What the Budget means for contractors

The Budget is a topic that’s been dominating the news recently, with Chancellor of the Exchequer Philip Hammond delivering his speech to Parliament on Monday, 29th of October.

As a contractor, you might be wondering what impact the Budget will have on you when it comes into effect from the new tax year in April 2019. So, we thought it would be useful to run through the key changes for self-employed professionals:

Company/Business Tax

Corporation Tax

As expected, Hammond said that the Corporation Tax rate will remain at 19%, though it will drop to 17% from April 2020.

VAT

Similar to Corporation Tax, the VAT threshold will stay at £85,000 until 2020. This news has been well received by the industry, due to the introduction of Making Tax Digital next year which will require businesses with a turnover over the threshold to submit their information electronically at least every quarter.

National Insurance Contributions (NICs)

In September, the government announced plans to scrap Class 2 NICs for self-employed people due to the ‘potential impacts on some of the lowest earning in society’. From the new tax year, workers will continue to pay either Class 2 or Class 4 NICs. The government announced it’s considering reforms to simplify the system from April 2020.

Employers Allowance

If you’ve more than one employee or director, you qualify for an employer allowance, meaning the initial £3,000 of your NI bill doesn’t have to be paid to HMRC. From 2020, this benefit will only apply to companies with a NIC bill below £100,000.

Entrepreneurs Relief

A benefit to company owners wishing to sell or close their business, Hammond announced that the 12-month qualifying period will be doubled for disposals after 6th April 2019, unless you stopped trading before 29th of October.

Personal Tax

Income Tax

From next year personal allowances will be raised, meaning people will be able to earn more before they start paying tax. According to Hammond, the government ‘want working people to keep more of the money they earn’. The new thresholds will be as follows:

Personal allowance will increase from £11,850 to £12,500
Basic rate tax band will increase from £34,500 to £37,500
Overall increase to the higher rate tax threshold of £3,650 to £50,000

Capital Gains Tax

The threshold for Capital Gains Tax – the tax on profit when you sell something that’s increased in value – is going to be raised by £300 from £11,700 to £12,000.

IR35

Of course, we can’t summarise the Budget for contractors without mentioning the elephant in the room: IR35. As expected, the Chancellor announced a delay in the rollout of IR35 to the private sector until 2020.

Currently, it’s a contractor’s duty to determine whether they are operating in or outside of IR35 but, from 2020, it falls to the medium and large businesses employing them. If the contractor is operating inside of IR35, the company – i.e. the end client – will be responsible for assessing each assignment, deducting Income Tax and NICs and paying employer NICs. You can read more on this change here.

With a good handful of changes on the horizon for contractors, pairing with the experts at Intouch Accounting will ensure the transition into the new tax year is a smooth one. To find out more about our services, get in contact today.

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.

 

All you need to know about submitting your Self Assessment tax return

Many people don’t like to hear the ‘C’ word mentioned until at least December. However, if you’re self-employed, now’s the time to start thinking about the festive period, particularly with regards to submitting your Self-Assessment tax return (SATR). Here’s all you need to know:

 

What is a SATR?

Self Assessment tax return or SATR is the system by which HM Revenue and Customs (HMRC) collect tax on your income.
Whereas tax is typically deducted automatically from wages, savings and pensions, if you’re self-employed, it’s your responsibility to declare taxable income and to notify HMRC that you need a tax return form. Fail to complete a return when necessary and you’ll receive a penalty.

 

Who needs to complete one?

If you can say yes to one or more of the below criteria for the last tax year (6 April 2017 to 5 April 2018), it’s highly likely you’ll need to complete a SATR:

You were self-employed and your income was over £1,000
You received over £2,500 from renting out property
You’re a partner in a partnership. The Partnership will have to file a return, too
You’re a company director
Your annual income was £100,000 or more
Your annual income was £50,000 or more, and you or your partner was in receipt of child benefit
You received over £2,500 in other untaxed income, such as commission or tips
You needed to claim expenses or reliefs, or you’re a trustee
You had Capital Gains Tax to pay, for instance if you sold shares or a second home
You had £10,000 or more in dividends or from other investments
You had income from abroad you needed to pay tax on

If HMRC send you a return to complete but you find none of the above apply to you, you should get in contact with HMRC as it may be an error.

 

What are the deadlines this year?

You have to submit returns for tax years, not calendar years. Meaning, this return will be to declare tax on income and gains from 6 April 2017 to 5 April 2018. The deadlines for submitting the returns are as follows.

5 October 2018 for registering for Self Assessment if you have never submitted a return before
31 October 2018 for submitting a paper tax return
31 January 2019 for submitting an online tax return (you need to submit your online return by 30 December 2018 if you want HMRC to automatically collect tax owed from your wages and pensions, however you must be eligible)
31 January 2019 for paying all of the tax you owe

 

What are the penalties?

If you need to file a return but it’s up to three months late, you’ll receive a penalty of £100, with this sum increasing the longer you leave it. If a partnership tax return is late, all partners will have to pay a penalty.

 

What if you make a mistake?

If you realise that you’ve made a mistake on your tax return, don’t fret – you’re able to make amendments after you’ve filed it. But the deadlines are as follows:

31 January 2019 for the 2016-17 tax year
31 January 2020 for the 2017-18 tax year

 

Partnering with Intouch

If you’re one of our clients, your dedicated Personal Accountant will have already been in touch to guide you through the process and make sure you know exactly what needs to be submitted.

We offer complimentary completion of a SATR for one employee as part of our comprehensive monthly services for contractors. If you want to find out about the many other features of this plan, or about the benefits of partnering with Intouch, call 01202 375758 today.

 

 

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.

Dividends and salary: getting the balance right

If you’re considering setting up your own contracting firm by trading under a Limited Company, then taking a mix of salary and dividends is the most tax-efficient way to take income from the business.

Due to the implications associated with drawing a £Nil salary, many contractors choose to pay themselves a modest salary, topped up with dividends.

For instance, you could pay yourself a basic salary up to the limit of when NI contributions become payable – the threshold for the current 2018/19 tax year is £8,424. Yet, while it’s your decision to do this, remuneration at the NI threshold is lower than the National Minimum Wage.

As of 1 April this year, the National Minimum Wage for people aged 25 and up is £7.83 per hour which, when full-time hours are considered, works out at approximately £14,250 per year. Taking a salary at this level may be a better alternative to taking one below the NI threshold, as it will demonstrate your intention to operate a genuine commercial, contracting business. There is no advantage to withdrawing a salary in excess of this figure however, except in ‘special’ circumstances.

 

Drawing a £Nil salary

So, you may be wondering: Can I take all my income as dividends and not pay myself a salary? The short answer is yes, you can; however, doing this has a number of implications you need to be aware of. These include:

 

The effect on future entitlements

Paying yourself a £Nil salary will mean you do not pay any National Insurance. However, not paying NI contributions could affect your entitlements later down the line, including the state pension and a number of other state benefits.

 

Investigations by HMRC

If you’re not taking any salary from your business, it’s possible that HMRC will argue that the dividends paid or declared incorrectly are in fact ‘salary in disguise.’ In this case, HMRC will seek to tax the dividends as salary.

 

Corporation Tax Relief

Any salary that your company pays to you will qualify for Corporation Tax relief. This means that if your company pays you £8,424 it will save £1,600 in Corporation Tax.

This combined with the fact that this income is tax free for you, as it’s within your personal allowance, makes a nominal salary very tax efficient.

 

Finding a balance that’s right for you

Of course, striking the right salary/dividend formula will be entirely dependent on your individual circumstances – there isn’t a one-size-fits-all solution. Many factors will need to be considered, such as:

  • Your age
  • Likely length of career
  • Projected income levels
  • Views of pensions planning and saving
  • Family status
  • Income from outside the business
  • IR35 risk status
  • Cash requirements to fund lifestyle

 

With all these factors to bear in mind, it can really help to turn to the professionals to help in your decision, like the team here at Intouch. We’ll help you get your business up and running and can advise on how best to withdraw income from your company. If you’d like to find out more, call our experts on 01202 375293. And, in the meantime, take a look at our new guide on combining salary with dividends.

 

 

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.

IR35 consultation response – we urge HMRC to learn from mistakes, start afresh and not to rush it

8th August 2018

IR35 consultation response – we urge HMRC to learn from mistakes, start afresh and not to rush it

 

I’m spoilt for proverbial choice when it comes to the advice we’ve given HMRC in our IR35 consultation response…’ fools rush in where angels fear to tread’, ‘more haste, less speed’, ‘measure twice, cut once’… they all add up to an appeal to take the time to create a new, fit for purpose approach to compliance in the public and private sectors rather than trying to reform and roll out the broken public sector approach.

Our formal response, filed today includes solid research to counter HMRC’s view that IR35 in the public sector is ‘working’, some suggested alternatives and our thoughts on timings:

 

  • We believe that the review of public-sector reforms set out in the consultation and other government documents provides an incomplete and misleading picture of the impact of the reforms. Further review on completion of a complete compliance cycle is needed and should include all parties in the supply chain. This will help identify all unintended effects of the reform such as the volume of self-employed contractors who have had PAYE incorrectly applied, and those who are working through non-compliant payroll vehicles.

 

  • We believe that the public sector reforms have driven non-compliance rather than addressing it, and for this reason, a different approach is needed for both public and private sectors. We have proposed a solution that focuses on compliance across the supply chain using enhanced record keeping with a legal requirement to supply the relevant information up the chain.

 

  • Given our points above, we believe that April 2019 is too soon for implementation of any reform and would not allow for proper consideration by HMRC or proper implementation of any reforms by contractors or end hirers.

 

We believe our response is measured, backed by evidence and realistic; we’ve always welcomed reform that encourages compliance and there is no doubt that compliance reforms are coming to the Private sector; we just ask HMRC to remember who won that race between the hare and the tortoise!

 

 

IR35 in the private sector – HMRC announces consultation

In last Autumn’s Budget, the government announced that it would consult on how to tackle non-compliance with IR35 rules in the private sector. On Friday, HMRC issued this eagerly-awaited consultation which they say “looks at improving the rules around ‘off-payroll’ working so contractors who work through their own company pay the right tax.”

At Intouch, we would suggest that HMRC learn from the negative feedback following the public sector reform and at the same time, remember that private sector and public sector hirers are different entities with different motivations and potential responses. They engage with their clients in different ways and often at different levels and as such we’d encourage HMRC not to view them as the same with respect to off-payroll rules and deemed employment. Input should be taken from across the industry with a view to tailoring a bespoke private sector solution that improves compliance whilst mitigating any potential administrative burdens.

The consultation timescales mean that any changes could be introduced as early as April 2019, although we’d urge HMRC to take the time to consider timings very carefully to avoid any negative impact to the UK economy as we move forward with Brexit.

Intouch will be responding to the consultation and we encourage all other interested parties to contribute; that means contractors as well as end-hirers who want to continue to have access to and support self-employed contractors. You can see the consultation and how to send your response here – you have until 10th August!

If you want to have your say but need to brush-up on your IR35 knowledge, check out our resources below:

Guide – Embracing IR35
Infographic – IR35; Don’t panic!
IR35 FAQs

 

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.

 

What you need to know about IR35

Familiarising yourself with numerous legislation is just one of the many tasks involved in setting up your own business. But for contractors, specifically, there’s a crucial piece of legislation to get to grips with: IR35.

 

What is IR35?

IR35 is a type of tax legislation put in place to prevent contractors from limiting their tax liabilities by supplying services through a Limited Company, despite carrying out the same work as the company’s employees. In short, it’s designed to stop false self-employment.

 

Does it affect all contractors?

HMRC defines ‘disguised employees’ as contractors who are treated and act like any other member of staff working for a company. IR35 law aims to stop disguised employees trading under an intermediary, which would entitle them to greater tax benefits.

It may seem simple on paper, but in actual fact, many contractors have found it difficult determining whether or not the legislation applies to them. Trading as a Limited Company and working ‘outside’ of IR35 can result in higher take-home pay than an Umbrella agreement, but you need to be certain about your position or you could face financial penalties.

Another thing to bear in mind is that the legislation applies to each individual contract. This means that you might be outside of IR35 for one contract, but within its scope for another. And that’s why it’s important to conduct thorough contract review processes, in order to clarify if any part of your work falls inside the legislation.

 

What penalties could I face?

Contractors found to have been ‘careless’ can be fined 30% of unpaid tax. This climbs to 70% of unpaid tax if the contractor was aware they were inside of the legislation but deliberately did not make the payment; and 100% of unpaid tax if they also tried to conceal their actions.

 

Whose responsibility is to determine IR35 status?

Big changes were introduced from April 2017, which saw the responsibility of determining IR35 status move from the contractor to the client. But this is only where the contract is with a public sector body. The government are currently also debating rolling it out to cover the Private Sector, although this is likely to take some time, if it happens at all.

Some evidence suggests that this has had a negative impact on the industry, causing firms to insist their contractors trade under an Umbrella agreement to relieve the burden of payroll and other administrative duties.

 

Pairing up with a professional

If you’re considering setting up as a contractor, the experts at Intouch Accounting can help you to navigate the minefield that is IR35. We’ll make sure you understand your rights and risks under IR35 and other laws, and will review your contracts for compliance. To find out more about our service, get in touch today.

 

 

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.

 

 

 

 

 

 

Spring Statement 2018

Today saw the Chancellor Philip Hammond deliver his first ever Spring Statement and we’re pleased to say that the future is looking positive for contractors. The Chancellor was upbeat about the recovery of the UK economy and spoke of continued investment in public services and large infrastructure projects. The announcement of a consultation on extending tax relief on training funded by the self-employed plus a review of late payments made to small businesses both also bode well for the future.

We had our ears open for news of the IR35 private sector consultation that was announced in the Autumn Statement last year, and although it wasn’t mentioned in the announcement itself, further information published following the Chancellor’s speech has confirmed that a consultation will be published in the coming months.

Philip Hammond’s written statement announced: “In the coming months the Government will publish: Off-payroll working – a consultation on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reform. The Government will work with businesses and individuals to mitigate the potential administrative burdens of any future changes.”

We would now urge the Government to take time to consider the right approach based on input from across the industry and will of course keeping close to any future announcements.

The IR35 saga has been rumbling on for so long that you may have lost track of the backstory. So, if you want a quick potted history of IR35, what’s happened, why it matters and what might happen next, then read on…

What is IR35?
IR35 is the tax legislation which determines whether an individual is truly self employed, or working as a ‘disguised employee’ in permanent employment in order to take advantage of certain tax relief schemes which permanent employees cannot. If you are ‘inside’ IR35 you are considered a permanent employee and will therefore be taxed as such. If you are considered to be ‘outside’ IR35, you are considered self employed. IR35 applies to all business sectors and specialisms and your status can vary from contract to contract, depending on the nature of the work and details of the contract.

Until April 2017, the contractor was responsible for determining whether their contract was inside or outside of IR35, according to the rules set out by HMRC.

IR35 in the Public Sector
From April 6th 2017, legislative reforms meant that the burden and responsibility of determining IR35 status for Public Sector Contracting was now with the client, not the contractor. This legislative move was perceived by some commentators as HMRC ‘testing the water’ in advance of potentially rolling out the reforms to the Private Sector.

However, the implications of the Public Sector reforms have been more wide-reaching than anticipated, with Public Sector entities like the NHS blanket-applying IR35 across all contracts for fear of getting it wrong and incurring fines. Not wanting the associated administrative burden of payroll management, they also insisted on their contractors using umbrella companies. This double whammy of having the Employer’s National Insurance costs passed down to the worker (and not borne by the Engager) plus the cashflow disadvantage of being taxed at source and still having to pay the umbrella fee left contractors substantially out of pocket. Many decided to work elsewhere, return to permanent employment, or work only in the Private Sector in future if their skills were transferrable.

IR35 in the Private Sector?
Following speculation that the IR35 reforms might be rolled out into the Private Sector imminently, contractors were relieved by the announcement in the November 2017 budget that a full review and consultation would be carried out before any decisions being made. We’ll be watching closely for the results of this consultation which may be published in the coming weeks or months.

If you have any questions relating to IR35 or want to find out more about our Contractor Accounting service, call us now on 01202 375 562.

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.

Dividends – how often should I take them, and when are they taxed?

Dividends can sometimes be difficult to understand and many contractors find themselves wondering when they should take them and when they actually get taxed? In this blog we answer these two questions and cover the timing and tax point of dividend declarations.

 

Question 1: When are dividends taxed? Is it when they’re paid, or the date they’re declared?

A dividend will be included on your tax return, according to the date the dividend was declared as becoming payable. The date it was paid is not relevant. For example:

A dividend declared 1 April 2018, that was ‘payable’ on 7 April 2018, is included as income for the 2018/19 tax year regardless of when it is actually paid.

Remember! Should HMRC decide to investigate, in order to support all dividends, you should keep copies of all dividend vouchers and minutes. Your contractor accountant should have a dividend template for you to use, then you can simply send them a copy every time you use it.

Tax planning opportunities

If you have some of your basic rate tax band left, have sufficient profits in your company and for whatever reason, you don’t want to pay yourself a dividend at that time, you’re able to declare a dividend immediately payable, if you intend to take the cash at a later date. This means you can fully utilise your tax allowances year on year, as it ensures the dividend falls into a specific tax year.

Don’t forget that as of 6 April 2018, the dividend allowance is £2,000. This applies for 2018/19. It’s worth taking at least £2,000 in dividends, as this amount is tax free, regardless of which tax band you fall into. Your contractor accountant will be able to review the level of dividend allowance available and amend this as necessary.

 

Question 2: How often should you pay yourself dividends? What are the dangers of monthly payments looking like disguised salary?

We generally recommend our clients to pay themselves dividends either monthly or quarterly. You can, however pay them whenever you wish.

As long as the correct dividend voucher and minutes paperwork are in place and your company has sufficient funds to cover the distributions, there’s little chance that HMRC will see your dividends as salary.

We do advise all clients to keep their salary and dividend payments completely separate from one another and pay all shareholders separately in the correct proportions, so that a clear audit trail can be provided. Should you be subject to an HMRC review, having clear audit trails in place can make all the difference, as every item is easy to trace and nothing has been missed or hidden.

If you’re looking for specialist, tailored advice regarding dividends that’s unique to you and your circumstances, speak to our team today to find out how Intouch can help you. Our Personal Accountants are here to be your guide, to ensure you get the best and most from contracting.

 


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.

What are alphabet shares and why do contractors need to be aware of them?

What are alphabet shares?

 

Limited Companies are traditionally formed with a nominal number of ordinary shares. As the company grows and more shareholders are added, alphabet shares are certainly something to consider.

 

In this blog, our Personal Accountant Patrick Gribben explores what alphabet shares are and how they could be of benefit to you.

 

Dividend waivers vs alphabet shares

Dividends are received by all the shareholders of a Limited Company, in proportion to their personal shareholdings. Should there be a need for one shareholder to be paid a different amount to the other shareholders, there either needs to be a dividend waiver or the share structure needs to be amended.

 

  • If you believe you’ll use dividend waivers on a regular basis to distribute company profits disproportionately to the same class of shareholder, then it’s advised to use alphabet shares as a permanent alternative method.
  • HMRC are more likely to question dividend waivers
  • Waivers can be seen as unreliable as all shareholders must give their consent each time
  • Alphabet Shares do not need the consent of all shareholders, as dividends are declared by reference to shares held, meaning that dividends declared as being payable to holders of Ordinary shares have no bearing on dividends declared as being payable to holders of an Alphabet share
  • It is possible to attribute rights or restrictions to alphabet shares. This could be in relation to voting rights or or rights to distribution on wind up.
  • Alphabet shares allow freedom and flexibility in paying dividends, so payments can be made to a certain class of share without having to pay the same amount in dividends to each company shareholder. If your Limited Company’s shareholders are taxed at higher rates than one another (if at all) then alphabet shares are a particularly good idea.

 

Settlement Rules

Whether you decide to use dividend waivers or alphabet shares, it’s important to understand whether either is caught by the Settlement Legislation.  In short, the Settlement Legislation is designed to expose and punish anyone who uses dividend waivers or alphabet shares purely to divert income from one person to another, thus resulting in a tax advantage.

 

For alphabet shares it’s particularly important to understand that a lack in voting rights (for example) could result in being caught by the Settlement Legislation.

 

To ensure you do not fall foul of the Settlement Rules, we advise you do the following:

 

  • Any new shares made under the alphabet scheme must be an outright gift and have exactly the same rights as the original ordinary shares. Restrictions cannot apply (such as being non-voting, carrying lesser rights to capital, or promise to return shares on demand). You must not make the shares redeemable preference shares.
  • If you decide to gift shares to spouses, it’s recommended to show that they have an active interest in the running of the company, such as becoming a director, the company’s secretary or even an administrator.
  • Only pay dividends into a bank account that holds the recipient’s name (such as joint accounts) to ensure you don’t attract unwanted HMRC attention.
  • Remember that in order to claim Entrepreneur’s Relief should you decide to sell the company, a 5% share is required.
  • Pay some dividends to each type of share, so as to minimise the risk of HMRC claiming that dividends should not be paid, unless one class of share was not allocated any dividend.

 

Should you have any questions about alphabet shares and how they could compliment your Limited Company, speak to one of our expert advisers today.

 

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.