Drum roll please……Intouch runner up in 2015 Contractor UK Reader Awards

The Contractor UK Reader Awards

We are pleased to announce that we have won runner up in The Best Accountant (medium/small) category in the 2015 Contractor UK Reader Awards!

 

They are the only industry specific awards created by and voted for by the UK’s contracting community, which makes being placed extra special.

 

Paul Gough, MD of Intouch Accounting had the following to say upon hearing the news:

”We are delighted with the outcome of the 2015 Contractor UK Reader Awards. This award is so special to us, as it reflects the importance and high level of personal service and fantastic technology that our team provides to our clients. We extend our thanks to those who voted for us, this award is shared with you all.”

 

Another reason why Intouch clients are great!

We’d like to say a big THANK YOU to our clients who voted for us! Without you we wouldn’t have come second, so we’d very much like to thank you for the time you took to vote for us.

 

If you are serious about your contracting career and specialise in the IT sector, then the Contractor UK website is an excellent resource for industry news, insights and of course, their famous contractor forum, where you can talk to other contractors about anything and everything contractor related.

 

Recommend Intouch and receive £150 Amazon vouchers every time!

If you recommend a friend or colleague to Intouch Accounting, we’ll send you £150 of Amazon vouchers when they sign up. We’ll repeat this every time you refer us!

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

And the winner is…

And the winner is…

We recently ran a contractor insight survey with one of the UK’s top recruitment search engines for technology professionals.

 

The survey gave us a strong insight into the current contractor industry, from professionals who have either previously worked as contractors and are now back in permanent employment, or are currently contracting through their own Limited Company or using an Umbrella. The results from this survey will aid us in continuing to offer contractors the specialist advice, support and services they need in order to contract successfully.

 

Whilst we received lots of fantastic feedback, one lucky participant was picked at random to win £150 Amazon vouchers! We are pleased to announce that the winner is (drum roll please…..) Kulvinder Jhalli!

 

Kulvinder had this to say about winning, I’m so pleased to have won the vouchers! As a contractor it’s great to be able to give my feedback and feel like my opinions and experiences have been heard.

 

Congratulations to Kulvinder and a big thank you to everyone else who filled out our survey. We will be displaying the results in the upcoming weeks, so keep your eyes peeled.

 

Wishing you all a very pleasant and peaceful festive period and New Year!

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Can I get a mortgage as a contractor?

Can I get a mortgage as a contractor?

As a contractor, one of the most commonly asked questions is whether or not it is possible to secure a mortgage. Quite understandably, many contractors are unsure as to what their position is, given the fact that they’re not in permanent employment. It’s common knowledge that it’s becoming increasingly difficult to secure a mortgage following the Mortgage Market Review in 2014.

 

Yes, a contractor can secure a mortgage

As a very top-line answer; yes, of course a contractor can get a mortgage. Lenders aren’t there to prevent individuals from owning their home, simply to reduce risk associated with it. So it all comes down to taking the right route to ensure an application is made to a lender who understands contracting. In theory, so long as a contractor is able to provide two or three years’ worth of income details (for example, wage slips, accounts, dividends documentation) or, if operating as a sole trader, SA302s, it should be possible to secure a mortgage. However, unfortunately, it’s rarely that simple.

 

Many lenders do not understand contracting

One of the main problems in this area lies in that many lenders may not understand what a contractor is. Whether you’ve been contracting six months or six years, there ARE lenders out there who understand your situation and are happy to lend to you, so long as the standard criteria are met.

 

Different contractors operate in different ways

It’s important to understand that contractors can operate in different ways; sole traders or company directors primarily. With a company director for example, lenders will be looking at the combined salary and dividends drawn in a financial year, however this can cause problems for contractors who leave profits within the business. In this instance, it’s necessary to apply to a lender who will consider and take into account the company’s retained profits.

 

Many advisers are inexperienced
It is commonly seen, further to the above, that the majority of advisers in banks are inexperienced in dealing with anyone other than employed individuals, so when a contractor makes an application, they themselves are unsure as to what is and isn’t able to be assessed. This further backs up the justification for carrying out the research and finding a suitable lender who understands the trading style.

 

The bottom line is that a contractor will need at least one year’s accounts in order to be considered, however in reality, having two or three year’s accounts will make a larger number of lenders accessible.

 

Proving a steady income

So long as it can be proven that a steady income is earned and that, in the case of a director who pays a smaller wage and dividend, there are retained profits which can be taken into account, there’s no reason why a contractor should struggle to get approval on a mortgage. Our top tip here, however, is to speak with a specialist mortgage broker who fully understands the options available, has a track record of securing mortgages for contractors and that, as with all mortgage applications, the base criteria of affordability and the correct paperwork are met.

 

If you want any further information on getting a mortgage as a contractor, contact one of our team on 01202 375 562. Also, why not contact us to see how Intouch Accounting can help keep you compliant and maximise your income?

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Intouch teams up with IPSE to offer membership discount to clients

Intouch teams up with IPSE to offer membership discount to clients

Intouch Accounting is delighted to announce that from today, any client who starts a new membership with IPSE can benefit from a 10% discount, year on year.

 

Who is IPSE?

IPSE, the Association of Independent Professionals and the Self-Employed, is the largest membership body supporting contractors, freelancers and independent professionals. Their goal is to enable you to succeed in business.

 

IPSE membership

IPSE offers Standard and Plus memberships and now, with Intouch, you can get a 10% discount when you sign up for a new membership. You can pay through a monthly direct debit or a one off annual payment, it’s up to you, and the discount will apply for a long as you’re an IPSE member. As a member you will have access to a whole range of benefits to help protect and defend your business as well as discounts to help you save hundreds of pounds a year.

 

Don’t forget, you can claim membership costs as a business expense. Speak to your contractor accountant about how to do this.

 

A bit more detail

IPSE membership offers you peace of mind and money in your pocket so you can focus on running your business without worry. Highlights of what you’ll get include:

 

  • IPSE protect to help you out when you need extra support
  • thousands of consumer discounts on items such as Apple products, Dell and HP hardware, software, gym memberships, and cash back in many high street stores
  • IPSE representation as they lobby government and across industry to ensure contractors’ voices are heard
  • help planning for your future as well as negotiated rates for pensions, life assurance and private medical insurance
  • IPSE library so you can access all the resources you need
  • access to events, webinars, workhubs, online training and, if you’re a Plus member, 24/7 access to virtual Ashridge providing a wide range of online business resources to learn new skills and improve existing ones.

 

You can find out more about what you’ll get for your membership here, including a quick link to get you on your way to signing up or speak to a specialist membership advisor by calling 0208 8979970 or email intouch@ipse.co.uk.

 

Join IPSE today and take advantage of the 10% discount straight away.

 

What else?

If you’re already an Intouch client, once you’ve signed up for your IPSE membership, don’t forget to refer a friend and we’ll send you £150 Amazon vouchers if they sign up with us. Recommend another and we’ll do the same again! And again and again!

 

If you’re not already with Intouch, this is another great reason to speak to us today about joining. Give us a call on 01202 069 551 or email us and we’ll get back to you at a time to suit you!

 

* excludes renewals or upgrades to existing memberships

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Flat Rate VAT Scheme for contractors explained

Flat Rate VAT Scheme for contractors explained

Once a business reaches a turnover of £82,000 within a twelve month period, it is a legal requirement to register for VAT and subsequently, charge VAT (20%). Businesses who are registered for VAT must charge this to their clients and customers (most commonly at a rate of 20% but occasionally at either a reduced or zero rate), but may reclaim any VAT paid out on business-related goods and services (expenses).

 

For many contractors however, the level of VAT which can be reclaimed is minimal, often as a result of the ‘service’ offered being time, knowledge and experience. In most cases, the level of VAT paid to HMRC by a business equals the difference between VAT charged and VAT claimed back. However, under the Flat Rate Scheme, this is calculated at a fixed rate based on their activities.

 

Fixed Rate VAT

In short, the Flat Rate VAT Scheme means a contractor must pay only a fixed rate of VAT and may keep the difference. In this instance, under the Flat Rate VAT Scheme, the VAT paid out on goods and services cannot be reclaimed unless on certain capital purchases costing more than £2,000 (in one transaction).

 

Eligibility

To be eligible to join the Flat Rate VAT Scheme, the business must have turnover of  less than £150,000 per annum (excluding VAT). Whilst it is a legal requirement to register for VAT once turnover exceeds £82,000 in a twelve-month period, it is possible for businesses to voluntarily register when turnover is below this threshold.

 

How it works

Somewhat different to standard VAT accounting, on the Flat Rate Scheme, you’ll pay a percentage of turnover in VAT as opposed to paying the difference between the amount of VAT charged to clients, less the VAT reclaimed on purchases.

 

The Flat Rate VAT Scheme fixed rate does differ from industry to industry however, to offer a number of examples:

 

  • Computer and IT consultancy or data processing – 14.5%
  • General building or construction services – 9.5%
  • Management consultancy – 14%

 

Whilst this is by no means a comprehensive list of industries within which contractors are commonly seen, the above gives an idea as to how the rates can differ.

 

When calculating the VAT due, the fixed-rate percentage of the gross is taken. This is calculated on the value of sales (including VAT) multiplied by the percentage based on the business’ main activity. As an example, on a sale of £100 (which becomes £120 once VAT is added), an IT Consultant would pay £17.40 to HMRC (14.5% of £120).

During the first year of registration, businesses will  be entitled to an additional 1% deduction on the fixed rate.

 

What this means for contractors

As a contractor, it may often be the case that you have very few expenses in comparison to other businesses. In this respect, you may find that the scheme is perfect for you, although this can differ between individuals depending upon turnover and expenses claimed.

 

Benefits of the scheme lie not only in the fact that it is possible to profit from being VAT registered if there would be very little that could be claimed back under the standard scheme, but also that the admin associated with filling a VAT return is significantly reduced. As opposed to being required to submit information on the VAT charged out as well as putting together a claim back for VAT paid out, on the flat rate, the VAT payable can be calculated solely from knowing the revenue.

 

Whilst not for all businesses, if you’re turning over no more than £150,000 in a twelve month period and don’t find yourself claiming much back in the way of expenses, it’s something seriously worth considering; even if you’re not reaching the £82,000 threshold.

 

You can find out more information about the Flat Rate VAT Scheme on the Gov.uk website, or the VAT – Could you be paying too much? Flat Rate VAT? blog from Intouch Accounting. However, if you’d prefer a chat with one of our friendly and helpful advisers, why not give us a call today on 01202 375 562 or fill in our contact form and we’ll call you back.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Mr Newspaperman: detention for shoddy homework

One month then payroll

Dear Mr Newspaperman,

 

Your recent article in the Guardian reminds me of an essay I wrote at school in Year 10. I too failed to do proper research and thought that sensationalism would save me from the wrath of people who know better. Alas in Year 10 the consequences were that I got a grade D for some shoddy work. You on the other hand have caused needless criticism of hardworking freelancers and contractors, who for a number of important reasons choose to operate their businesses through small companies.

 

Claiming tax relief for business expenses as a flexible worker is not exploiting a loophole, any more than your using any form of tax relief is a loophole. For your article to be taken seriously it needs to be factually and emotionally accurate.

 

Ever since I was born Her Majesty’s Government has given me an annual Personal Allowance to be used before I start paying income taxes, but does my accepting or using this allowance in times of austerity make me a tax dodger? Am I a bad person for using my tax free allowances? So what is the difference?!

 

If you or the other hacks in offices along the corridor, can show me that you don’t claim tax relief on items you are perfectly entitled to, for the reasons they exist in the first place, I will send you £1.

 

The other thought that struck me is that rather than reporting a ‘scoop’ from an unnamed government source you are being used as puppet. A scaremonger designed to upset the economy and create unfair, unjustified, unwarranted, unhelpful, unnecessary and undefended animosity between different categories of worker. Well I am sorry to disappoint you. The UK contractor and freelancer workforce is stronger than that, they are bold and proud and like many others have placed their trust in Cameron’s boys and girls to steer the economy further into the Black.

 

If the flexible workers of the UK are let down it is not because they shirk hard work, neither is it because the vast majority do not fully respect tax legislation. It will once again be because the people advising David and George have failed to do their homework properly.

 

If I read your article as a Year 10 assessment, my advice would be to make sure you do more research in future, don’t get your words mixed up and worst of all don’t be so easily influenced by the other boys. The only level playing field they are used to is the topography in the grounds of their public school! 4/10.

 

Paul Gough

Another flawed proposal

 

This latest reported plan for ‘one-month-then-payroll’ has already received huge amounts of criticism from IPSE, FCSA and the contractor community at large. Of course, with the Autumn Statement less than two weeks away we will be posting our reactions and summaries with the issues affecting contractors. Now is a good time to make sure you have a contractor accountant you can trust – with Intouch Accounting you get everything you need to run your company efficiently, including unlimited advice from your Personal Accountant to make sure you’re up to date with everything you need to know and do.

 

Everything you need for one fixed fee. Call 01202 375 562 or email enquiries@intouchaccounting.com

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Thinking of contracting or freelancing? Which trading model is right for you?

Limited, Umbrella or Sole Trader?

Are you thinking about making the move away from permanent employment to set up as a contractor? Sole Trader, an Umbrella or Limited Company? What’s the difference and which is best for you?

Read this blog to get to know your choices, then download our comprehensive guide to help you weigh up:

  • the things you need to consider
  • your options
  • the associated advantages and disadvantages
  • next steps.

Or give us a call on 01202 375 491 to chat through your options.

 

Why bother?

With the country’s top contractors reportedly earning around three times the average UK wage, why aren’t all permanent staff taking the leap into contracting? One reason may be the confusion surrounding available options. Our following example shows you how the options can affect a professional who is considering leaving permanent employment, and how certain factors can determine what is the right path for him to take.

 

Meet Peter

Peter works in IT and has been a permanent employee for 15 years. A few of his friends have recently told him about the benefits of moving away from permanent employment, and naturally Peter is curious, but unsure of his options. A friend advises him that he needs to establish if he should be a freelancer or contractor and how he will operate: as a Sole Trader; under an Umbrella; or as a Limited Company. These decisions are important, as they will have an effect on how he will pay the relevant tax due to HMRC in the future. What is right for Peter’s friend may not be right for Peter’s personal circumstances so he needs to make sure he is clear on what his options are.

So let’s take a look at each, and which solution will work best for Peter:

Freelancer or contractor?

Freelancer

While researching the marketplace, Peter finds a number of ad hoc jobs which are task-specific, and would not be extended once the work has been completed. For a number of these jobs he could complete them either in the client’s workplace, or from his home office. He could take on as many jobs as he likes from numerous clients, simultaneously, charging an hourly rate.

In this instance Peter would be a freelancer – an option popular among consultants, creatives and journalists.

Contractor

Peter continues researching the market and finds work with a third party employer, whom he will work for exclusively for a fixed period of time. He will be paid a daily rate, and travel to the office each day to work a set number of hours. The contract can end or be extended at any point, and Peter could expect to earn approximately £600 per day.

As Peter will solely be working for this one client for the duration of the contract, he would be considered to be a contractor.

As Peter works in IT, being a contractor is a more viable option for him.

Now Peter has established what type of worker he is, he needs to select the right trading model for his situation.

Sole Trader vs Umbrella vs Limited Company

Peter now needs to decide how he is going to operate: as a Sole Trader; under an Umbrella; or as a Limited Company. These are the three most popular options for for knowledge-based, highly skilled workers earning well above the National Minimum Wage but are dependent on what solution suits an individual best, their daily rate and how they wish to operate:

Sole Trader: is a person who wishes to be the exclusive owner of the business, and is therefore entitled to keep all profits, after tax. A freelancer traditionally would consider themselves to be a Sole Trader, or self-employed. They are also liable for all losses so if the contracting business gets into financial trouble, the Sole Trader is personally liable and their private assets could be at risk. It is unlikely that an agency would take him on this basis and very few clients would allow this model so it is therefore impractical. For this reason being a Sole Trader isn’t the best option for Peter.

Umbrella: is a company which acts, for a fee, as an employer for a contractor who will have an agreed fixed-term contract. Traditionally contractors earning less than £30,000pa or who are new to contracting and are just dipping their toe in the water to see if it is the right option for them, are recommended to consider using an Umbrella company. Intouch do not offer Umbrella services, so we suggest carefully researching compliant companies offering this service and choosing one based on your personal preferences and requirements.

If Peter was earning less than the £30,000pa (on average £125 per day) or didn’t want the added responsibilities which come with running a Limited Company, then an Umbrella company solution would be best for him. He should also consider working under an Umbrella if contracting is just a short-term option for him and he doesn’t anticipate it lasting for more that 6-9 months in total.  But, as Peter is in this for the long-haul and charges a higher daily rate, he is confident he can run his own company.

Limited Company: is for a contractor or freelancer who is earning on average over £30,000pa. This is just a guide and setting up as a Limited Company can also potentially benefit those expecting to earn less than £20,000 in some cases, so if this applies check with a professional contractor accountant to ensure you get the best advice and choose the right option for you.

A Limited Company ultimately allows a contractor to take the highest rate of take-home pay and be your own boss, but there are a number of considerations and responsibilities which must first be explored, and subsequently be adhered to. Engaging the services of a reputable contractor accountant means that they should guide Peter from the offset so he is fully aware of his responsibilities and obligations. The added benefit is that often the tax savings realised with the advice of a contractor accountant out-weigh the costs as professional fees are tax deductible and, of course, Umbrella companies also charge a fee or percentage for their services (which is often more expensive). If, as expected,  Peter will earn £600 a day as a contractor, and is comfortable with the responsibilities, then he would be better suited to set up his own Limited Company. Using our free take home pay calculator Peter can compare take home pay based on several stated assumptions. He can input his personal contract income and contractor expenses to instantly see the difference being Limited makes.

There are other things to consider, from creating a company name and formation, to setting up a business bank account but working with a specialist contractor accountant such as Intouch Accounting means a lot of that is taken care of as part of our fixed monthly fee.

So once Peter has made his mind up about which solution works best for him and how he will operate, he is ready to make the move!

What’s next for you?

To help you think through your options we have written a new guide for contractors and freelancers: Limited Company, Umbrella, or Sole Trader – which is the right choice for you? available for you to download now.

Or contact us for a no obligation discussion to work through your options.

Intouch can help you

If the prospect of going contracting is still daunting and you are not sure where to go from here, or just need a chat with one of our experts, give us a call on 01202 375491  and we will happily discuss your situation and options with you. We are renowned with our existing clients for our dedicated service and account management, and we’re happy to take your call and assist you on this exciting new venture!

Call 01202 375 491

Email enquiries@intouchaccounting.com

Download our guide

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

[download_pdf file=”http://www.intouchaccounting.com/wp-content/uploads/2015/03/Car-and-Motorcycle-Expenses-for-Contractors.pdf” title=”Download our comprehensive guide”]

How often can a Limited Company director draw dividends?

Drawing Dividends

Contractors are increasingly turning to forming their own Limited Companies rather than operating as sole traders or under Umbrella companies. This is in part due to the tax efficiencies available as well as the additional security it offers.

 

Why go Limited?

Whilst the ‘sole trader vs Umbrella company vs Limited Company’ debate is one which has been going on for quite some time and will continue to do so, the bottom line is that for many contractors, going Limited is the best approach. Why? Just a few advantages include:

  • Higher take-home pay
  • The ability to claim on a wider range of expenses
  • Flat Rate VAT Scheme entitlement
  • Security of personal assets
  • Greater control (when compared to using an Umbrella Company)
  • Better credibility
  • Greater tax planning opportunities

 

How do you pay yourself?

As a sole trader, the business’s money and the contractor’s personal money are one and the same. However, once a Limited Company is formed, these become separate entities and the money of the company and the contractor are separate, providing additional financial security.

 

In order for the contractor to ‘pay’ themselves as tax efficiently as possible, it is generally the case that they are paid a mixture of salary and dividends (depending on their circumstances and IR35 status), both of which should always be discussed with an accountant.

 

For those unaware, dividends are payments made to the owners of the company, ‘the shareholders’, from the company profit. Company profit is not only income less expenses for the current year, but also takes into account the Corporation Tax that will be due. It also includes any retained profits or losses brought forward from prior years. In some respects, dividends can be complex, however as a general rule, so long as the company has the money to be able to make the dividend payment and cover any tax and VAT due, there won’t be any issues.

 

One question which many contractors ask time and time again, however is:

 

How often can you draw dividends?

There are two types of dividend – Interim and Final. Interim dividends are those paid throughout the year, with Final dividends paid once annual accounts have been completed. Within a small company, the accounts are rarely complex, which means Interim dividends can be paid throughout the financial year. It is worth noting here that dividends are received on the date they are declared and, as such, it is important to consider the declaration date when declaring dividends close to the end of the tax year, as it can be an incredibly useful tax planning tool.

 

To answer the question asked however, it is important to understand that the frequency with which dividends are declared is much less important than whether they are legal or not. An illegal dividend, as outlined in The Companies Act 2006, Section 830, states that, ‘a company may only make a distribution out of profits available for the purpose’.

 

This simply means, that as long as a company is in a position to cover the dividend as well as their tax liabilities, the dividend can be legally declared. If declaring the dividend would result in the inability to satisfy tax and VAT obligations, it would be illegal and may result in repayment demands from shareholders (the contractor).

 

For many contractors, drawing a regular dividend is a sound way of financial planning; ensuring that your earnings are as tax efficient as possible and that a regular income is received. So long as the dividend is legal, the frequency at which they are drawn is down to the individual contractor’s discretion; something which is great news to contractors worrying that a dividend could perhaps only be taken at the end of a financial year.

 

For further advice on drawing dividends from a Limited Company, why not see our full guide, or for full financial planning support, give us a call today on 01202 375 562 to discuss how Intouch Accounting’s team of expert Contractor Accountants could help you make the most of your Limited Company.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Unlimited shades of grey as HMRC closes in on IR35 abusers

HMRC closes in on IR35 abusers

As the post-Summer Budget dust starts to settle, there is a hotly debated topic still keeping contractors awake at night. Last week I started to look at the proposed changes to dividend tax, which form part of a series of wider reforms to the Intermediaries Legislation, commonly known as IR35.

The publication of HMRC’s IR35 discussion document in July has triggered a growing sense of unease amongst the contractor community. The big concern is that these latest attempts to achieve clarity will only serve to move the onus of declaring a worker’s status from the worker themselves, to the reluctant client.

The story so far

In order to get on board with the so-called “Rationale for Change”, it is important to first understand the current situation…

Under the current ways of trading with a client, self-employed workers have been able to use employment intermediaries such as Umbrella companies, employment businesses and Personal Service Companies (PSCs) as a way to reduce their tax and National Insurance payments.

As a result, people pay different levels of tax depending on whether they are employees, self-employed, or work through their own Limited Company.

An example of this is a contractor being able to claim tax relief for travel and subsistence costs to and from their usual place of work, whereas an employed worker doing exactly the same job would have to grin and bear it with no tax reliew for themselves. It is this disparity that the Chancellor, George Osborne, wants to even out.

Who is at risk?

Most contractors are operating fairly and squarely through these employment intermediaries and have legitimate and justifiable reasons for working through a Limited Company, such a the protection of limited liability, greater flexibility and long-term planning options. However, some are taking unfair advantage of the system and it is these “abusers” that the Chancellor has set his sights on catching.

In my view, anything that helps police the industry more effectively and “level the playing field” so it is fair to all, is a good thing. By tightening the noose on IR35 abusers, the Chancellor is paving the way for legitimate PSCs to get on with what they do best and being recognised for the valuable contribution they make to the UK’s flexible workforce.

Understandably the fear is that, rather like trawling the ocean to catch a few naughty fish hiding in the shadows, many compliant businesses will be caught up in the new measures designed to better fill the Treasury’s coffers. The other contentious matter is introducing the concept of “fairness” to a moral and ethical debate. How can ‘fair’ be anything other than subjective?

As you can see, the situation is not as clear cut as HMRC would like us to think. The Treasury’s promise to the Chancellor that the IR35 reforms could help raise an additional £430 million is, in the view of many commentators, unrealistic.

There may be trouble ahead

A key flaw in the discussion document’s suggestion is the proposal of putting the responsibility of assessing a contractor’s IR35 status onto the engager. This is likely to cause a serious headache for UK employers. Why does HMRC think engagers will be any more accurate in doing this than the worker, unless it is accompanied by transfer of debt provisions?

To me, this is where the reforms start to unravel. Is the tax man seriously expecting people to put up their hands and declare, “I am Spartacus!”?

The current guidance for identifying “supervision, direction or control” [see ESM2029 for examples] to help assess the worker’s tax status is, in itself, entirely based on hypothetical examples and open to misinterpretation in the real world. This is a subject I will be exploring in more detail on the Intouch blog over the coming weeks.

The constant challenge for HMRC is deciding who should, or should not, be either side of the IR35 dividing line. In an ideal world, HMRC would like to make every PSC worker or self-employed contractor fit in a neat little box and put the onus on the engager to determine where they slot in on the compliancy scale.

After reading the discussion document, you would be forgiven for thinking that every individual case is easy to assess. The case study examples are so clear cut and unrealistic it’s almost caricature.

For as we know, the reality of whether IR35 applies or not is anything but black and white. In fact, there are so many shades of grey in between that there are almost unlimited ways to argue the situation.

This is why HMRC has struggled to enforce legislation in the past. So although its good intentions are to be supported, viewing the current landscape through an oversimplified lens and merely playing around with subjective rules is unlikely to improve effectiveness of the current legislation.

To make a real difference, HMRC needs a system that sorts the wheat from the chaff, and can identify abusers based on something other than gut feel. They should not be scared of rapid expansion in a modern method of working just because the Treasury would be better off if we were all permanent employees.

I have no doubt HMRC recognises and accepts the reality of this deeply complex issue and wants to develop solutions that work within the grey areas as well as the black and white ones. The discussion document asks for help and, as stakeholders, we must respond responsibly and impartially. It is still better for Spartacus to identify himself rather than letting the soldiers of HMRC do it.

There’s no doubt the industry faces change ahead. But rather than hiding away, now is the time to fasten your seatbelt and talk to your accountant about what changes you might need to put in place to reinforce best practice standards and compliancy.

If you haven’t already, I recommend anyone who suspects they might be affected by the changes should read HMRC’s Intermediaries Legislation (IR35): discussion document or speak to your trade body and get involved in the conversation while you still have a chance to make a difference.

At Intouch our priority over the weeks and months leading up to next April is to advise and support our clients making the correct decision on their IR35 status.

If you are concerned about the proposed IR35 reforms or your compliancy position, give our team of expert contractor accountants a call on 01202 375491 and let Intouch make this complex issue a simple one to resolve.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

It’s never too early to plan ahead

It’s never too early to plan ahead

We often get asked about how to be tax efficient when running a Limited Company, and what many people don’t realise is that this also ties in quite nicely with your final exit strategy from your Limited company.  If you take a long term view and plan ahead, you can save a fair amount of tax when you close down…….

Dividend income is effectively tax free in the basic rate band, and then at taxed 25% of the net when you stray into higher rates.  To work out the maximum dividend you can take before those higher rates kick in you simply take the higher rate limit of £41,865, reduce by other income such as bank interest, salary and rental profit, then divide by 10 and x by 9 (this can be slightly more complex when other income or pensions are involved, so ask your contractor accountant to double check your calculation).

 

So £41,865 less your salary of say £12,000 (plus other gross income) leaves £29,865 /10×9 = £26,878.

 

This means you can take dividends of £26,878 tax free, provided the company has the profit available to pay that amount.  You can take the dividend as a lump sum, or break it down into a monthly figure of £2,239.  This can be paid on top of expenses and salary you’re owed.

 

What happens to the rest of the profit that gets left in the company?  That’s the good bit.  Any final profit that is paid out to the shareholders when the company closes can in many cases be paid as a Capital Gain, which, after Entrepreneur’s Relief, is taxable at just 10%.  So you’ll pay 25% on higher rate dividends if you withdraw them year by year, or just 10% if you save the profit in the company to pay out on closure.  Over a few years this could save you a fair amount!

 

Talk to your contractor accountant to find out more details about when Entrepreneur’s Relief is available, and what you can do to plan now for your future.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.