whitehall budgets will be cut by around £1 billion next year, and overall spending on welfare will be subject to a new cap in future years.

There was some better news for business, with the Chancellor offering relief in the form of a new 2% cap on business rates increases in England, together with an extension of Small Business Rate Relief for a further year. In addition, a new 50% ‘reoccupation relief’ will be available to local retail businesses, and a rates discount of up to £1,000 will be applied to some small shops, pubs and other retail properties.

He also announced that for businesses the government was the scrapping of employer national insurance contributions for the under-21s from 2015. Meanwhile, April 2015 will see the application of capital gains tax to gains made by non-residents who sell residential property in the UK.

There were a number of measures aimed at supporting families, including plans to introduce a new transferable personal tax allowance for some married couples and civil partners, as well as introducing an average £50 saving on energy bills, which will be achieved through a rolling back of green levies.

Other measures include:

  • free school meals for infants
  • a scrapping of 1% above inflation increases to rail fares
  • the abolition of next year’s planned 2p per litre fuel duty rise
  • the demise of car tax discs which will be replaced by an electronic vehicle excise duty system after over 90 years in circulation

Tax Codes on Xero (verses Sage)

With so many of us transferring from Sage Desktop to Xero Online, its easy to forget the Tax Codes and meanings.  Here are a few basic rules to help you.

Tax Rules on XERO:

If you want it shown on the VAT Return @ 0% – T0 – Zero Rated Expenses or Exempt Tax

If you want it excluded from VAT Return – T9 – No Tax

  • If you don’t want sales tax to be included at all on your transaction, you need to use ‘No Tax’ (rather than ‘Tax Inclusive’ or ‘Tax Exclusive’). Specify this each time you create a transaction using the ‘Amounts are’ option on invoices or uncheck the ‘Include tax’ check box on bank transactions and journals.
  • If your transaction is set to ‘No Tax’, Xero determines that you do not want this transaction included in any tax reporting and therefore the tax rate column or field will not be editable and the transaction will not be included in the calculation of your total sales or purchases figures on the VAT Return for the period.
  • Alternatively, if you mean that your transaction is reportable but incurs no VAT (i.e. VAT is 0%) then you should leave your overall tax treatment as ‘Tax Inclusive’ or ‘Tax Exclusive’ and choose an appropriate tax rate that doesn’t attract VAT – in the case of UK VAT, this will be sales or purchases tax rates that are ‘Zero Rated’, ‘Exempt’ or your own sales or purchases rates that have VAT of 0% (see below for exactly which rates are reported in each box on the Return).
  • As it happens, transaction amounts set to ‘No VAT’ also fall outside of the scope of VAT as determined by HMRC and as such will not be included in the VAT Return calculations at all i.e. where all line items on a transaction are set to ‘No VAT the whole transaction will not be included in the total sales/income and purchases/expenses figures on your Return. If ‘No VAT’ is used on one of many line items, then just that portion of the transaction will be excluded.
  • Transactions that are ‘No Tax’ overall or transactions that have line items set to ‘No VAT’ will still be listed on the VAT Audit report (in the ‘No VAT’ section) as being transactions that occurred in that period. You can use this as a useful reference when checking that all the transactions you expect to be included in your VAT Return totals have been correctly accounted for.
  • Remember, if you need a transaction to be reported on your Return yet it does not have a VAT component, make sure you choose a tax rate that doesn’t attract tax (e.g. ‘Zero Rated Income’, ‘Zero Rated Expenses’ etc) rather than choosing that the transaction be ‘No Tax’ and excluded from the Return calculations altogether.
Box 1 – VAT on sales and other outputs
  • ‘VAT on Income’
  • Your own rates with the tax type ‘Sales’
  • Acquisitions from the EC are not included.
  • Note: VAT from transactions that use your own custom rate of type ‘EC Sales’ are not included, even if you have applied a percentage to this rate. The total value of these transactions is reported at Box 8. If you want VAT to be reported here in Box 1, use ‘VAT on Income’ or your own tax rate or type ‘Sales’.
Box 2 – VAT on EC Acquisitions

The VAT portion of transactions in the period that use an EC tax rate set up by you with a type of ‘EC Purchases’. The figure will be included in the total VAT calculation boxes (3 and 5). If you’ve not set up your own tax rate of this type, no VAT will be included in this box.

Box 4 – VAT on purchases and other inputs (including acquisitions from the EC)
  • ‘VAT on Expenses’
  • Your own rates with the tax type ‘Purchases’
  • Your own rates with the tax type ‘EC Purchases’
  • It also includes the EC VAT that you paid on imports from EU countries i.e. your own tax rate with the tax type ‘EC Purchase’
  • ‘VAT on Imports’
  • Please note that the ‘VAT on Imports’ tax rate should be used with the VAT account to code transaction line items that are 100% refundable – the whole amount coded to this tax rate will be included in Box 4 for inclusion in you VAT Refund/VAT to Pay total.
Boxes 6 and 7 – Sales and purchases excluding VAT
  • ‘VAT on Income’
  • ‘Zero Rated Income’
  • ‘Zero Rated EC Income’
  • ‘Exempt Income’
  • Your own rates with the tax type ‘Sales’
  • Your own rates with the tax type ‘EC Sales’
  • Your own rates with the tax type ‘Exempt Sales’
  • ‘VAT on Expenses’
  • ‘Zero Rated Expenses’
  • ‘Zero Rated EC Expenses’
  • ‘Exempt Expenses’
  • Your own rates with the tax type ‘Purchase’
  • Your own rates with the tax type ‘EC Purchase’
  • Your own rates with the tax type ‘Exempt Purchase’
Boxes 8 and 9 – EC Supplies and purchases excluding VAT
  • ‘Zero Rated EC Income’
  • Your own rates with the tax type ‘EC Sales’

For more information, please get in touch with some @ADJBusiness

Should I set up a new company – and what type?

What type of Company should I set up?

With the ever changing tax rules and laws surrounding running a business, it is important to consider carefully what type of entity you should set up.  The main choices are:

  • Sole trader – an individual
  • Partnership – two or more individuals or companies
  • Limited liability partnership
  • Limited company

A new business entrepreneur often asks, ‘Should I form a Limited Company?’ In reality, there is no easy answer. Each situation has to be decided on an individually basis. As well as the obvious issues of tax and national insurance contributions (NICs), there are many other potentially relevant factors, such as:

  • The business
  • The expected rate of growth
  • The degree of commercial risk
  • Administrative obligations
  • Personal preferences
  • Pensions and retirement

In the beginning of a business, the privacy of operating as a sole trader or partnership may seem attractive. Business funds can be used at will with fewer restrictions than in an incorporated environment.

However, we are considering here the features of a limited company. A company is a completely separate legal entity subject to two main areas of regulation – tax and company law. This planning guide looks at some of the advantages and disadvantages of trading as a limited company. Please do contact us if you want more specific help or advice.

Advantages of incorporation as a Limited Company

  • Incorporation normally provides limited liability. If a shareholder has paid fully for his or her shares, he or she cannot normally be required to invest any more in the company. Although companies with bank borrowings often have to provide directors’ personal guarantees, the protection of limited liability will generally apply in respect of liabilities to other creditors.
  • A company enjoys legal continuity – it can own property, sue and be sued.
  • Effective ownership or part ownership of the business may be readily transferred, subject to the provisions of the Articles of Association. Whilst such transfers may well be covered by inheritance tax business property relief, the capital gains tax position needs careful review.
  • A bank usually can take extra security by means of a ‘floating charge’ over the assets of the company, and this will increase the amount that can be borrowed compared with a sole trader or partnership.
  • Shareholders can be paid in dividends (currently free of NICs) but strict company law formalities must be observed.
  • The National Minimum Wage does not apply to directors (as they are office holders) unless they have a Contract of Employment.
  • Growing businesses can re-invest profits after an overall tax charge of 20% (if profits are below £300,000), compared with 40% for higher-rate tax paying sole traders and partners.
  • Accumulated funds could be withdrawn on a sale of shares with the benefit of capital gains tax (CGT) Entrepreneurs’ relief which reduces the CGT rate to 10% once shares have been held for one year.
  • Corporate status is sometimes thought to add to the credibility or commercial respectability of the business.
  • A company can establish an approved pension scheme, as well as private medical schemes, which may provide greater benefits than self-employed schemes.
  • Employees may be offered an opportunity to buy their own stake in the business, reflecting their commitment and importance to the company.
  • Formation of a company incurs legal and administrative costs, which may include new accounting records and possibly systems, new PAYE system, new business tax reference, new VAT registration, new stationery etc.
  • Administrative time in informing everyone of the change of status.
  • The tax position arising on the incorporation of an existing business needs careful analysis. It may be possible to defer capitals gains tax on the transfer of goodwill etc, but the timing and effect of cessation on income tax must be closely planned.
  • Annual Accounts must comply with the requirements of the Companies Act 2006. In most cases, a statutory audit is not required for companies with an annual turnover of not more than £6.5 million and a balance sheet total of not more than £3.26 million. The statutory audit involves work over and above that which is normally carried out for a sole trader or partnership.
  • A company’s accounts must be filed on public view with the Registrar of Companies. An Annual Return must also be submitted to the Registrar of Companies together with a filing fee of £13 (if filed online).
  • The company will be taxed on its profits of each accounting period, as opposed to the income tax ‘current year’ basis for sole traders and partnerships. A company must file a company tax return.
  • Funds withdrawn from a company normally give rise to tax liabilities, whereas owners of unincorporated businesses can generally introduce and withdraw cash without tax implications.
  • Remuneration for directors is subject to both employee’s and employer’s National Insurance liabilities.  Both the company and its directors are liable to NIC on many benefits in kind, and a P11D form may need be prepared for each director, whatever the level of earnings. This can lead to extra work in filing a tax claim for reimbursed expenses etc for which individual tax relief is available.
  • Companies pay tax on capital gains at their corporation tax rate (20% for profits up to £300,000). In a company, a capital gain is reflected in the value of its shares and if these are sold a “double charge” to capital gains tax can arise. This may be avoided if assets that are likely to increase in value are owned either outside the company or within a self-administered pension scheme, or if a company is sold complete with its assets
  • An individual has greater flexibility in dealing with trading losses.
  • A company director is more at risk of criminal or civil penalty proceedings, eg for late filing of accounts or for breaching the insolvency rules.

Disadvantages of incorporation

It is always important to look at the long term benefits rather than short term gain.  Whilst there could be increased costs in setting up a limited company, the advantage of having a trusted advisor (your accountant) could help to potentially grow the company.  The accountancy fees could be swallowed up by the increases in profits.  That said, the same could be said for a sole trader.  A complicated Self-Assessment should be completed by your tax advisor or accountant to ensure you are correctly complying with all aspects of tax and ensure you are benefiting to your max.

All this shows is you should complete your research before jumping into one form or another.  Yes, once you are established you can change your status, but with everything, there would be costs involved.

We would be happy to sit and discuss your options with you and help come up with a detailed analysis to best calculate your long term success.

Contact us on hello@adjbusiness.com or see more details on our website – www.adjbusiness.com

The tax avoidance debate

Tax Avoidance or Evasion

Tax avoidance schemes are continuing to make the headlines, not only in the UK but all over the world.  EU leaders have now agreed to support the automatic exchange of information between the tax authorities of member states, in a bid to increase transparency within the tax system.  This exchange includes information about who owns and controls individual companies.  My concern is, with the media hype at the moment, are people sure they know the difference between tax avoidance and tax evasion.  One is legal, maybe not wholly ethically, but still legal, whilst the other is completely wrong.

In recent criticism by the Labour leader, Ed Miliband, he specifically noted the ‘extraordinary lengths’ taken by Google to avoid paying corporation tax in the UK.  His fellow Labour MP, Margaret Hodge, even accused Google of ‘doing evil’.  However, Eric Schmidt, executive chairman for Google, refuted that the responsibility for setting tax policy should rest with governments.  Ed Miliband answered this by saying that he will write new rules to tackle corporate tax avoidance if he wins the next election.

This latest development followed the news that overseas territories have signed an agreement to share their tax information with the UK. The British Virgin Islands, the Cayman Islands, Anguilla, Bermuda, Montserrat and the Turks and Caicos Islands have agreed to the automatic exchange of information with the UK authorities, together with France, Spain, Germany and Italy to try to tackle those who hold their assets abroad.

A month before the G8 summit, Prime Minister David Cameron urged overseas territories to ‘get their house in order’ and sign up to international tax treaties.  HM Revenue & Customs have a page on their Anti-Avoidance Strategy which discusses how they want to deal with the whole issue of tax avoidance.  This can be found at – http://www.hmrc.gov.uk/avoidance/vision-strategy.htm 

Tax avoidance is a subject that has received extensive media coverage in recent months, with the Public Accounts Committee accusing companies paying low rates of corporation tax as ‘immoral’.

The President of the CBI criticised politicians’ moral rhetoric when it came to tax avoidance, stating that ‘tax should not be viewed as a down payment of social acceptability. Tax should be calculated in keeping with the law of the land.’ He stated that while the CBI did not pardon abusive tax avoidance, a change in legislation was needed, to ‘fix the rules internationally, not unilaterally’.  To add to this, Britain’s manufacturers have warned the government that the current debate on tax avoidance could undermine the efforts to attract investment to the UK, which could ultimately hinder our economic growth.

The question is what we, as the public, should now do.  Should we boycott companies who don’t pay enough tax and what will this achieve in the long term?  I agree that governments need to be doing more to ensure the larger multi-national companies do not get away with avoiding paying their dues, but we must tread carefully to assure the continued growth of our economy.

2013 Budget

Following George Osborne’s recent Budget it has been claimed that the amount of tax paid by the masses has been reduced, though this has been met with an air of scepticism by many.  If you are a house-building or home-buying motorist who’s fond of the occasional beer you would have done rather well, whereas retailers continue to feel the pinch.

The two main tax announcements in The Budget were the increase in the tax free personal allowance to £10,000 from April 2014, for individuals, and a reduction in the main Corporation Tax rate to 20% from April 2015, for companies.  Reductions in tax are always welcome, but there is still at least a year before these reductions will come in to force and large tax bills could still be looming for many.

Whilst not likely to be the first three letter word ending in “x” that springs to mind, tax is something that is suffered (and I mean suffered) by pretty much everybody in one way or another and planning in this regard is often overlooked.

The end of the tax year is upon us so it’s definitely something to think about.  There are numerous ways in which tax can be saved, some far more complex than others.

There are, however, some simple actions you can take each year to reduce your exposure to tax, such as:

  • If you are married or in a civil partnership and only one of you are paying tax at the higher rate you could look to transfer any income generating assets to the spouse with the lower rate of income. This income would then be subject to tax at a lower rate, saving as much as 45% in some cases from 6 April.
  • Making capital disposals (e.g. shares) to fully utilise your annual capital gains tax exemption (currently £10,600, increasing to £10,900 from 6 April).  Both you and your spouse are entitled to this exemption, so by transferring assets to your spouse prior to sale (which is exempt for tax purposes) you can effectively double your tax free allowance each year.
  •  If your income is likely to exceed £150,000 for the year it may be worth deferring any payments or bonuses due to you over and above this amount until after 5 April 2013, when the highest tax rate of 50% drops to 45%.
  •  Making payments to your pension to obtain higher rate tax relief and maximise the contributions you are permitted to make.  It can also be tax efficient for your company to pay contributions on your behalf and can enable you to pay a larger amount into your pension than previously thought.
  •  Taking advantage of the ISA investment limits for the year (currently £11,280, increasing to £11,520 from 6 April).

Just by utilising the 5 suggestions above effectively, substantial tax savings can be made.

There are numerous other tweaks that could reduce your tax bill and these are not just limited to your own personal tax affairs. These can also have a major impact on the tax payable on your business profits, be they through a company, a partnership or self-employment.

On 6 April HM Revenue and Customs will begin issuing Tax Returns for the year ended 5 April 2013.  Whilst these are not due to be filed until 31 January 2014 in most cases, there are benefits to filing these as soon as possible.

  •  If you are expecting a large tax bill you will give yourself much more time to provide for the tax due by doing so.
  •  Should you be due a refund the sooner you file the Return the quicker you will get the money back, as HMRC are usually not as busy during April and May.

If you are keen to learn more about these tax saving plans and what we can do for you, please contact us for a free, no obligation consultation and we will be happy to discuss any needs or queries you may have.