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Tax FAQ’s

with you on the journey to a brighter future

Here you will find some answers to the questions we are often asked.

We have popped these into categories to make them easier to find. Click on the category to get going.

Employers

Student Loans are part of the Government’s financial support package for students in higher education in the UK.

They are available to help students meet their living costs while they are studying and there are two main types of student loan.

Fixed – term repayment loans (old – style loans).

These loans were available to students commencing a course of higher education up to and including the academic year 1997-98 and are often known as ‘fixed – term repayment’ or ‘mortgage – style’ loans. Repayments are made directly to the Student Loans Company (SLC).

Income – Contingent Loans (new – style loans).

These loans replaced the fixed – term repayment loans and became available to students commencing a course of higher education from the academic year 1998-99. It is HMRC’s responsibility to collect repayments where the borrower is working in the UK. The SLC is responsible for collecting the loans of borrowers outside the UK tax system.

There is an annual threshold below which repayments are not due. If the borrower’s income is above the threshold, repayments will be made according to the level of income.

There are two main types of loan known as ‘Plan 1’ and ‘Plan 2’.

Repayments are deducted at a rate of 9% of income over the threshold, although each plan has a different threshold.

In April 2019, a new loan for England and Wales known as Postgraduate Loan (PGL) was introduced.

There are separate thresholds and rates for these loans which are:

2017/18

Plan 1 – £17,775
Plan 2 – £21,000

2018/19

Plan 1 – £18,330
Plan 2 – £25,000

If you are employed then your employer will collect these sums and they will be reported on your P60. If you are self employed then you MUST tell me about the Student Loan and Plan so that I can calculate the liability. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Categories: Employers, General

General

IR35 was brought in to prevent the payment of less tax and national insurance by using a personal service company or partnership to provide services through rather than being a direct employee.

For example, by using a personal service company it has been possible to extract income from the company in the form of dividends rather than salary so saving substantial amounts of national insurance. In addition, shares of the company may be split with the spouse of the worker to help avoid higher rate tax and there is far more that can be deducted in the way of tax-deductible expenses by operating through a company rather than as an employee.

The regulations are applied where a worker supplies services through a relevant intermediary (which can be a company, partnership or individual), to a client and had the worker contracted directly with the client, the income would have been treated as employment income for tax purposes. The status tests outlined below are used to help determine whether the worker would have been treated as an employee or self-employed if they had contracted directly.

Large amounts of tax and NIC are at stake. Every case needs to be judged on its merits and several factors need to be considered in concluding on whether a contract is caught or not.

HMRC can provide an opinion on whether the contract is caught by IR35 or not, but do not provide opinions on draft contracts. Unsurprisingly perhaps, the view of HMRC often tends to come down on the side that the contract is caught by IR35 but very often their view has been shown to be wrong and should not be accepted without further investigation. Whether HMRC should also be asked for their opinion also needs consideration.

We can help advise you on how to stay on the right side of the law.

A company is a relevant intermediary for the IR35 rules if…

  • the worker (together with his close family and business partners) controls more than 5% of the company; OR
  • the worker receives payments or benefits which are not salary, but which could reasonably be taken to be payment for services provided to the client

For partnerships the IR35 rules are only applied when any of the following apply…

  • a partner (together with his close family) has more than 60% of the profits;
  • most of the partnership profits come from the work of a single client;
  • where a partner share of the profits is based on their income from the relevant contracts.

The Calculation

Any salary paid during the year has PAYE operated on it in the normal way during the year.

However, where there is income that is caught by IR35, then to the extent that it exceeds any salary to which PAYE is already applied plus taxable benefits, the excess will be treated as a deemed salary and is treated as pay on 5th April, and is liable to PAYE and Class1 NIC’s accordingly. This makes the extra tax and NIC payable on 19th April following the tax year concerned, which is a very short timescale, so contractors need to be organised. Interest runs on underpayments from this date.

In arriving at the excess salary, certain expenses can be deducted from the income derived from IR35 contracts as follows…

  • a flat rate allowance of 5% of the net of VAT income;
  • expenses that would have been allowable as an employee – this includes travel from home to the client’s premises as long as the job is expected to and does not last more than 24 months;
  • employer pension contributions;
  • employer national insurance contributions;
  • some capital allowances.

The excess amount is treated as being inclusive of employer’s Class 1 NIC, so these are deducted to arrive at the deemed salary on which tax and NIC is calculated.

The deemed payment and employers NIC payment thereon are then deductible expenses for the intermediary company, treated as if paid on 5th April.

If actual salaries are paid later of amounts that were included in the deemed salary calculation, they cannot be paid free of tax and NI as they only reduce the salary payment of the actual year in which they are paid. To avoid potential double taxation, it is better to use dividends.

If caught by IR35, the method of extracting funds from the company once the deemed payment calculation has been applied needs to be considered. For example…

  • A salary could be paid during the year to avoid a large tax and NIC payment on 19th April, but it does mean you pay the tax earlier.
  • It is possible to borrow from the company and then repay the borrowing out of a salary nearer the 5th April. There can be tax and NIC on the notional interest on the loan and it is possible a payment to HMRC of 25% of the loan will be required if the loan is not repaid in full within nine month of the company’s year end.
  • Paying interim dividends in the tax year following the deemed payment and then claiming for the dividend not to be treated as a dividend for tax purposes relieved to avoid any double taxation – this is often the best way forward.

Status Tests

In determining whether the contract is caught by IR35 it is necessary to consider the existing tests developed over the years to determine whether an individual is employed or self-employed. These tests can be summarised in one question: Is the individual in business on his own account when offering services to the client? If the answer is not a definite ‘yes’ the following factors need to be considered…

Requirement to provide a personal service

  • Must you complete the work personally?
  • Can you send substitute to do the work?

Control and supervision of the worker by the client

  • Can you work at times to suit you?
  • Does the client control how you do the work?

Mutuality of obligation between the parties for the duration of the contract

  • Do you have the option to turn down work offered and does the client have the option not to offer work?
  • Is each side obliged to offer work and accept work?

Financial risk of the worker

  • Do you correct defective work in your own time, at your own cost?
  • Are invoices raised by reference to the job rather than hours worked?
  • Is public liability insurance in place?
  • Is work carried out for more than just one or a very small number of clients?

Provision of equipment and materials by the worker

  • Do you use your own equipment?
  • Are materials supplied by you?
  • Do you work from your own premises?
  • Does your company have its own business stationery?

Trappings of employment

  • Is holiday and sick pay paid to you by the client?
  • Are any employment type benefits provided to you by the client?
  • How long have you been working for the client?
  • Is there a notice period to end the arrangement?

Intention of the parties

  • What was the intention of the parties in forming the contract?

The first three factors are the most important. If one of these does not exist the contract does not have the attributes of an employment contract so must be another type of contract, such as a self-employment relationship. However, to determine whether the worker is self-employed the other factors also need to be considered.

HRMC Business Status Tests

HMRC think they can generalise about what makes some companies fall within IR35 and other escape it. In May 2012 they have drawn-up a set of business entity tests, complete with a scoring system, to help you to judge whether your business would be at high, medium, or low risk of being investigated for falling under IR35.

These business entity tests are not derived from the tax law. They merely represent the Taxman’s view of the risk of a business falling within IR35.

The scoring attached to the tests is controversial, as it penalises businesses that have no bad debts, never pay to advertise and operate from the owner’s home. These IR35 business entity tests do not change the IR35 law one bit, and will probably be ignored by the Tax Tribunal.

If you choose to use the IR35 business entity tests, you don’t have to declare your score to the Taxman, the tests are merely for your own guidance. However, if you are concerned that the business entity tests produce a high risk score for your businesses, we should discuss why this is the case. Are they any changes which can be made to the way your business operates which would make it less likely to be caught by IR35?

Dragonfly Consulting Tax case

The Dragonfly Consulting tax case established that the Tax Inspector can question the relationship between the end client and the worker, and if he decides that it is really one of employee and employer, in spite of all the various contracts, agency and service company in place, the extra tax due will fall on the worker’s own company.

The case demonstrated how the contract between the agency and the final client can knock for six any clever contract drawn up between the worker’s company and the agency. HMRC have proved that the entire stream of contracts needs to be considered and compared to what actually happens on the ground.

For example, the agency may agree to include a substitution clause in the contract with the worker’s company, but if this clause is not reflected in the contract with the final client it is ineffective. Even if a substitution clause does exist in the agency/client contract it will be ignored if the client tells HMRC or the tax tribunal that it would never actually accept a substitute for the worker.

To ensure your working arrangement with your client will stand up to challenge by HMRC you need to see all the contracts in the chain and be sure your client would agree to accepting a substitute if asked to.

It should be noted that in a recent case with judgement issued on 5 Jan 2011 (MBF Design Services Ltd) where a hypothetical contract was sought to be created to examine the relationship between the end client and the worker, the three key status tests of personal service, control and mutuality of obligations led to the decision in favour of the taxpayer. It was particularly noted that the ability to cancel the contract without notice and the fact that contractors were sent home without pay whilst employees had to remain on site meant there was a lack of mutuality of obligations.

Managed Service Companies

A Managed Service Company differs to a Personal Service Company in that there is normally a scheme provider that operates the company on behalf of the worker. Often these are known as “composite companies” with perhaps 10 to 20 workers being put through the same company or “managed personal service companies” with one for each worker but managed by the scheme provider on behalf of the worker.

From 2007/08 the Government has taken action to tackle Managed Service Company (MSC) schemes which are used to disguise arrangements that should be treated as employment arrangements for tax purposes and are used to avoid paying the employed levels of tax and national insurance.

Income that is received by workers through MSCs is now subject to employment levels of tax and NI. It is the responsibility of the MSC to operate PAYE and deduct the necessary tax and NI on the income.

In addition, the rules for tax relief on travel expenses are the same as for other employed workers.

Whilst in many cases these companies should be caught by the IR35 legislation, they did not follow the legislation and when caught they simply liquidate as they have no assets and start up another company the next day. To stop MSCs avoiding payment of these taxes, recovery of underpaid taxes and NICs will be possible from appropriate third parties, principally those behind the company operating such schemes including directors, shadow directors and connected or controlling parties.

These individuals will also be easier to catch as there will be no need to consider the specific relationship between each individual worker and the end client which was proving too labour intensive for HMRC.

The IR35 intermediaries legislation remains in place for personal service companies where the worker operates the company himself. The MSC rules are not targeted at these companies.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Categories: General, Limited Company

The Working Tax Credit (WTC) is designed to help taxpayers on low incomes by providing top-up payments and includes those who do not have children.

There are extra amounts available for qualifying childcare expenses and working households in which someone has a disability. The basic amount of WTC is £1,960 a year and is always included for qualifying applicants. There are also payments that may be available for couples or for those with certain disabilities. In order to satisfy the rules for claiming the WTC, claimants must work a certain number of hours a week.

For couples, one member has to work at least 16 hours a week, with the joint total being at least 24 hours. Single people who are responsible for 1 or more children can claim the WTC if they work at least 16 hours per week.

Claims can also be made by those without children who work at least 30 hours per week if they are aged over 25. There are different limits for those claiming the disability element.

Backdated claims for WTC will usually only be backdated for a maximum of one month. There are exceptions for those with refugee status and claimants that qualify for certain sickness or disability benefits.

Making a new claim for tax credits is no longer possible for most people and it has been replaced by universal credit. Universal credit will eventually replace tax credits and other social security benefits.

Existing tax credit claimants are expected to be moved across to universal credit between 2020 and 2023 although a small pilot will start from July 2019.Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

If your personal details change, you may be required to notify HMRC as this can affect your entitlement to certain tax breaks and or benefits.

For example, you need to tell HMRC if:

you get married or form a civil partnership
you divorce, separate or stop living with your husband, wife or partner

You can tell HMRC online if you are paid a salary or pension through PAYE. The sooner you tell HMRC the better as the change could result in you paying too much or too little tax.

If you receive tax credits or Child Benefit you also need to tell HMRC separately about changes to your relationship or family.

In the event, that your spouse or civil partner dies it is also a requirement to report the death to HMRC as well as notifying of changes to your income. For example, the death of a spouse would mean that the surviving spouse was no longer entitled to claim the Married Couple’s Allowance.

If you move home, it is of course advisable to let HMRC know as soon as possible so they can update your contact details. HMRC should also be informed if you change gender, although the process is usually automatic if you apply for a Gender Recognition Certificate. Please also inform me of any changes. You can update the records I hold for you by securely logging onto Accountancy Manager. I will be automatically notified of any changes you make so no need to email me separately.

Please contact us for further information.

Disclaimer: This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

Student Loans are part of the Government’s financial support package for students in higher education in the UK.

They are available to help students meet their living costs while they are studying and there are two main types of student loan.

Fixed – term repayment loans (old – style loans).

These loans were available to students commencing a course of higher education up to and including the academic year 1997-98 and are often known as ‘fixed – term repayment’ or ‘mortgage – style’ loans. Repayments are made directly to the Student Loans Company (SLC).

Income – Contingent Loans (new – style loans).

These loans replaced the fixed – term repayment loans and became available to students commencing a course of higher education from the academic year 1998-99. It is HMRC’s responsibility to collect repayments where the borrower is working in the UK. The SLC is responsible for collecting the loans of borrowers outside the UK tax system.

There is an annual threshold below which repayments are not due. If the borrower’s income is above the threshold, repayments will be made according to the level of income.

There are two main types of loan known as ‘Plan 1’ and ‘Plan 2’.

Repayments are deducted at a rate of 9% of income over the threshold, although each plan has a different threshold.

In April 2019, a new loan for England and Wales known as Postgraduate Loan (PGL) was introduced.

There are separate thresholds and rates for these loans which are:

2017/18

Plan 1 – £17,775
Plan 2 – £21,000

2018/19

Plan 1 – £18,330
Plan 2 – £25,000

If you are employed then your employer will collect these sums and they will be reported on your P60. If you are self employed then you MUST tell me about the Student Loan and Plan so that I can calculate the liability. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Categories: Employers, General

A P800 tax calculation is issued if, according to HMRC’s information, the taxpayer has underpaid or overpaid tax.

The first wave of these annual tax reconciliations for 2018/19 started to land on doormats on 17 June 2019.

Who gets a P800?

Following the end of the tax year, HMRC carries out a reconciliation for anyone who received PAYE employment or a pension income in that year but who was not in self-assessment. The reconciliation checks to see if – based on the information that HMRC holds – the taxpayer has paid the correct amount of tax for that year. Reconciliations are also carried out for taxpayers not in PAYE but who receive a state pension that exceeds their personal allowance.

When their work for 2018/19 is complete, HMRC estimate that 85% of those for whom a reconciliation is performed will have paid the correct amount of tax, 10% will be entitled to a refund, and 5% will have an underpayment.

It is the two latter groups that will be issued with a P800 or potentially a PA302 where simple assessment applies, to correct the position. HMRC should not attempt to reconcile anyone who is in self-assessment. However, sometimes the flag that prevents reconciliation can be accidentally removed. If a taxpayer in self-assessment receives a P800 they should contact me and I can in turn contact HMRC and advise that they will be submitting a tax return instead.

Timing

Given the vast numbers of taxpayer records that must be reconciled, it takes HMRC some time to process and issue all the reconciliations. For 2018/19, HMRC aims to complete the bulk of reconciliations by November 2019, with the final deadline to complete the operation for the most complex cases being March 2020.Since nothing is issued if the reconciliation does not throw up a discrepancy, a taxpayer who wants to know if HMRC has carried out a reconciliation can check by looking on their personal tax account (PTA)

Bank interest

HMRC estimates that three-quarters of taxpayers for whom a reconciliation is performed will have bank interest. This information is provided by the banks directly to HMRC by 30 June following the end of the tax year.Where HMRC’s records indicate that bank interest was received in 2017/18, it will wait until data has been received from the bank for 2018/19 before carrying out a reconciliation.

Post receipt

When a P800 is received the taxpayer should check the information HMRC used in its calculations. This will include making sure that any employment or pension income on the P800 matches supporting paperwork from the taxpayer’s employer, interest and dividend figures are correct, and that any allowances such as marriage allowance, or job-related expenses are included.

Refunds

Where the taxpayer is due a refund, this should be issued automatically within two months of receipt of the P800. The taxpayer can speed up this process by logging into their PTA and providing their bank details.

Tax due

P800 letters have been notorious for not making it clear to individuals how they should settle any tax due. HMRC says it has improved the wording for 2018/19 letters.In most cases, the taxpayer will have the tax collected from their employment or pension income through a change to their PAYE coding notice. Where this is not possible, the taxpayer should receive a payslip. Alternatively, HMRC may issue a PA302 (simple assessment) instead of a P800.

Why a simple assessment?

HMRC will issue a simple assessment instead of a P800 where the taxpayer: owes tax that cannot be taken out of their income automatically; owes HMRC more than £3,000; or has to pay tax on their state pension. The intention was to gradually move more taxpayers into the simple assessment regime, but this was paused in May 2018 due to the pressures of Brexit work on HMRC resources.

Appealing a P800 or PA302. What happens if the taxpayer considers that their P800 is incorrect?

In the first instance you should contact me and I in turn can contact HMRC. Where any differences cannot be resolved, the taxpayer cannot appeal against the P800 itself but can appeal against the new PAYE code that gives effect to the tax recovery. In contrast, where a taxpayer receives a PA302, the simple assessment regime does include a right of appeal. If HMRC will not accept the taxpayer’s initial objections (which must be made within 60 days of the issue of the assessment) the taxpayer can appeal against a simple assessment demand. If you have any issues with a P800 please get in touch.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for loss occasioned by anyone acting on information within the App.

Category: General

The High Income Child Benefit charge (HICBC) applies to parents whose income exceeds £50,000 in a tax year and who is in receipt of Child Benefit.

If both parents have an income that exceeds £50,000, the charge will apply to the highest income earner.

The charge claws back the financial benefit of receiving Child Benefit either by reducing or removing the benefit entirely.

If you or your partner have exceeded the £50,000 threshold during the last tax year (2018-19) then you must take action. If you or your partner continue to receive Child Benefit (and earn over the relevant limits) you must pay any additional tax owed (the HICBC), for 2018-19, on or before 31 January 2020.

If you have exceeded the limit for the first time and do not currently submit a tax return you will be required to do so.

The HICBC is levied at the rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000.

If your income exceeds £60,000, the amount of the charge will equal the amount of Child Benefit received. HMRC’s guidance on Child Benefit stresses that if the HICBC applies to you or your partner, it is still worthwhile to claim Child Benefit for your child.

This can help to protect your State Pension and will make sure your child receives a National Insurance number. However, you can still choose to keep receiving Child Benefit and pay the tax charge through self-assessment or elect to stop receiving Child Benefit and not pay the charge. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

The meaning of goodwill for a business and CGT purposes is complex.

The term ‘goodwill’ is rarely mentioned in legislation and there is no definition of ‘goodwill’ for the purposes of Capital Gains legislation. In fact, most definitions of goodwill are derived from case law.

At its simplest you could describe goodwill as the ‘extra’ value of a business over and above its tangible assets. In the vast majority of cases when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of putting a monetary value on the business’s reputation and customer relationships.

Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

‘Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.’

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

If you are subject to an HMRC enquiry you can incur significant amounts in accountancy fees, even if at the conclusion it is found that there is no additional tax to pay.

For a very modest premium, Tax Investigation Insurance or fee protection insurance as it is sometimes known covers accountancy fees incurred by your accountant in the event of an enquiry, providing you with peace of mind, knowing that your accountant’s fees are covered and you have the resource to provide a strong defence.

Being the subject of an HMRC enquiry is stressful and tax investigation insurance will help you to relax.HMRC were targeted with achieving additional tax revenues of over £28 billion through compliance activities in 2017/18. They achieved £30.3 billion according to their annual report. In the past decade the number of enquiries undertaken by HMRC has increased significantly year on year. Any individual or business can be subject to an enquiry, even if your affairs are in order.

Through Sch36 of the Finance Act HMRC has wider powers than ever before. In recent years HMRC has recruited 2,500 new Compliance Officers to help achieve their ambitious targets.The chances of you being subject to an HMRC enquiry have never been higher.

An illustration of how the insurance works:

We have been asked multiple times to provide an example of what the insurance does.

Using very simplistic numbers:

Your tax affairs are chosen for an enquiry and HMRC request some more information than the basic records (this is the norm). HMRC review the records and dispute the figures. You are notified by HMRC that you/your business owes £4,500 in unpaid tax. You instruct your accountant to work on your behalf and provide information to HMRC and hopefully get the tax demand down.

Let’s say the accountant spends £1,500 of their time. 

Without Tax Investigation Insurance

The best case scenario: your accountant manages to get the tax bill down to £0, you still have to pay £1,500 in total with their fees.

The worst-case scenario: your accountant hasn’t been successful so you owe the £4,500 to HMRC and £1,500 to the accountant meaning your total is £6,000.

With Tax Investigation Insurance

The best case scenario: your accountant manages to get the tax bill down to £0 and the £1,500 is paid for by the insurance. Your total is £0

The worst case scenario: your accountant has not been successful, so you owe £4,500 to HMRC but the professional fees are paid for by the insurance meaning your total is £4,500.

Please remember- Tax is not optional and Tax Investigation Insurance does not cover the amount owed to HMRC. It simply covers the professional fees associated with a HMRC enquiry.

Please contact us for further information.Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

Here I provide you with an overview of the information to provide to your accountant (me) to enable completion of your end of year accounts. 

Every business is different, and you should discuss your own bookkeeping requirement with me. Between us we can decide what you can prepare for me and agree a time schedule for when you will provide the records and for when I will have your accounts ready for discussion. 

Basic ways in which you may find you can help me…

·         Adding up and balancing your books such as cross casting of column totals

·         analysing your payments and receipts

·         filing your invoices in sensible system so that relevant invoices can be easily found 

If you’re feeling more adventurous, you can also assist by

·         preparing a bank reconciliation that reconciles the balance on your bank statement to that derived from your records after adjusting for unpresented receipts and payments

·         using control accounts for key nominal accounts such as debtors and creditors that reconcile to your year end list of debtors and creditors 

By using reconciliations and control accounts on a regular basis during the year, you help to ensure there are no errors in the records. 

Records to provide to me

Not every business will have all of the following records but if you do, you should provide them to me covering the year (plus one month after)… 

·         Access to your Cloud Accounting records.

·         Your cash book if you have one

·         Petty cash records.

·         Sales and purchase day books if operated.

·         Any ledgers that you keep.

·         Bank statements covering the whole financial year for all business accounts.

·         Purchase invoices.

·         Sales invoices.

·         Cheque books and paying in stubs if used.

·         Copies of VAT returns covering the year together with any workings.

·         Your payroll records for the year together with details of PAYE calculations for payments to HMRC.

·         Copies of any new loan or HP agreements taken out during the year.

·         Details of any business income or expenditure that didn’t go through your business bank account.

·         Anything else you feel may be relevant – if in doubt, include it. 

Schedules to provide to me 

In addition, the following schedules will assist me in completing your end of year accounts. I can prepare these myself but if you wish to do so, it would reduce the time I spend preparing your accounts… 

·         A list of fixed asset additions with copy purchase invoices provided.

·         A year end stock list. This should be at the lower of cost and net realisable value.

·         Details of work in progress at the year end.

·         A list of debtors at the year end, their age and an indication of any that unlikely to pay

·         Sales ledger control account reconciliation.

·         Reconciliations for all bank and cash accounts.

·         A list of trade creditors at the year end and their age.

·         Purchase ledger control account reconciliation.

·         Details of PAYE owed at the year end.

·         Details of VAT owed at the year end.

·         Schedules of key and tax sensitive profit and loss accounts such as repairs, sundry expenses, entertainment, etc. 

How I Can Help You 

I can help you avoid all of the above by moving you to online cloud accounting. There are many benefits to online accounting, and it also means I can work with you throughout the year, giving advice and providing reports when you need it most, not after the year end when it could be too late.   

Please contact us for further information 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Special tax rules apply to the construction industry and workers which are detailed in The Construction Industry Scheme (CIS).

The Construction Industry Scheme

CIS uses a verification system for contractors to confirm whether a subcontractor should be paid gross or net.

Construction Activities

The definition of construction activities is widely drawn and so most businesses working in construction will be caught by CIS. It applies to sole traders, partnerships and Limited Companies but not to private householders who are paying contractors.

Contractors are businesses that carry out “construction operations” as part of their business and subcontractors are those who carry out such work for the contractor, but it does not include employees of the contractor. Some businesses will be both a contractor and a subcontractor.

Registration

New subcontractors have to register with HMRC but as well as calling into the local office it can also be done by phone or online if HMRC already know about you.

The subcontractor will be informed whether they can receive payments gross or net. To qualify to be paid gross a subcontractor must pass the Business Turnover and Compliance Tests. In summary these are…

  • It is run in the UK with a bank account;
  • It has a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and companies);
  • It has complied with all its tax obligations to date.

Verification

When a contractor engages a subcontractor who has not worked for them in the current or previous two tax years, they must get the name, unique taxpayer reference and national insurance number of the subcontractor in the case of an individual and contact HMRC to ascertain if the subcontractor should be paid gross or net, this is called verification. The contractor must also decide the contract proposed is one of self-employment, or whether the worker should be treated as an employee.

It is important to ensure that the status of the worker in terms of self-employment or employment is correctly established. This is a question of fact and not what the parties want it to be. The CIS scheme only applies to self-employment situations, but because a subcontractor is registered under the CIS it does not mean that he should be treated as self-employed for every job he does.

If the subcontractor is registered with HMRC the contractor will be told to pay the subcontractor gross or to apply the standard rate of deduction (20%) to all payments to the subcontractor. If the subcontractor has not registered with HMRC, a higher rate of tax deduction of 30% will be required.

The deductions count as payments on account of the eventual tax and Class 4 NI liability of the subcontractor. If the subcontractor has an accounting period ending early in the tax year, for example 31 Dec they can apply for an in-year repayment where the deductions already taken will exceed the total tax and Class 4 NI bill for the year. Arrangements exist for subcontractors that are companies to be able to set-off deductions against any PAYE, NIC and CIS deductions that they owe.

Contractors will be given a verification number for the subcontractor, or group of subcontractors, that is matched to the HMRC records in one query or phone call. This number is for the contractor’s reference only.

For each subcontractor that cannot be matched either because they are not registered or the wrong details have been given, a special verification number will be given for each unmatched subcontractor and this number must be recorded on the subcontractor’s payment statement. This will be needed to get refunds later.

Records

Payment Statement – Contractors must give a statement to each subcontractor that a deduction has been made from his payments, either done once a month to cover all payments or for each payment, and this must be issued within 14 days of the end of the month in which the payment was made. Statements can be in any format as long as they contain the necessary information. They are not required for subcontractors who are paid gross.

Monthly Return – The contractor will submit a monthly return to HMRC that shows all subcontractors that payments have been made to, the amount paid and where net payments are made, the amount of materials and deductions. The return must be filed with HMRC within 14 days of the month end, with nil returns made if there were no payments in the month.

There are penalties for filing returns late.

There is no annual return required under the new CIS.

Real Time Information (RTI)

Under the rules of RTI you cannot process subcontractors through PAYE. RTI does not change how CIS is reported. Employers will still file monthly returns (CIS300). But for Limited Companies acting as a subcontractor, on the Employer Payment Summary (EPS) each month you are required to declare ‘CIS deductions suffered’, to offset any liability due to HMRC.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

When is a car a pool car?

Rather than allocating specific cars to particular employees, some employers find it preferable to operate a carpool and have a number of cars available for use by employees when they need to undertake a business journey.

From a tax perspective, provided that certain conditions are met, no benefit in kind tax charge will arise where an employee makes use of a pool car.

The conditions

There are five conditions that must be met for a car to be treated as a pool car for tax purposes.

1. The car is made available to, and actually is used by, more than one employee.

2.In each case, it is made available by reason of the employee’s employment.

3.The car is not ordinarily used by one employee to the exclusion of the others.

4.In each case, any private use by the employee is merely incidental to the employee’s business use of the car.

5. The car is not normally kept overnight on or in the vicinity of any of the residential premises where any of the employees was residing (subject to an exception if kept overnight on premises occupied by the person making the cars available).

The tax exemption only applies if all five conditions are met.

When private use is ‘merely incidental’

To meet the definition of a pool car, the car should only be available for genuine business use. However, in deciding whether this test is met, private use is disregarded as long as that private use is ‘merely incidental’ to the employee’s business use of the car. HMRC regard the test as being a qualitative rather than a quantitative test. It does not refer to the actual private mileage, rather the private element in the context of the journey as a whole.

For example, if an employee is required to make a long business journey and takes the car home the previous evening in order to get an early start, the private use comprising the journey from work to home the previous evening would be regarded as ‘merely incidental’. The car is taken home to facilitate the business journey the following day.

Kept overnight at employee’s homes – the 60% test

For a car to meet the definition of a pool car, it must not normally be kept overnight at employees’ homes. In deciding whether this test is met, HMRC apply a rule of thumb – as long as the total number of nights on which a car is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period, HMRC accept that the condition is met.

When a benefit in kind tax charge arises

If the car does not meet the definition of a pool car and is made available for the employee’s private use, a tax charge will arise under the company car tax rules.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Categories: General, Limited Company

Can we deduct entertaining expenses?

The tax rules on the deductibility of entertaining expenses are harsh and often misunderstood – the fact that the expenditure is incurred for businesses purposes does not make it deductible.

Subject to certain limited exceptions, no deduction is allowed for business entertaining and gifts in calculating taxable profits.

What counts as business entertainment?

Business entertainment is the provision of free or subsidised hospitality or entertainment. Hospitality includes the provision of food drink or similar benefits for which no payment is made by the recipient. It also extends to subsidised hospitality whereby the charge made to the recipient does not cover the costs of providing the entertainment or hospitality.

Examples of business entertaining would include taking a supplier to lunch, taking customers to a day at the races, or inviting them to a box at rugby match, and suchlike. The definition is wide.

Exception 1: Entertaining employees

One of the main exceptions to the general rule that entertaining expenses cannot be deducted is in relation to staff entertainment. A deduction is allowed for the cost of entertaining staff, as long as the costs are incurred wholly and exclusively for the purposes of the trade and the entertaining of the staff is not merely incidental to the entertaining of customers. So, for example, a company would be able to deduct the cost of the staff Christmas party in calculating its taxable profits. However, if a company takes customers to Wimbledon, the fact that a number of employees also attended is not enough to guarantee a deduction as the entertaining provided for the employees is incidental to that for customers.It should be noted that unless an exemption is in point, employees may suffer a benefit in kind tax charge on any entertainment provided.

Exception 2: Normal course of trade

The disallowance does not apply where the business is that of providing hospitality, and as such a deduction is allowed for the costs incurred in providing that hospitality as long as they are incurred wholly and exclusively for the purposes of the business. Businesses such as restaurants and events management companies would fall into this category.

Exception 3: Contractual obligation to provide entertainment

Where entertainment is provided under a contractual obligation, this is not treated as business entertainment and a deduction is allowed for the cost. A common example would be where hospitality is provided as part of a package. However, the business should be able to demonstrate that they have received a full return for the entertainment provided.

Exception 4: Small gifts carrying an advert

The provision of business gifts is treated as business entertaining with the result that a deduction for the costs is not generally allowed. However, there is an exception for gifts costing not more than £50 per year per recipient which bear a conspicuous advert for the business. An example of a deductible gift would be a diary or a water bottle featuring an advert for the business.

Remember…Just because entertaining is incurred for business purposes does not mean that it is allowable and business entertaining needs to be added back in the corporation tax computation.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

An individual, Partnership or Company must keep records that enable them to make a correct and complete return.

These records must record income received and amounts paid out to run your business. These records can be maintained on paper, spreadsheet or nowadays it is common for accounting software to be used.

Indeed in light of HMRC’s Making Tax Digital project, it is advisable that all new businesses are encouraged to use software, even if it is not mandatory for the business to use software at that stage. A range of products is available, and each should be considered against the person’s particular circumstances so contact us before making your choice.

Good practice is for the business to have its own bank account, and for all business income to be paid into, and for all business expenditure to be paid out of, this account. In this way, all business transactions can be easily identified and there is a reduced risk of: (1) business transactions being missed; and (2) personal transactions being treated as business transactions.

In addition, the individual should be encouraged to set up a tax savings account and to make regular deposits into this account to cover estimated future tax liabilities. The correct amount to put aside will be determined by the circumstances; for example, the rate at which tax is likely to be payable, the person’s anticipated profit margin, and significant one-off costs, such as the purchase of a van. It is likely that this will need to be revised on a regular basis as the accounting information is reviewed and as the business grows.

Example

Amber commenced trading as a mobile hairdresser on 1 December 2019. She expects to make sales totaling £25,000 for her first year, incurring costs of approximately £5,000. Based on an anticipated profit of £20,000, her estimated tax and NICs liability is:

 Income tax ((£20,000 – £12,500) x 20%) £1,500
Class 4 NICs ((£20,000 – £8,632) x 9%)£1,023
Class 2 NICs (£3 x 52)£156
 Total £2,679
  

Amber would be advised to transfer £225 per month into her tax savings account to ensure that she has sufficient funds to pay her future tax liabilities.

Bear in mind that failure to maintain adequate business records can incur a fine from HMRC of up to £3,000.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

Yes and here’s why. Incidentally although this article is about Companies, the principle applies very well to all those in business.


Why a Limited Company needs its own bank account

It is not a specific legal requirement that a company opens and runs a bank account in its own name and where a new company has been formed to take over an existing sole trader business it can be tempting to continue to use the business bank account that has already been set up for that business. Or, where you have set up a new company it would be tempting to use that “spare” bank account in your own name.

However I strongly recommend that every company opens its own separate bank account and uses it to process all the company’s transactions for the following reasons.

Often when an existing business is transferred to a company, the formalities of the change are handled less than perfectly. For example, there may be no formal documentation of the transfer of assets, the sales invoices raised by the company may not make it clear that the sale is now being made by a limited company and suppliers may be slow to update the details that appear on their invoices. This carries a risk of HMRC arguing that the business has not been transferred with a view to taxing the business at a higher rate. Having a company bank account being correctly set up and used can act as a counter-argument.

Where a person is holding money on behalf of the company he is borrowing money from that company. This is likely to be the case where a person’s own bank account is being used as a company bank account and the account is in credit even if the only transactions on the account are company ones. Borrowing money from the company can be illegal under the Companies Act 2006. It can also lead to additional tax liabilities in the form of Section 455 tax and tax and National Insurance on beneficial employee loans.

If the business is unfortunate enough to be subject to a tax investigation all of its records and bank accounts will be reviewed. Once HMRC discover that a personal bank account is being used for company transactions they may extend the scope of their investigation to the director as well.

If bank interest and charges have been paid on the account HMRC may not allow tax relief on them on the grounds that they have not been incurred in the company’s name.

Where company funds are held in a private bank account, the distinction between the company and its owner is blurred. This may cause difficulties if the company becomes insolvent and the owner wishes to rely on the principle of limited liability to avoid being held personally liable for any business debts. This would be particularly relevant with a bank overdraft if there were no personal guarantee in place.

And, last but by no means least, record keeping is transformed by maintaining a company bank account making my life easier and Accountancy fees down !!

A properly set up company bank account should be an account held by the limited company in its own name which in most cases means that “Limited” or “Ltd” should appear in the account name.

Company legislation provides an opportunity for a business organisation to benefit from the protection of limited liability, separating the legal persona of the organisation from the individuals who own it.

In return for this protection a certain amount of information about a company must be publicly available including, for example, the company’s annual accounts, registered office address and details of directors, company secretary (if there is one) and members. Historically, providing and updating this information has been the job of the company secretary but is now the responsibility of all Directors.

Whilst on the subject of bank accounts there are some very good challenger banks to the traditional High Street that make it easy to set up an account and are well worth looking at. Please contact me for guidance on which ones are the best for your business.

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

There are a number of reasons why you may need to register with HMRC to submit a tax return.

This could include:

  • if you are self-employed and earning more than £1,000 per year from the self-employed activity,
  • if you are a company director,
  • if you have an annual income over £100,000 and / or if you have certain income from savings, investment or property.

And see HMRC’s list of criteria to file set out below.

If you need to complete a tax return for the first time you should inform HMRC as soon as possible. The latest date that HMRC should be notified is by 5 October following the end of the tax year for which a return needs to be filed. For example, if you had income that necessitated you registering for Self Assessment in the 2018-19 tax year, you need to notify HMRC by 5 October 2019.

HMRC has published a check list of reasons that you may be required to submit a Self Assessment return. The list includes the following:

  • If you are self-employed;
  • If you had £2,500 or more in untaxed income; Have savings or investment income of £10,000 or more before tax;
  • If you have made profits from selling things like shares, a second home or other chargeable assets and need to pay Capital Gains Tax;
  • If you are a company director – unless it was for a non-profit organisation (such as a charity) and you didn’t get any pay or benefits, like a company car;
  • If your income (or that of your partner’s) was over £50,000 and one of you claimed Child Benefit;
  • If you had taxable income from abroad;
  • If you lived abroad and had a UK income;
  • or If your income was over £100,000.

In certain limited circumstances HMRC can also ask you to complete tax returns for other reasons.

Uncertain if you need to register? Please call us with details of your various income sources in the UK if you would like help to decide, if you do need to register for Self-Assessment and/or need help with the completion and filing of your return.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

That really depends upon what you want us to do.

We always agree a bespoke fee with you based upon the work you wish us to undertake.

You can find out more about our pricing methodology by clicking HERE

All our fees are paid monthly in advance and collected by Direct Debit via GoCardless.

Category: General

We work alongside all types of business including self employed, partnerships, Limited Companies and landlords / individuals with rental property.

We provide a full range of accountancy services including:

  • Statutory Accounts
  • Tax Returns
  • Payroll
  • Employer Holiday Records
  • VAT
  • Construction Industry Scheme (CIS)
  • Business financial reports
  • Company Formation
  • Company Secretarial
  • Business finance access

And a few other services !

No distance too small or too great and we are happy to have a no obligation discussion at any time.

Category: General

Limited Company

IR35 was brought in to prevent the payment of less tax and national insurance by using a personal service company or partnership to provide services through rather than being a direct employee.

For example, by using a personal service company it has been possible to extract income from the company in the form of dividends rather than salary so saving substantial amounts of national insurance. In addition, shares of the company may be split with the spouse of the worker to help avoid higher rate tax and there is far more that can be deducted in the way of tax-deductible expenses by operating through a company rather than as an employee.

The regulations are applied where a worker supplies services through a relevant intermediary (which can be a company, partnership or individual), to a client and had the worker contracted directly with the client, the income would have been treated as employment income for tax purposes. The status tests outlined below are used to help determine whether the worker would have been treated as an employee or self-employed if they had contracted directly.

Large amounts of tax and NIC are at stake. Every case needs to be judged on its merits and several factors need to be considered in concluding on whether a contract is caught or not.

HMRC can provide an opinion on whether the contract is caught by IR35 or not, but do not provide opinions on draft contracts. Unsurprisingly perhaps, the view of HMRC often tends to come down on the side that the contract is caught by IR35 but very often their view has been shown to be wrong and should not be accepted without further investigation. Whether HMRC should also be asked for their opinion also needs consideration.

We can help advise you on how to stay on the right side of the law.

A company is a relevant intermediary for the IR35 rules if…

  • the worker (together with his close family and business partners) controls more than 5% of the company; OR
  • the worker receives payments or benefits which are not salary, but which could reasonably be taken to be payment for services provided to the client

For partnerships the IR35 rules are only applied when any of the following apply…

  • a partner (together with his close family) has more than 60% of the profits;
  • most of the partnership profits come from the work of a single client;
  • where a partner share of the profits is based on their income from the relevant contracts.

The Calculation

Any salary paid during the year has PAYE operated on it in the normal way during the year.

However, where there is income that is caught by IR35, then to the extent that it exceeds any salary to which PAYE is already applied plus taxable benefits, the excess will be treated as a deemed salary and is treated as pay on 5th April, and is liable to PAYE and Class1 NIC’s accordingly. This makes the extra tax and NIC payable on 19th April following the tax year concerned, which is a very short timescale, so contractors need to be organised. Interest runs on underpayments from this date.

In arriving at the excess salary, certain expenses can be deducted from the income derived from IR35 contracts as follows…

  • a flat rate allowance of 5% of the net of VAT income;
  • expenses that would have been allowable as an employee – this includes travel from home to the client’s premises as long as the job is expected to and does not last more than 24 months;
  • employer pension contributions;
  • employer national insurance contributions;
  • some capital allowances.

The excess amount is treated as being inclusive of employer’s Class 1 NIC, so these are deducted to arrive at the deemed salary on which tax and NIC is calculated.

The deemed payment and employers NIC payment thereon are then deductible expenses for the intermediary company, treated as if paid on 5th April.

If actual salaries are paid later of amounts that were included in the deemed salary calculation, they cannot be paid free of tax and NI as they only reduce the salary payment of the actual year in which they are paid. To avoid potential double taxation, it is better to use dividends.

If caught by IR35, the method of extracting funds from the company once the deemed payment calculation has been applied needs to be considered. For example…

  • A salary could be paid during the year to avoid a large tax and NIC payment on 19th April, but it does mean you pay the tax earlier.
  • It is possible to borrow from the company and then repay the borrowing out of a salary nearer the 5th April. There can be tax and NIC on the notional interest on the loan and it is possible a payment to HMRC of 25% of the loan will be required if the loan is not repaid in full within nine month of the company’s year end.
  • Paying interim dividends in the tax year following the deemed payment and then claiming for the dividend not to be treated as a dividend for tax purposes relieved to avoid any double taxation – this is often the best way forward.

Status Tests

In determining whether the contract is caught by IR35 it is necessary to consider the existing tests developed over the years to determine whether an individual is employed or self-employed. These tests can be summarised in one question: Is the individual in business on his own account when offering services to the client? If the answer is not a definite ‘yes’ the following factors need to be considered…

Requirement to provide a personal service

  • Must you complete the work personally?
  • Can you send substitute to do the work?

Control and supervision of the worker by the client

  • Can you work at times to suit you?
  • Does the client control how you do the work?

Mutuality of obligation between the parties for the duration of the contract

  • Do you have the option to turn down work offered and does the client have the option not to offer work?
  • Is each side obliged to offer work and accept work?

Financial risk of the worker

  • Do you correct defective work in your own time, at your own cost?
  • Are invoices raised by reference to the job rather than hours worked?
  • Is public liability insurance in place?
  • Is work carried out for more than just one or a very small number of clients?

Provision of equipment and materials by the worker

  • Do you use your own equipment?
  • Are materials supplied by you?
  • Do you work from your own premises?
  • Does your company have its own business stationery?

Trappings of employment

  • Is holiday and sick pay paid to you by the client?
  • Are any employment type benefits provided to you by the client?
  • How long have you been working for the client?
  • Is there a notice period to end the arrangement?

Intention of the parties

  • What was the intention of the parties in forming the contract?

The first three factors are the most important. If one of these does not exist the contract does not have the attributes of an employment contract so must be another type of contract, such as a self-employment relationship. However, to determine whether the worker is self-employed the other factors also need to be considered.

HRMC Business Status Tests

HMRC think they can generalise about what makes some companies fall within IR35 and other escape it. In May 2012 they have drawn-up a set of business entity tests, complete with a scoring system, to help you to judge whether your business would be at high, medium, or low risk of being investigated for falling under IR35.

These business entity tests are not derived from the tax law. They merely represent the Taxman’s view of the risk of a business falling within IR35.

The scoring attached to the tests is controversial, as it penalises businesses that have no bad debts, never pay to advertise and operate from the owner’s home. These IR35 business entity tests do not change the IR35 law one bit, and will probably be ignored by the Tax Tribunal.

If you choose to use the IR35 business entity tests, you don’t have to declare your score to the Taxman, the tests are merely for your own guidance. However, if you are concerned that the business entity tests produce a high risk score for your businesses, we should discuss why this is the case. Are they any changes which can be made to the way your business operates which would make it less likely to be caught by IR35?

Dragonfly Consulting Tax case

The Dragonfly Consulting tax case established that the Tax Inspector can question the relationship between the end client and the worker, and if he decides that it is really one of employee and employer, in spite of all the various contracts, agency and service company in place, the extra tax due will fall on the worker’s own company.

The case demonstrated how the contract between the agency and the final client can knock for six any clever contract drawn up between the worker’s company and the agency. HMRC have proved that the entire stream of contracts needs to be considered and compared to what actually happens on the ground.

For example, the agency may agree to include a substitution clause in the contract with the worker’s company, but if this clause is not reflected in the contract with the final client it is ineffective. Even if a substitution clause does exist in the agency/client contract it will be ignored if the client tells HMRC or the tax tribunal that it would never actually accept a substitute for the worker.

To ensure your working arrangement with your client will stand up to challenge by HMRC you need to see all the contracts in the chain and be sure your client would agree to accepting a substitute if asked to.

It should be noted that in a recent case with judgement issued on 5 Jan 2011 (MBF Design Services Ltd) where a hypothetical contract was sought to be created to examine the relationship between the end client and the worker, the three key status tests of personal service, control and mutuality of obligations led to the decision in favour of the taxpayer. It was particularly noted that the ability to cancel the contract without notice and the fact that contractors were sent home without pay whilst employees had to remain on site meant there was a lack of mutuality of obligations.

Managed Service Companies

A Managed Service Company differs to a Personal Service Company in that there is normally a scheme provider that operates the company on behalf of the worker. Often these are known as “composite companies” with perhaps 10 to 20 workers being put through the same company or “managed personal service companies” with one for each worker but managed by the scheme provider on behalf of the worker.

From 2007/08 the Government has taken action to tackle Managed Service Company (MSC) schemes which are used to disguise arrangements that should be treated as employment arrangements for tax purposes and are used to avoid paying the employed levels of tax and national insurance.

Income that is received by workers through MSCs is now subject to employment levels of tax and NI. It is the responsibility of the MSC to operate PAYE and deduct the necessary tax and NI on the income.

In addition, the rules for tax relief on travel expenses are the same as for other employed workers.

Whilst in many cases these companies should be caught by the IR35 legislation, they did not follow the legislation and when caught they simply liquidate as they have no assets and start up another company the next day. To stop MSCs avoiding payment of these taxes, recovery of underpaid taxes and NICs will be possible from appropriate third parties, principally those behind the company operating such schemes including directors, shadow directors and connected or controlling parties.

These individuals will also be easier to catch as there will be no need to consider the specific relationship between each individual worker and the end client which was proving too labour intensive for HMRC.

The IR35 intermediaries legislation remains in place for personal service companies where the worker operates the company himself. The MSC rules are not targeted at these companies.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Categories: General, Limited Company

The meaning of goodwill for a business and CGT purposes is complex.

The term ‘goodwill’ is rarely mentioned in legislation and there is no definition of ‘goodwill’ for the purposes of Capital Gains legislation. In fact, most definitions of goodwill are derived from case law.

At its simplest you could describe goodwill as the ‘extra’ value of a business over and above its tangible assets. In the vast majority of cases when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of putting a monetary value on the business’s reputation and customer relationships.

Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

‘Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.’

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Here I provide you with an overview of the information to provide to your accountant (me) to enable completion of your end of year accounts. 

Every business is different, and you should discuss your own bookkeeping requirement with me. Between us we can decide what you can prepare for me and agree a time schedule for when you will provide the records and for when I will have your accounts ready for discussion. 

Basic ways in which you may find you can help me…

·         Adding up and balancing your books such as cross casting of column totals

·         analysing your payments and receipts

·         filing your invoices in sensible system so that relevant invoices can be easily found 

If you’re feeling more adventurous, you can also assist by

·         preparing a bank reconciliation that reconciles the balance on your bank statement to that derived from your records after adjusting for unpresented receipts and payments

·         using control accounts for key nominal accounts such as debtors and creditors that reconcile to your year end list of debtors and creditors 

By using reconciliations and control accounts on a regular basis during the year, you help to ensure there are no errors in the records. 

Records to provide to me

Not every business will have all of the following records but if you do, you should provide them to me covering the year (plus one month after)… 

·         Access to your Cloud Accounting records.

·         Your cash book if you have one

·         Petty cash records.

·         Sales and purchase day books if operated.

·         Any ledgers that you keep.

·         Bank statements covering the whole financial year for all business accounts.

·         Purchase invoices.

·         Sales invoices.

·         Cheque books and paying in stubs if used.

·         Copies of VAT returns covering the year together with any workings.

·         Your payroll records for the year together with details of PAYE calculations for payments to HMRC.

·         Copies of any new loan or HP agreements taken out during the year.

·         Details of any business income or expenditure that didn’t go through your business bank account.

·         Anything else you feel may be relevant – if in doubt, include it. 

Schedules to provide to me 

In addition, the following schedules will assist me in completing your end of year accounts. I can prepare these myself but if you wish to do so, it would reduce the time I spend preparing your accounts… 

·         A list of fixed asset additions with copy purchase invoices provided.

·         A year end stock list. This should be at the lower of cost and net realisable value.

·         Details of work in progress at the year end.

·         A list of debtors at the year end, their age and an indication of any that unlikely to pay

·         Sales ledger control account reconciliation.

·         Reconciliations for all bank and cash accounts.

·         A list of trade creditors at the year end and their age.

·         Purchase ledger control account reconciliation.

·         Details of PAYE owed at the year end.

·         Details of VAT owed at the year end.

·         Schedules of key and tax sensitive profit and loss accounts such as repairs, sundry expenses, entertainment, etc. 

How I Can Help You 

I can help you avoid all of the above by moving you to online cloud accounting. There are many benefits to online accounting, and it also means I can work with you throughout the year, giving advice and providing reports when you need it most, not after the year end when it could be too late.   

Please contact us for further information 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Special tax rules apply to the construction industry and workers which are detailed in The Construction Industry Scheme (CIS).

The Construction Industry Scheme

CIS uses a verification system for contractors to confirm whether a subcontractor should be paid gross or net.

Construction Activities

The definition of construction activities is widely drawn and so most businesses working in construction will be caught by CIS. It applies to sole traders, partnerships and Limited Companies but not to private householders who are paying contractors.

Contractors are businesses that carry out “construction operations” as part of their business and subcontractors are those who carry out such work for the contractor, but it does not include employees of the contractor. Some businesses will be both a contractor and a subcontractor.

Registration

New subcontractors have to register with HMRC but as well as calling into the local office it can also be done by phone or online if HMRC already know about you.

The subcontractor will be informed whether they can receive payments gross or net. To qualify to be paid gross a subcontractor must pass the Business Turnover and Compliance Tests. In summary these are…

  • It is run in the UK with a bank account;
  • It has a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and companies);
  • It has complied with all its tax obligations to date.

Verification

When a contractor engages a subcontractor who has not worked for them in the current or previous two tax years, they must get the name, unique taxpayer reference and national insurance number of the subcontractor in the case of an individual and contact HMRC to ascertain if the subcontractor should be paid gross or net, this is called verification. The contractor must also decide the contract proposed is one of self-employment, or whether the worker should be treated as an employee.

It is important to ensure that the status of the worker in terms of self-employment or employment is correctly established. This is a question of fact and not what the parties want it to be. The CIS scheme only applies to self-employment situations, but because a subcontractor is registered under the CIS it does not mean that he should be treated as self-employed for every job he does.

If the subcontractor is registered with HMRC the contractor will be told to pay the subcontractor gross or to apply the standard rate of deduction (20%) to all payments to the subcontractor. If the subcontractor has not registered with HMRC, a higher rate of tax deduction of 30% will be required.

The deductions count as payments on account of the eventual tax and Class 4 NI liability of the subcontractor. If the subcontractor has an accounting period ending early in the tax year, for example 31 Dec they can apply for an in-year repayment where the deductions already taken will exceed the total tax and Class 4 NI bill for the year. Arrangements exist for subcontractors that are companies to be able to set-off deductions against any PAYE, NIC and CIS deductions that they owe.

Contractors will be given a verification number for the subcontractor, or group of subcontractors, that is matched to the HMRC records in one query or phone call. This number is for the contractor’s reference only.

For each subcontractor that cannot be matched either because they are not registered or the wrong details have been given, a special verification number will be given for each unmatched subcontractor and this number must be recorded on the subcontractor’s payment statement. This will be needed to get refunds later.

Records

Payment Statement – Contractors must give a statement to each subcontractor that a deduction has been made from his payments, either done once a month to cover all payments or for each payment, and this must be issued within 14 days of the end of the month in which the payment was made. Statements can be in any format as long as they contain the necessary information. They are not required for subcontractors who are paid gross.

Monthly Return – The contractor will submit a monthly return to HMRC that shows all subcontractors that payments have been made to, the amount paid and where net payments are made, the amount of materials and deductions. The return must be filed with HMRC within 14 days of the month end, with nil returns made if there were no payments in the month.

There are penalties for filing returns late.

There is no annual return required under the new CIS.

Real Time Information (RTI)

Under the rules of RTI you cannot process subcontractors through PAYE. RTI does not change how CIS is reported. Employers will still file monthly returns (CIS300). But for Limited Companies acting as a subcontractor, on the Employer Payment Summary (EPS) each month you are required to declare ‘CIS deductions suffered’, to offset any liability due to HMRC.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

When is a car a pool car?

Rather than allocating specific cars to particular employees, some employers find it preferable to operate a carpool and have a number of cars available for use by employees when they need to undertake a business journey.

From a tax perspective, provided that certain conditions are met, no benefit in kind tax charge will arise where an employee makes use of a pool car.

The conditions

There are five conditions that must be met for a car to be treated as a pool car for tax purposes.

1. The car is made available to, and actually is used by, more than one employee.

2.In each case, it is made available by reason of the employee’s employment.

3.The car is not ordinarily used by one employee to the exclusion of the others.

4.In each case, any private use by the employee is merely incidental to the employee’s business use of the car.

5. The car is not normally kept overnight on or in the vicinity of any of the residential premises where any of the employees was residing (subject to an exception if kept overnight on premises occupied by the person making the cars available).

The tax exemption only applies if all five conditions are met.

When private use is ‘merely incidental’

To meet the definition of a pool car, the car should only be available for genuine business use. However, in deciding whether this test is met, private use is disregarded as long as that private use is ‘merely incidental’ to the employee’s business use of the car. HMRC regard the test as being a qualitative rather than a quantitative test. It does not refer to the actual private mileage, rather the private element in the context of the journey as a whole.

For example, if an employee is required to make a long business journey and takes the car home the previous evening in order to get an early start, the private use comprising the journey from work to home the previous evening would be regarded as ‘merely incidental’. The car is taken home to facilitate the business journey the following day.

Kept overnight at employee’s homes – the 60% test

For a car to meet the definition of a pool car, it must not normally be kept overnight at employees’ homes. In deciding whether this test is met, HMRC apply a rule of thumb – as long as the total number of nights on which a car is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period, HMRC accept that the condition is met.

When a benefit in kind tax charge arises

If the car does not meet the definition of a pool car and is made available for the employee’s private use, a tax charge will arise under the company car tax rules.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Categories: General, Limited Company

Can we deduct entertaining expenses?

The tax rules on the deductibility of entertaining expenses are harsh and often misunderstood – the fact that the expenditure is incurred for businesses purposes does not make it deductible.

Subject to certain limited exceptions, no deduction is allowed for business entertaining and gifts in calculating taxable profits.

What counts as business entertainment?

Business entertainment is the provision of free or subsidised hospitality or entertainment. Hospitality includes the provision of food drink or similar benefits for which no payment is made by the recipient. It also extends to subsidised hospitality whereby the charge made to the recipient does not cover the costs of providing the entertainment or hospitality.

Examples of business entertaining would include taking a supplier to lunch, taking customers to a day at the races, or inviting them to a box at rugby match, and suchlike. The definition is wide.

Exception 1: Entertaining employees

One of the main exceptions to the general rule that entertaining expenses cannot be deducted is in relation to staff entertainment. A deduction is allowed for the cost of entertaining staff, as long as the costs are incurred wholly and exclusively for the purposes of the trade and the entertaining of the staff is not merely incidental to the entertaining of customers. So, for example, a company would be able to deduct the cost of the staff Christmas party in calculating its taxable profits. However, if a company takes customers to Wimbledon, the fact that a number of employees also attended is not enough to guarantee a deduction as the entertaining provided for the employees is incidental to that for customers.It should be noted that unless an exemption is in point, employees may suffer a benefit in kind tax charge on any entertainment provided.

Exception 2: Normal course of trade

The disallowance does not apply where the business is that of providing hospitality, and as such a deduction is allowed for the costs incurred in providing that hospitality as long as they are incurred wholly and exclusively for the purposes of the business. Businesses such as restaurants and events management companies would fall into this category.

Exception 3: Contractual obligation to provide entertainment

Where entertainment is provided under a contractual obligation, this is not treated as business entertainment and a deduction is allowed for the cost. A common example would be where hospitality is provided as part of a package. However, the business should be able to demonstrate that they have received a full return for the entertainment provided.

Exception 4: Small gifts carrying an advert

The provision of business gifts is treated as business entertaining with the result that a deduction for the costs is not generally allowed. However, there is an exception for gifts costing not more than £50 per year per recipient which bear a conspicuous advert for the business. An example of a deductible gift would be a diary or a water bottle featuring an advert for the business.

Remember…Just because entertaining is incurred for business purposes does not mean that it is allowable and business entertaining needs to be added back in the corporation tax computation.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Self Employed

The meaning of goodwill for a business and CGT purposes is complex.

The term ‘goodwill’ is rarely mentioned in legislation and there is no definition of ‘goodwill’ for the purposes of Capital Gains legislation. In fact, most definitions of goodwill are derived from case law.

At its simplest you could describe goodwill as the ‘extra’ value of a business over and above its tangible assets. In the vast majority of cases when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of putting a monetary value on the business’s reputation and customer relationships.

Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

‘Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.’

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Here I provide you with an overview of the information to provide to your accountant (me) to enable completion of your end of year accounts. 

Every business is different, and you should discuss your own bookkeeping requirement with me. Between us we can decide what you can prepare for me and agree a time schedule for when you will provide the records and for when I will have your accounts ready for discussion. 

Basic ways in which you may find you can help me…

·         Adding up and balancing your books such as cross casting of column totals

·         analysing your payments and receipts

·         filing your invoices in sensible system so that relevant invoices can be easily found 

If you’re feeling more adventurous, you can also assist by

·         preparing a bank reconciliation that reconciles the balance on your bank statement to that derived from your records after adjusting for unpresented receipts and payments

·         using control accounts for key nominal accounts such as debtors and creditors that reconcile to your year end list of debtors and creditors 

By using reconciliations and control accounts on a regular basis during the year, you help to ensure there are no errors in the records. 

Records to provide to me

Not every business will have all of the following records but if you do, you should provide them to me covering the year (plus one month after)… 

·         Access to your Cloud Accounting records.

·         Your cash book if you have one

·         Petty cash records.

·         Sales and purchase day books if operated.

·         Any ledgers that you keep.

·         Bank statements covering the whole financial year for all business accounts.

·         Purchase invoices.

·         Sales invoices.

·         Cheque books and paying in stubs if used.

·         Copies of VAT returns covering the year together with any workings.

·         Your payroll records for the year together with details of PAYE calculations for payments to HMRC.

·         Copies of any new loan or HP agreements taken out during the year.

·         Details of any business income or expenditure that didn’t go through your business bank account.

·         Anything else you feel may be relevant – if in doubt, include it. 

Schedules to provide to me 

In addition, the following schedules will assist me in completing your end of year accounts. I can prepare these myself but if you wish to do so, it would reduce the time I spend preparing your accounts… 

·         A list of fixed asset additions with copy purchase invoices provided.

·         A year end stock list. This should be at the lower of cost and net realisable value.

·         Details of work in progress at the year end.

·         A list of debtors at the year end, their age and an indication of any that unlikely to pay

·         Sales ledger control account reconciliation.

·         Reconciliations for all bank and cash accounts.

·         A list of trade creditors at the year end and their age.

·         Purchase ledger control account reconciliation.

·         Details of PAYE owed at the year end.

·         Details of VAT owed at the year end.

·         Schedules of key and tax sensitive profit and loss accounts such as repairs, sundry expenses, entertainment, etc. 

How I Can Help You 

I can help you avoid all of the above by moving you to online cloud accounting. There are many benefits to online accounting, and it also means I can work with you throughout the year, giving advice and providing reports when you need it most, not after the year end when it could be too late.   

Please contact us for further information 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Special tax rules apply to the construction industry and workers which are detailed in The Construction Industry Scheme (CIS).

The Construction Industry Scheme

CIS uses a verification system for contractors to confirm whether a subcontractor should be paid gross or net.

Construction Activities

The definition of construction activities is widely drawn and so most businesses working in construction will be caught by CIS. It applies to sole traders, partnerships and Limited Companies but not to private householders who are paying contractors.

Contractors are businesses that carry out “construction operations” as part of their business and subcontractors are those who carry out such work for the contractor, but it does not include employees of the contractor. Some businesses will be both a contractor and a subcontractor.

Registration

New subcontractors have to register with HMRC but as well as calling into the local office it can also be done by phone or online if HMRC already know about you.

The subcontractor will be informed whether they can receive payments gross or net. To qualify to be paid gross a subcontractor must pass the Business Turnover and Compliance Tests. In summary these are…

  • It is run in the UK with a bank account;
  • It has a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and companies);
  • It has complied with all its tax obligations to date.

Verification

When a contractor engages a subcontractor who has not worked for them in the current or previous two tax years, they must get the name, unique taxpayer reference and national insurance number of the subcontractor in the case of an individual and contact HMRC to ascertain if the subcontractor should be paid gross or net, this is called verification. The contractor must also decide the contract proposed is one of self-employment, or whether the worker should be treated as an employee.

It is important to ensure that the status of the worker in terms of self-employment or employment is correctly established. This is a question of fact and not what the parties want it to be. The CIS scheme only applies to self-employment situations, but because a subcontractor is registered under the CIS it does not mean that he should be treated as self-employed for every job he does.

If the subcontractor is registered with HMRC the contractor will be told to pay the subcontractor gross or to apply the standard rate of deduction (20%) to all payments to the subcontractor. If the subcontractor has not registered with HMRC, a higher rate of tax deduction of 30% will be required.

The deductions count as payments on account of the eventual tax and Class 4 NI liability of the subcontractor. If the subcontractor has an accounting period ending early in the tax year, for example 31 Dec they can apply for an in-year repayment where the deductions already taken will exceed the total tax and Class 4 NI bill for the year. Arrangements exist for subcontractors that are companies to be able to set-off deductions against any PAYE, NIC and CIS deductions that they owe.

Contractors will be given a verification number for the subcontractor, or group of subcontractors, that is matched to the HMRC records in one query or phone call. This number is for the contractor’s reference only.

For each subcontractor that cannot be matched either because they are not registered or the wrong details have been given, a special verification number will be given for each unmatched subcontractor and this number must be recorded on the subcontractor’s payment statement. This will be needed to get refunds later.

Records

Payment Statement – Contractors must give a statement to each subcontractor that a deduction has been made from his payments, either done once a month to cover all payments or for each payment, and this must be issued within 14 days of the end of the month in which the payment was made. Statements can be in any format as long as they contain the necessary information. They are not required for subcontractors who are paid gross.

Monthly Return – The contractor will submit a monthly return to HMRC that shows all subcontractors that payments have been made to, the amount paid and where net payments are made, the amount of materials and deductions. The return must be filed with HMRC within 14 days of the month end, with nil returns made if there were no payments in the month.

There are penalties for filing returns late.

There is no annual return required under the new CIS.

Real Time Information (RTI)

Under the rules of RTI you cannot process subcontractors through PAYE. RTI does not change how CIS is reported. Employers will still file monthly returns (CIS300). But for Limited Companies acting as a subcontractor, on the Employer Payment Summary (EPS) each month you are required to declare ‘CIS deductions suffered’, to offset any liability due to HMRC.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Can we deduct entertaining expenses?

The tax rules on the deductibility of entertaining expenses are harsh and often misunderstood – the fact that the expenditure is incurred for businesses purposes does not make it deductible.

Subject to certain limited exceptions, no deduction is allowed for business entertaining and gifts in calculating taxable profits.

What counts as business entertainment?

Business entertainment is the provision of free or subsidised hospitality or entertainment. Hospitality includes the provision of food drink or similar benefits for which no payment is made by the recipient. It also extends to subsidised hospitality whereby the charge made to the recipient does not cover the costs of providing the entertainment or hospitality.

Examples of business entertaining would include taking a supplier to lunch, taking customers to a day at the races, or inviting them to a box at rugby match, and suchlike. The definition is wide.

Exception 1: Entertaining employees

One of the main exceptions to the general rule that entertaining expenses cannot be deducted is in relation to staff entertainment. A deduction is allowed for the cost of entertaining staff, as long as the costs are incurred wholly and exclusively for the purposes of the trade and the entertaining of the staff is not merely incidental to the entertaining of customers. So, for example, a company would be able to deduct the cost of the staff Christmas party in calculating its taxable profits. However, if a company takes customers to Wimbledon, the fact that a number of employees also attended is not enough to guarantee a deduction as the entertaining provided for the employees is incidental to that for customers.It should be noted that unless an exemption is in point, employees may suffer a benefit in kind tax charge on any entertainment provided.

Exception 2: Normal course of trade

The disallowance does not apply where the business is that of providing hospitality, and as such a deduction is allowed for the costs incurred in providing that hospitality as long as they are incurred wholly and exclusively for the purposes of the business. Businesses such as restaurants and events management companies would fall into this category.

Exception 3: Contractual obligation to provide entertainment

Where entertainment is provided under a contractual obligation, this is not treated as business entertainment and a deduction is allowed for the cost. A common example would be where hospitality is provided as part of a package. However, the business should be able to demonstrate that they have received a full return for the entertainment provided.

Exception 4: Small gifts carrying an advert

The provision of business gifts is treated as business entertaining with the result that a deduction for the costs is not generally allowed. However, there is an exception for gifts costing not more than £50 per year per recipient which bear a conspicuous advert for the business. An example of a deductible gift would be a diary or a water bottle featuring an advert for the business.

Remember…Just because entertaining is incurred for business purposes does not mean that it is allowable and business entertaining needs to be added back in the corporation tax computation.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

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