Every day contractors ask us questions about tax and accounts, things to do with their limited company, or just general business questions. This is what we tell them.

Taxation FAQ's

View all FAQ's

Q: When do I need to register for VAT?

Answer:

VAT registration is mandatory for companies who have made taxable sales in the last 12 months above the current VAT registration threshold amount. For the 2014/15 tax year this is £81,000. HMRC usually increases the threshold by around £1,000 each year so for the 2015/16 tax year the threshold is likely to be higher. Even if your sales are unlikely to reach this level you can still voluntarily register your company for VAT. Many contractors choose to do this as it can offer several advantages as claiming back VAT on invoices they receive. If you decide not to register but you believe you’ll exceed the threshold in the near future (if you win a huge contract for example) you should register as soon as possible to remain within HMRC rules.

How to register for VAT

You need to apply directly to HMRC to register your company for VAT. This can be done online using their website or by post. You can do this yourself or your InTouch accountant can do this for you on your behalf.

Quarterly VAT returns at InTouch

At InTouch Acounting we offer Quarterly VAT return administration as a standard part of our comprehensive Monthly Service package (£92 + VAT per month). Contact us to find out more about our services and how we can help take the stress out of running your business.

Q: What is the Flat Rate VAT Scheme?

Answer:

The Flat Rate Scheme (FRS) was introduced to make filing a VAT return easier for businesses where turnover is less than £150,000. It works by allowing the business to simply pay HMRC a flat percentage of their gross turnover in VAT rather than calculate the difference between VAT charged and VAT reclaimed.

The percentage that has to be paid over to HMRC varies based upon the exact nature of the business activity and can range between 8 and 14.5%. Most Contractors providing consultancy services would fall in the 14 to 14.5% category.

The company would still charge clients 20% but pay less over to HMRC. For example:

  • Invoice for £1,000 + VAT = £1,200 charged to the client
  • Client pays you £1,200
  • You pay HMRC (say) 14.5% of the gross value = £174
  • You keep the difference of £26

This scheme often results in extra profits for contractors, although you need to be aware that it does not allow for reclaiming of VAT on purchases unless the item is a capital asset costing over £2,000.

The scheme may not therefore be suitable for contractors with considerable purchases, or contractors making zero-rated sales (on which the percentage would still be payable to HMRC, even though no VAT was charged).

The percentage payable in VAT is determined by matching the company activity against a list provided by HMRC. Potentially making registration even more attractive, there is a 1% discount in the first year of VAT registration.

Q: How does Corporation Tax affect me?

Answer:

All limited companies that make a taxable profit are liable for Corporation Tax – this of course includes those set up for individual contractors to use.

For each accounting period profits are calculated for tax purposes and a Corporation Tax return (CT600) is submitted to HMRC.

If your company has taxable profits of up to £1.5 million, or less if you have associated companies, you must pay your Corporation Tax by the normal due date which is nine months and one day after the end of your Corporation Tax accounting period. For example, if your company’s accounting period ends on 31 May, your Corporation Tax payment is due on or before 1 March the following year.  If you pay early HMRC will pay interest based upon the difference between the payment date and the due date.

A Corporation Tax accounting period can only last for a maximum 12 months, so you may find that you have two CT600 forms in any accounting period that is longer.  This is very common in your first year, where your first accounts may cover 13 months.

The rate of tax paid does vary between large and small companies but most personal service companies will suffer the small company rate, which for the financial year to 31 March 2015 is 20%. The maximum taxable profit a company can earn in a 12 Month period before it pays more than the small company rate is £300,000.  That limit is apportioned across associated companies, so be aware that companies under common control may suffer higher tax at a lower level of profit, and for shorter accounting periods.

The large company rate of Corporation Tax is 21% for the year ended 31 March 2014 and 21% for the year ended 31 March 2015, and applies to annual profits greater than £1,500,000.  This is unlikely to apply to many contractors. From 1 April 2015 the small profits rate will be unified with the main rate, so there will be only one Corporation Tax rate for non-ring fence profits – set at 20%.

Q: How does National Insurance work for a contractor running a limited company?

Answer:

Contractors running their own limited company pay two types of National Insurance (NI) through the business. Part of it is an employer liability and part of it is the employee’s (contractor’s) liability

Where an individual receives earnings and benefits from a limited company then the company has to pay Class 1 National Insurance on the earnings and Class1A on the benefits.

No contributions are payable on the first £153 per week (2014/15) but thereafter the employer pays at a rate of 13.8% without limit. The same rate applies to relevant benefits in kind under Class 1A.  In the 2014/15 year, a company may be entitled to claim the Employer Allowance enabling the first £2,000 of employer national insurance not due to be payable to HMRC.

An employee also has to pay National Insurance contributions on their earnings also under Class 1. The same exemption applies to the first £153 per week and then the rate is at 12% on the band until earnings reach £805 per week.

For amounts in excess of £805 per week the employee pays a reduced rate of 2% without an upper limit.

Q: What has to be entered on a Self Assessment Tax Return?

Answer:

Directors may have other personal income from investments, savings or other businesses, which have to be entered on a Self Assessment Tax Return (SATR). For contractors and freelancers using limited companies to trade, the most common form of income tax due apart from PAYE on their salary/wages is on dividends they award themselves.

Each year SATR have to be filed with HMRC no later than 31 January (in the calendar year following the end of the tax year). Payment of any tax due is made in two instalments at the end of January and July starting in the tax year.

Q: What is income tax and PAYE?

Answer:

Individuals pay Income tax based upon their earnings including benefits in tax years. Income tax normally comes from earnings as an employee and is paid to you after personal tax has been deducted. Tax deducted from your earnings is called PAYE (Pay as you earn).

Q: What is the tax on dividends

Answer:

Dividends paid from a company are deemed to be paid net of 10% tax, so if you take £5,000 your tax return will show you received £5,555 and paid tax of £555 (even though you haven’t actually paid anything you retain the benefit of the credit).

As dividends are taxed at 10% up to the higher rate band, the tax that is due has already been paid, so nothing further is due. When you cross into higher rates the tax due increases to 32.5%, less the 10% tax credit, so 22.5% – this works out at 25% of the money you actually received. This additional tax, if any, is calculated and paid for on your tax return.

From 06 April 2013 there is a new additional rate of 37.5% on dividends paid when total income is in excess of £150,000.

Q: As a Limited Company what are the tax requirements?

Answer:

From the company’s point of view it will probably have to submit VAT returns, and account for PAYE, National Insurance and Corporation Tax on profits. Individuals have to submit personal tax returns under self assessment.

VAT

If a company is VAT registered it must charge VAT on invoices it issues. The client then pays the total invoice value, and your limited company pays the VAT element over to HMRC each quarter. The amount payable can be reduced by any VAT your company has paid on business purchases, for example on stationery, telephone bills.

HMRC allow certain companies to register for VAT under the Flat Rate Scheme. This enables the company to simply pay a pre agreed (“flat”) percentage of turnover as VAT rather than calculate the actual amount due on sales less the amount repayable on purchases. The advantage of this is that it’s easier, and the company will make a small profit.

We will advise you on the VAT scheme appropriate to you, and the amounts that are due to be paid. It is then your responsibility to make the actual payment.

PAYE

This is paid each quarter according to the tax and NI deducted from any wages paid. We will inform you of the amounts due in advance, and you simply then make the payment.

Corporation Tax

Corporation Tax is paid 9 months after your company year end, and is based on the profits.

Personal Tax

Personal Tax  this is payable each January and July, as per your self assessment tax return. The amount due depends on the value of dividends, rental income, bank interest, capital gains and anything else not taxed at source.

Q: What is Surplus Cash?

Answer:

Surplus cash is the remaining cash balance after your business expenses, salary, corporation tax and  declared dividends are deducted from your company income.  Be aware that the cash balance in the bank is not always the same as your surplus cash.  There maybe invoices that haven’t been paid or some business expenses or taxes that are still to be paid.

If you want to see what your surplus cash was last year-end, look at the Balance Sheet page of your accounts. At the bottom you’ll see a value for Profit and Loss.  For your current surplus cash speak to your contractor accountant who will advise you accordingly.

 

Q: When do I need to register for VAT?

Answer:

VAT registration is mandatory for companies who have made taxable sales in the last 12 months above the current VAT registration threshold amount. For the 2014/15 tax year this is £81,000. HMRC usually increases the threshold by around £1,000 each year so for the 2015/16 tax year the threshold is likely to be higher. Even if your sales are unlikely to reach this level you can still voluntarily register your company for VAT. Many contractors choose to do this as it can offer several advantages as claiming back VAT on invoices they receive. If you decide not to register but you believe you’ll exceed the threshold in the near future (if you win a huge contract for example) you should register as soon as possible to remain within HMRC rules.

How to register for VAT

You need to apply directly to HMRC to register your company for VAT. This can be done online using their website or by post. You can do this yourself or your InTouch accountant can do this for you on your behalf.

Quarterly VAT returns at InTouch

At InTouch Acounting we offer Quarterly VAT return administration as a standard part of our comprehensive Monthly Service package (£92 + VAT per month). Contact us to find out more about our services and how we can help take the stress out of running your business.

Q: How is an IR35 case decided?

Answer:

It’s easiest to use an analogy to show this works, for example a builder. If you ask a builder to come and build a fence for you agree with him what the end result will be but it’s entirely up to him how he does it, you don’t tell him how to build the fence. He is subject to certain constraints such as where you want it built, and he might need to work certain hours as you wouldn’t want him to turn up at 2am, but you don’t control how he does what he does. It’s also entirely possible that on day 2 his building partner turns up and takes over, which you don’t care about as long as the work gets done and the replacement person is equally as good. You also don’t care if he brings in someone to help him, as long as he’s not charging you extra. Once the fence is built the builder has no expectation that you’re going to find him something else to do, he can turn down further work if you do offer it, and you have no responsibility to find him anything to do ever again. If he does a bad job you can ask him to correct it free of charge or take legal action, and he will no doubt have insurance in place for just that reason. You may delay paying him, or refuse to pay until he provides an invoice.

An employee turns up at work each day and you can tell them what to do, how to do it, when to do it and where to do it. They cannot send a replacement person. They expect that when they finish one task you’ll find them something else to do, and in turn you expect them to carry on working on a new task when they finish the old one. They have performance reviews, sick pay, holiday pay and potentially pension or bonus schemes. They go to staff events, staff training, park in the staff car park and their name is on the internal contact list. They are very much ‘part and parcel’ of the company. If they make a mistake, they correct it in the employer’s time, and there’s rarely any suggestion that they could be sued (unless they are guilty of fraud).

This is obviously quite simplistic, but it’s how IR35 cases are decided. HMRC (or the Courts) will look at where you fit in between those two extreme examples, and if you’re deemed to be an employee then you’ll have tax and NI to pay on what you should have taken as wages (which is 95% of your income).

Q: How will I know if my contract is within IR35?

Answer:

IR35 itself depends on several factors, and this isn’t just the written contract itself but the theoretical contract that exists between you and the end client.  It’s therefore not possible to avoid IR35 purely by having a well written contract, as it would simply be dismissed as a sham if it’s not realistic.

 

1.    Personal Service - if the contract requires you specifically then it is a contract of service and therefore a pointer toward employment.  If you can send a substitute then it is a contract for services which cannot then be seen as employment.  This is often deemed the strongest argument against IR35, providing it is a genuine right and not merely an ability to offer a substitute.

 

2.    Control - this covers how, when and where the work is carried out.  If you have reasonable autonomy over the work to be done then you would be more likely to be seen as a contractor.  If you are told what to do and how to do it, and are expected to work set times for a set fee, it is more indicative of employment.

 

3.    Lack of Mutuality of Obligation (MOO) - this relates to whether you are obliged to carry out the work and whether the client is obliged to offer you work, and also whether you are obliged to carry out work outside the scope of the contract.  This applies not only after the current contract finishes, but within the current contract itself.  MOO is the most difficult one of the three factors to prove, although the MBF Design case in January 2011 was won by the taxpayer with heavy emphasis on this point.

Q: Can I claim my Christmas Party Expenses?

Answer:

Yes you can. HRMC provides a tax exemption, providing it is an annual reoccurring event. The maximum allowable spend per head is £150. If you would like partners of employees to be invited the allowable spend increases by a further £150 for each additional individual. More Information can be found in the Christmas Party Expenses Blog.

Q: What business expenses can you claim for?

Answer:

Contracting through your own limited company allows each of the company’s employees to claim reasonable expenses.

A company can claim from a long list of expenses, but generally they must be “wholly, exclusively and necessarily for the purposes of the trade” in order to be allowable and you must have actually incurred the expense. Any expenses that have a personal benefit or can be seen to have dual purpose will often result in a benefit in kind charge, unless such use can be argued to be incidental.

The rules surrounding expenses are often subject to qualifying conditions so it is difficult to give a definitive list. The following general list should not be taken to be exhaustive and no responsibility is accepted for the eventual tax status of any claim.

  • Employee wages — employees include any directors
  • Contributions into employee private pension plans
  • Up to £55 a week toward registered childcare — but be careful as this may affect any tax credit claims
  • Business stationery and postage costs
  • Subscriptions to professional bodies
  • Technical books and journals required
  • Business insurances
  • Training costs incurred to upgrade current skills
  • Use of home — a flat allowance of £4 a week can be claimed without receipts
  • Accountancy fees
  • Mileage, travel and subsistence
  • Mobile phone bills if the contract is in the company name — if not, only identifiable business calls
  • A broadband connection if private use is not significant and cannot be identified
  • A computer, if your work requires one
  • An eye test if you are required to use a computer screen
  • Entertaining staff — up to £150 per head for an annual event such as a Christmas Party
  • Company bank charges and interest

Q: What can you claim for when using your home as an office?

Answer:

Basic claim

If you are purely using your home to carry out general administration tasks and do not have a specific room set aside for business use, the HMRC approved rate of £4 is the most suitable. You do not have to keep any records to back up your claims and any claim is unlikely to be challenged by HMRC.

Apportionment of costs

If you work from home on a fee earning basis and have a separate room set aside for the company, you could make a claim based upon the space used and the actual bills incurred. You must be able to show logical calculations and keep all invoices relating to the claim for the standard 7 years.

The following can be used to calculate the total cost:

  • Rent
  • Council Tax
  • Mortgage Interest
  • Home insurance
  • Internet line rental
  • Telephone line rental and call costs
  • Water rates
  • Light and heating costs

The next step is to calculate the total floor space within your house, ignoring hallways, the bathroom and the kitchen and determine the proportion of the total space that is used by the business.

This amount should finally be adjusted for the actual hours in use. For example if you use the room for 8 hours out of a 24hour day the value should be reduced to 1/3 of the total (24 divided by 8).

We advise that you avoid claiming 100% business use of any space within your home, as it may have implications from a Capital Gains Tax point of view.

Q: What is considered a reasonable mileage claim?

Answer:

HMRC issue guidance on what they consider to be the maximum “reasonable” rate of reimbursement and as a consequence any rate used to reimburse employees, that is lower than or equal to, HMRC’s statutory or recommended rate is not taxable as a benefit to the employee.

If the company provides the car but the employee pays for all fuel then fuel claims for business mileage can only be for the fuel itself and therefore will not include an element for other costs. Where the employee uses his own vehicle the allowable charge can include elements for wear and tear, tyres, and other running costs.

HMRC offer advisory guidance for fuel only rates of between 14p and 24p for petrol and 12p to 17p for diesel (effective from 1 June 2014). For employees own cars 45p for the first 10,000 miles and 25p per mile thereafter are the statutory maximum rates

Q: What mileage can I claim?

Answer:

Contracting through your own limited company gives you the opportunity to reduce your tax burden by allowing you to claim travel costs for your work related travel, subject to the rules below.

Employees are entitled to be reimbursed by their employers for business mileage costs that the employees have incurred personally. These reimbursed costs are deductible as expenses in the company. Provided the claim is not unreasonably high reimbursement is not taxable in the hands of the employee.

Q: What is a ‘benefit in kind’?

Answer:

As a contractor who is a director and/or employee of their own company it is especially important for you to keep a clear line between personal and business expenses, many of which can be paid for by the limited company, but as a consequence of the company paying private expenses they will be treated as benefits in kind.

The term “benefit in kind” refers to the value of any extra benefits an employee enjoys by virtue of their employment. Common examples would include medical insurance, a company car, clothing (unless specialist protective clothing), computer equipment used privately and no/low interest loans.

The benefits and amounts are reported on a form P11D each year, with extra employer’s national insurance also being due. There is likely to be extra tax due from the employee that is disclosed on their Self Assessment Tax Return. Generally the taxable value is based upon the cost of providing the benefit, but for some benefits tables or formula are used to identify the “cost” of provision.

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