Allowable costs and expenses
I am a Contractor operating through my own limited company – can my company pay for my Spanish Lessons?
Any training would need to be related to business need, so if learning Spanish will help your company win work then this is acceptable – so long as this purely for business purposes. If HMRC can argue that it is partly business and partly a personal purpose then you would be in a weak position to argue your case – if you would have had no intention to study Spanish if it wasn’t for your business, then it is for a business need.
I have often been asked about the Tax effects of Equipment and training costs to the one person owner/director/worker limited company.
Firstly the tax effect is that if the corporation tax rate is 19% (as it is currently) then the actual net cost to the company is 81% of what is paid for the equipment.
Say the equipment/training is £1,000 and you choose not to spend the money, then your company will have £1,000 additional profit so pay £190 corporation tax.
If you are a Higher Rate Taxpayer then take what is left as dividends, you will pay income tax on those £810 dividends of 32.5% ie £263.
Therefore in summary not to spend £1000 on equipment/training will normally lead to a £453 tax bill for a higher rate taxpayer. The real cost of £1000 expenditure here then, will be net £547.
In addition, the more your company spends on equipment and training, the stronger your IR35 position will be.
You should not personally receive any expenses direct from clients/end clients – very bad practise for those of you outside of IR35.
All receipts from your company’s clients should be made payable to and received by your company. All should be invoiced by your company and VAT should always be charged.
With regards to landline telephone costs, if this is in your name rather than your company name then you can only claim the specific business calls made (no line rental) and no other costs.
With regards to the internet/broadband, if this is also in your name then it is debatable if the Revenue would allow any business portion as you would be paying the internet provider in any case.
Company owners are managing their own business and it is best if their company pays for its own business line/broadband – then it is clear that the cost is for 100% business use and will therefore be allowable as a business expense..
Always best to have dedicated telephone business landline but if not then you should reclaim business call costs (and you enter them on your P11D).
It is best to organise a contract for a mobile phone in the company name (one per worker). That way your company pays for personal as well as business calls, which is acceptable to HMRC. Please note that the same concession does not apply to a device such as an iPhone or BlackBerry although if it is provided solely for business use and any private use is not significant, it will be exempt.
Note that dfor your company to pay, mobile phone contracts should be in the company’s name (if not you enter the amount you have claimed from your company on your P11D and look into changing mobile contracts).
Please note we recommend to clients that they do not claim the mortgage interest, insurance costs and home telephone line rental under “use of home as office”. It is still very rarely they do investigate this item but we are erring on the side of caution with our advice!However, we recommend you draw a minimum £300 per year on the basis we do not know of a single case where the Revenue have challenged a claim up to this value.
The stipulated minimum from the Revenue is £4 per week from 6/4/12. This was originally £3 based on the Finance Act 2003 where an employer can pay an employee £3 pw for the extra costs of working at home without tax implications and without the need for any proof of those additional costs. As a director/shareholder/key worker, you can of course claim more than this but should then have proper calculations to back it up (to calculate accurately, add up total household bills – electricity, gas, council tax, cleaning, and rent (if paid!) – and divide by the number of rooms in the house (if you use a dedicated room for business purposes – if used 50% for business purposes, half the room cost, and so on). You will need to exclude bathrooms, WCs and entrance halls from the total rooms.
NB It is not an expense of the worker/Director of the Company; it is rather a rental by the owner/occupier of premises to another legal entity i.e. the Company for being allowed to use the actual space on the premises to house the Company assets and records and where to work on at least the administrative side of running that Company. If this space was not available to the Company you would point out to HMRC that you would need to use serviced offices or rent your own business premises probably at a much higher cost.You can set up a formal rental agreement but it is debatable whether or not a tax inspector would accept a significant increase in reclaimable amount via this route.
A company worker can only claim tax allowable travel for a maximum of 2 years when working on the same site when 40% or more of the time worked is spent on this same client site (nb not the same client).
When working away from home on business an employee can claim £5 tax/NI free per night from the company for incidental expenses (no receipts needed) in addition to subsistence costs (£10 if working outside the UK).
Business miles using own car- claim 45p per mile as the maximum allowable for first 10,000 miles (25p per mile thereafter). 2p per mile can also be reclaimed for VAT if you are not on the VAT Flat Rate Scheme. Mileage log for each journey should always be maintained.
Remember this is a workplace rule (not working for the same client rule). As soon as the contract exceeds 2 years and you are still working at the same place, it is no longer classed as a temporary workplace unless less than 40% of your working time is spent there over a given period.
Best to arrange for your company to pay for these directly (enter in Business Entertainment Category under Expenses in spreadsheet). Although this is a disallowable item for corporation tax, it is still more tax effective than paying for it personally if you are a higher rate tax payer – then for us to disallow the cost when we calculate the corporation tax. IE if the corporation tax rate is 20%, you will in effect pay tax on these items at this rate, as opposed to paying tax @ 25% as a higher rate tax payer on dividend income (or even more with income from employment of course).
Business Entertainment relates to taking out a prospective client/client/supplier to lunch/dinner etc so still must be business related!
Operating your company
The new Agency Workers Regulations (AWR) comes into effect on 1 October 2011. Contractors working through an Umbrella Company with contracts exceeding 12 weeks will be affected by AWR.
AWR will create a heavy burden of administration through the supply chain for Umbrella Companies, Recruiters and the End Clients.
In order to avoid the administration burden and additional cost of providing the information of the pay levels and benefits of their employees to Umbrella Companies and Agencies the End Clients may look to reduce or cut contracts to less than 12 weeks for contractors working through an Umbrella Company and favour taking on contractors who run their own Ltd Company and fall outside IR35. Contractors who are genuinely in business and are outside IR35 will not be subject to AWR.
If you are working through an Umbrella Company this may be a good time to think about setting up a Limited Company. If you would like to know more about AWR and how it will affect you or want to set-up a Limited Company please call us on 0800 8404014 and ask to speak to one of our Partners.
You can find full guidance on AWR at http://www.bis.gov.uk/assets/biscore/employment-matters/docs/a/11-949-agency-workers-regulations-guidance.pdf
The New Agency Worker Regulations that came into force in October 2010 are designed to ensure that temporary workers supplied by Temporary Work Agencies (TWAs) enjoy the same conditions of employment as permanent employees.
Independent Freelancers who are in business in their own right, operating their own limited companies are exempt from these regulations.
These freelancers must not be under the direct supervision and control of their clients, raise invoices for work done, be seen to enter into financial risk and possess their own business insurances ie operate outside of the IR35 Regulations.
Also, “Regulations” or “Agency Regulations” are often referred to in the contracts that our clients enter into. These phrases refer to the Conduct of Employment Agencies and Employment Businesses Regulations 2003 as amended from time to time. It is best to opt out of these when you enter into a contract with an Agency as an Independent Freelancer because firstly you are not in their employment and secondly it underlines that no restrictions apply to you. Similarly you should opt out of Regulation 5 of the Working Time Regulations 1998 – in Regulation 4, there is a 48 hour threshold for each worker for each week.
Graeme Bennett ACMA MBA
You may know them by another name, such as an EBT or trust-loan scheme and the mechanics of them are fairly simple :-
You go to work > your “client” pays your salary into a trust (somewhere like the Isle of Man) > The trust “lends” the money to you.
The principle idea behind all of these schemes relies on the monies paid to you, being treated as a loan and not as earned income. As the income has not actually been earned, you don’t pay tax on it. It all sounds very genuine and the glossy sales brochure will attest to a QC having reviewed the whole system and given it a green light.
Rather than go through the legalities of this type of scheme, which is very subjective and open to interpretation, we will look at the human impact instead.
We receive frequent contact from people that have utilised these schemes and are currently being investigated. The real issue here is the impact this has on their daily life and also their close family. An investigation of this type regularly exceeds 2 years , with a considerable volume of correspondence between HMRC and your scheme provider. Before you decide if an off-shore scheme is right for you – take into account the time you may have to put aside to spend dealing with questions from HMRC. Also remember, when an investigation starts – HMRC are not simply going to forget about you if their letters are not answered.
Secondly – there is a another side to these schemes rarely mentioned. You will pay between 10% to 15% of your gross income to the scheme provider as a “commission”. This is not a payment of your tax and does not form part of the double-taxation treaty legislation we have with these tax havens. Consequently – when your investigation starts, HMRC usually give the option for the tax payer to settle the claim immediately. Bear in mind – the commission you have already paid will not count towards your tax liability later on. It is essentially spent and you then have the total tax liability to contend with.
Online security is set to become even more important due to the cheque guarantee scheme being discontinued on 30th June 2011 and the widely argued discontinuity of cheques which is expected to happen by 2018.
This will be an issue for many small businesses who are used with taking payment in this form. Many businesses rely entirely on this alternative payment method instead of accepting cash such as plumbers, electricians, builders and many individuals simply prefer this option as they don’t trust/understand banking online.
And don’t forget our day to day transactions of paying for our children’s school trips and gifts inside cards, I certainly won’t be sending any cash through the post!
Pensioners may be particularly hard hit by the demise of the cheque, while companies have pointed out that the cost of processing debit and credit card payments will eat into their profits.
With this in mind the use of direct debits is set to increase over the coming years along with online banking of course.
It is more important than ever that businesses and individuals make sure they have performed the necessary checks to ensure they are fully secure from viruses, worms, malwares and other nasty’s that can infect and hack into our systems. All of the above are usually self-replicating and it doesn’t cost the online criminals anything so they don’t care about the extent of the damage.
You can do a number of things in defence which will keep you and your business safe.
Install security software which includes anti-virus, anti-spyware and a firewall. There are plenty of free versions available although for a small monthly cost you can get some very sophisticated versions online.
Always keep your computer up to date with the latest versions and block any spam emails you might receive. If you also use an up to date web browser it will make it harder for the offenders to get into your PC in the first place.
It’s a good idea to make a user account rather than performing day to day transactions in an administrator account. If you’re using Windows Vista keep the user account control switched on. This will enable you to perform the necessary work on your PC if your main user account becomes infected.
As a last resort, make sure you make a backup of all company data, photos and music so that if something does take over your computer you can get up and running again as quickly as possible.
Finally always encrypt your wireless connections so that you remain in control of the websites which are being accessed.
These spywares and viruses can invade to destroy your privacy, picking up email accounts, passwords and banking logins. We may find a lot of new users dipping their toe into the online water in the next few years and doing so in a hurry.
Research has identified that 76% of businesses did not know that the cheque guarantee scheme was being abolished next month and three out of five businesses have not made any plans for an alternative payment method. Start thinking now about how your business could be affected and the security measures you’ll need to put in place.
1. Through your company
If you purchase property through another company, this is fraught with potential problems:
The company may be classed as a Close Investment Holding Company in which all company profits are taxed at the main rate of corporation tax (28%).
Loss of interest relief on sums invested into the company.
Deemed distributions of income which are taxable on the shareholders as if they were dividends.
Where a property is owned personally there is scope for reliefs via private letting relief and rent-a-room relief.
Please note the following points for you to consider relate to a second (investment) property, there is no capital gains implications on your main residence.
If you extract dividends from the company’s profits arising from rental income and you already have £44k income in tax year 2010/11, there is very little difference in your “take-home remuneration” – ie if you extract dividends from the company’s profits arising from rental income and you already have £44k income, there is very little difference compared with owning the property personally and having the rental income come directly to you.
Both the company and the individual are subject to capital gains tax if a capital gain is made. The individual would be subject to this when the property is sold to the company. If you paid £100,000 for a property and sold it for £200,000 to your company, then there would be a capital gain of £100,000. Subtracting the capital allowance of say £10k would mean that you would be taxed on £90k. This could be at 40% or even 50% if you are a higher rate tax payer and cannot claim entrepreneurs relief (if you can tax rate is 18%). Companies are not entitled to an annual exemption. The company would be subject to this when the director closes his company down later on. This could be quite substantial if this is a few years down the line when the property has increased in value.
Loans and Mortgages
Obtaining a mortgage through your company can be quite difficult if your company is relatively new and they are usually a lot more expensive than a private mortgage. In order to transfer/buy the property through the company, all loans and mortgages would need to be in the company’s name. It would be advisable to get in touch with a mortgage advisor about this area.
Raising capital to buy property
Depending on who was buying the property you would usually raise the funds in the following ways:
a. If you were to buy the property personally, you would usually take dividends from your company. These are not taxed at all on an income of up to £44k gross (this tax year) and thereafter @ at least 22.5% on the gross dividend (25% on the net dividend you actually receive from your company).
b. If the company were to buy the property then capital gains tax is payable by company, when the property is sold, as above.
You would of course need to get in touch with a solicitor to transfer all of the deeds to the property to the company’s name which in itself can be expensive.
Residential property is VAT exempt.
As well as not charging VAT on the rent you would be unable to claim back VAT on any business expenses relating to the property side of the business and the company would be classed as partially exempt so this would mean the VAT you could claim on other company expenses may need to be apportioned for the element relating to taxable supplies i.e. office costs or accountancy fees however if you are on the flat rate scheme this shouldn’t be an issue.
Working as a contractor through your own limited company in the UK is commercially rewarding and also very tax efficient. It is easy to forget, but the UK has one of the lowest rates of Corporation Tax in Europe. Before you decide to leave the UK as a contractor consider the following:
1. All countries around the world have their own tax laws, some are very different and have some rather unusual restrictions. For example the Netherlands, where you will not be allowed to contract through your own limited company.
2. You can of course trade and invoice through your UK company in many other countries. However, to do this effectively you will need to:
a) source expert tax help in the country you are working in, as you may be liable for additional tax, especially if you will be spending a considerable time overseas;
b) consider the implications with regards to your UK corporation and personal tax if bringing money back into the UK;
c) think about continuing your National Insurance contributions. If you don’t keep these up to date you may not be eligible for NHS treatment or your state pension.
d) In some countries, it is unlikely, unless you are provided with a local resident visa, you will be allowed to open a bank account in local currency. You will therefore need to investigate how your client intends to pay you.
e) The good news is, it is very unlikely that you will be the first person to have been asked to provide your services as a contractor to the client.
Your client or agent should be able to answer most of your questions. Also, other contractors are usually more than happy to provide a helping hand when it comes to explaining how they work and what pitfalls to look out for.
Other things to think about are currency exchange rates and the sometimes high cost of expert tax advice in the country you are working in. This coupled with potentially higher corporation tax may actually take the shine off those higher daily contract rates.
Our advice is if you are just working overseas for a short while i.e. a couple of months and are invoicing from your UK limited company and being paid by a UK client, there is little to worry about. However, if you are considering working abroad for any length of time, it would be in your best interest to seek specialist advice.
These records should be kept for at least 6 years to back up your Accounts should HMRC wish to view them.
They need not be kept in hard copy form ie computerised records/scanned copies are acceptable to HMRC.
Best also to keep bank statements, Accounts and other financial records for 6 years minimum too.
We advise that all emails contain the company’s full name and its place of registration, company number and registered office as per the New Companies Act November 2006.
Clients should ensure that their websites, business letters, order forms etc contain the company’s full name and its place of registration, company number and registered office.These would normally be included anyway but now those who don’t will now be liable to a fine. Non-disclosure of the company’s name can incur a maximum fine of £5,000.
This may well also apply to emails, which can be interpreted as a “business letter”. Therefore best advice is to ensure that all emails sent contain these details in the standard rubric at the end.
Clients should always be aware they are managing their own independent limited company and should be seen to be acting independently of their company’s client/end client, especially from an IR35 viewpoint! Best not to use clients email rubrics, compliments slips, letterheads etc
Salary, Dividends & directors loans
Dividend tax credits will be replaced with a zero-rated band of £5,000 of dividend income for all tax payers as from 6/4/16. The tax effect of this is that Taxpayers who receive significant dividend income will obviously pay more tax from 6/4/16 IE 7.5% more except for the first £5,000 of dividend income.
From this date, Income Tax Rates on dividend income apart from the first £5,000 will be 7.5% for basic rate tax payers (up to £43k per year); 32.5% for Higher Rate tax payers (on earnings above £43k per year) and 38.1% for Additional Rate Tax payers (on income above £150k per year).
Technically, HMRC have recently clarified that the £5k is not an “allowance” but a zero-rated band.
Earning income via your own ltd company by taking a small salary and high dividends as opposed to via employment will still be more beneficial though mainly due to the National Insurance position (no NI is payable on dividend income) – for example remuneration of £43k would see the contractor approx £2k pa better off; or with £64k, approx £4k better off. Additional income from the VAT FRS scheme along with tax allowable expenses that can be taken from your company should also be considered as additional benefits in addition of course.
As the tax on dividend income will increase as from 6/4/16, generally it is advisable to maximise your dividend income up to 5/4/16 especially for earners with £150k or less in this tax year.
Dividends paid within pensions and ISAs will remain tax free and are unaffected by the changes.
Contractors Share –splitting with their spouse will be an even more attractive proposition in the new tax year: for instance contractor taking £8k in salary and taking £70k in dividends next tax year will pay approx. £13,400 in income tax; whereas a contractor taking £8k in salary and £35k in dividends who splits the shareholding 50/50 with their spouse (who also earns £8k in salary and £35k in dividends) will each only pay £2,025 income tax (total for the 2 of them £4,050) leading to a tax saving of £9,350.
As an alternative to taking dividends (especially as from 6/4/16 onwards), setting up/enhancing payments into a pension scheme (where your company makes tax allowable contributions into your pension fund) must be considered even more from 6/4/16.
Graeme Bennett ACMA MBA
With the P11D/P11D(b) deadline fast approaching on 6th July, it’s worth taking a look at why this form is necessary and what is required from the average contractor.
So what is a P11D?
P11Ds are necessary to report the benefits provided and expense payments made to employees by employers that are not put through the payroll. It is the employer’s responsibility to submit this form to HMRC and staff by 6th July following the end of a tax year (6th April – 5th April) for any director and/or employee (earning over £8500pa) it has had throughout the period.
Why does HMRC need this information?
The main purpose of the form is to declare if any Class 1A NI is due on the benefits or expenses given to directors/employees. In reality it’s usually just a paperwork exercise for most contractors running their own limited companies, as in the main they tend to only claim expenses which are wholly and exclusively for company purposes and therefore no additional NI is usually due.
NI at 12.8% can be payable by the employer if a client has a company car or receives other benefits such as gym memberships or a company loan of over £5000.
How should I collect the information required for my form?
You can ask your accountant to complete this form for you, as they should already have all of the necessary information to do so from your quarterly accounts.
Alternatively if you’re completing the form yourself you’ll need to total all of the expenses/benefits paid to you within the tax year 6th April to 5th April and allocate them to the relevant category on the return. You will need to decide for each type of expense if it was paid to you wholly and exclusively for company purposes and declare the decision on the form.
Working out the cash equivalent for company cars and loans can be quite tricky so it’s worthwhile consulting your accountant if you have these in any case.
Class 1A NI at 12.8% will be due by your company on any benefit or expense received not wholly and exclusively for company purposes. This is declared on form P11D(b) which the company should submit alongside your P11D and is due to be paid online by 22 July.
How can I make the submission?
Again just ask your accountant to submit this on your behalf; it should be part of the service they already provide.
Alternatively if you’re completing it yourself a paper version of the form is still available from HMRC or a more popular option is an online submission using HMRC website or third party software.
What happens if your company doesn’t submit the form by the deadline?
Late submissions are charged at £100 per 50 employees for each month or part month your return is outstanding after the 6 July deadline.
Your company can apply for a dispensation from HMRC so that it doesn’t need to complete a return each year however in our experience these are more hassle than they’re worth and only relate to the particular expenses you’ve applied for so they require regular review. Certain HMRC offices seem more reluctant than others to grant these dispensations and seem to result in a relentless exchange of letters.
For further information on P11Ds or any other matter please contact your Forbes Young Accountant today.
Despite the myths, national minimum wage does not apply to directors. Do not be fooled if your accountant suggests that you take a salary based on national minimum wage – you will be paying unnecessary National Insurance (Employers as well as Employees).
In the majority of cases (and obviously all cases are unique) the optimum annual salary level should be set to match the secondary threshold for NI. For 2017/18 this is £8,0160.
You will pay no tax or NI on this salary, but the salary is treated as an expense to your company. The company will therefore benefit by saving corporation tax at 19% .
You can then withdraw dividends to boost your income.
If for example, you are currently paying a salary of £12k per annum you are probably paying Employees NI, Employers NI and income tax.
Not only will this leave you paying more tax and NI but also with the headache of having to keep track of making PAYE/NI payments.
By adopting a salary equivalent to the secondary NI threshold no tax or NI needs to be paid.
This is probably one of the most common and most important questions asked by a Contractor working via their owner managed Service Company.
At the outset this may seem like a pretty simple question, however like most tax related questions the answer is as complex as the question is simple due to the many factors that need to be taken into account.
Furthermore, the complexity of the answer is matched only by its importance as the wrong advice could lead to thousands of pounds of extra tax.
The issue of how to distribute monies from your company has taken on even greater importance in recent years due to the increases in Taxation and National Insurance for individuals especially with the introduction of the top rate of tax at 50% on income over £150,000 from 6th April 2010.
To help answer the question posed there has to be an understanding of the major differences between salaries and dividends. Don’t worry, you don’t need to understand the differences – that’s your accountant’s job.
The rates of income tax differ between dividends and salaries – this in itself is pretty complex. Your accountant should be able to explain this in easy to understand simple terms.Tax and National Insurance due on salaries is collected through the payroll system (usually monthly). Income Tax due on dividends for higher rate tax payers is usually collected through the self-assessment tax return system, 9 months following the end of the tax year. Salaries are generally subject to National Insurance for both the individual (Employee’s NI) and the company (Employer’s NI). Dividends are not subject to National Insurance.
Salaries are classed as ‘earnings’ for tax relief on Pension Contributions whereas dividends are not.
Salaries paid from your company will usually be classed as a ‘tax allowable’ expense i.e. the amount of the salary plus employer’s NI will reduce the profits of the company and so in turn reduce the amount of Corporation Tax payable by the company. Dividends are paid to shareholders from the profits of the company ‘after’ Corporation Tax has been taken into account i.e. Dividends do not reduce the Corporation Tax payable by the company.
One of the first and possibly the most important thing your accountant should do is help you as a Contractor establish whether you fall ‘inside’ or ‘outside’ of the IR35 legislation. IR35 is an extremely complex subject in itself and so you should choose an experienced specialist contractor accountant to help you determine your status.
Having helped establish your IR35 status the next step should be for your accountant to spend time to get to understand your personal financial requirements. To do this there are some common questions that your accountant would normally ask.
Have you had employment income prior to starting your company in the current tax year What’s the minimum income required by you from the company to ensure you receive sufficient funds to pay your day-to-day living expenses.
Do you have income from other sources e.g. rental income or investment income.
What are your short and long term intentions – Do you have the need to take as much income as possible from the company in a short period of time e.g. to pay off credit card debts or are your circumstances more flexible to enable you to time the distributions from your company in a more tax efficient manner.
Based on the answers to these and other questions your accountant will be able to carry out strategic ‘bespoke’ tax planning and recommend the most tax efficient way for ‘you’ to take income from your company.
As you can see there is no simple ‘one fits all’ formula. Therefore, to ensure you receive the correct tax saving advice you should choose an experienced specialist contractor accountant who has in depth knowledge of the specific taxation regimes in the industry you work in.
Any loan from your company above the £10,000 is a benefit in kind and taxed accordingly ie subject to personal income tax AND National Insurance.
The loan can run and run if the client wishes, but if it is not repaid within 9 months of the Company year end (and that includes loans under £10,000), then there will be a charge of 25% of the outstanding loan payable to the HMRC as additional corporation tax. This additional C.T.is not repaid by them until 9 months after the end of the accounting year in which it is repaid.
It doesn’t matter if the loans are not documented – they simply are loans by virtue of the fact they are not salary or dividends. It is therefore far more tax effective (and a lot less messy) if funds are drawn from the company as salary and/or dividends. All expenditure incurred by the company must be for the company’s business purposes. Any private expenditure incurred by the directors or employees on items such as general shopping, petrol, holidays, non-business travel, childrens school fees etc etc are not items of business expenditure and are subject to tax and National Insurance as Benefits in Kind as well as being subject to Corporation Tax as explained above.
The above should be born in mind when directors submit their P11d (deadline 19 July each year).
A Dividend Declaration Form/voucher with which we supply to our clients should he held on your records to cover all dividends paid out by your company.
This is really important in case you are investigated by HMRC. The absence of this documentation may well encourage a Tax Inspector to class the receipts not covered by the forms as salary and then put in a claim for unpaid PAYE/NI.
Company owners should always bear in mind that dividends are returns on investment (ie on the shares you hold in the company); they are not glorified salary/employment income.
Dividends should be paid by your company in proportion to the shareholding (ie number of shares each person owns), of course.
Dividends can be taken as often as you like, funds permitting in your company’s bank account.
Starting a new company
We recommend to the vast bulk of our clients to set up their own limited company to save on tax and NI, thereby maximising their take-home remuneration.
If operating outside of IR35, we recommend that our clients take a small salary and take the rest as dividends. Dividends can be taken as often as you like and are NI-free and attract lower tax – this saves a typical contractor several thousand pounds each year.
We can set up a company the same day, help you open a (free) company bank account, register you for PAYE scheme and VAT – all you need to do is have a company name in mind and supply us with your details.
When forming the company we subscribe for 1 share only as the default – that way you will be 100% shareholder and be entitled to all of the dividends issued. If you would like any more shares to be issued eg to “share split” with your spouse, let us know and we will arrange that for you.
Most clients appoint themselves as the director and do not bother to appoint a company secretary as there is now no legal necessity to do so. If however you would like to appoint one, most clients appoint their spouse/partner/family member.
Your home address can be used as the Registered Office address and most of our clients use their home address.
Once the company is formed you will need to speak to your new company’s client (typically an Agency) to organise a contract.
We also advise you set up business insurances to lessen your commercial risk and to strengthen your position from an IR35 viewpoint -we strongly recommend you set up business insurances before you commence work on a contract. For business insurance we recommend PolicyBee, a professional insurance broker. Call them for a quote on 0845 872 5099, quoting Forbes Young.
To summarise, to form a limited company and operate outside of IR35 is the best way to maximise your take home remuneration, whether the take-home total after tax is 80%, 75% or 70%. This all depends on how much income your company generates and how many expenses the company incurs and the timing of your dividends.
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You could ask them same question of any professional. Why do you need a Solicitor to move house or architect to design your extension? The answer is very simple :-They have knowledge you are able to tap into for a relatively small fee. This will save time and give you the freedom to concentrate on the parts of your life that are of more interest. A good example of this is the website you are currently reading! Whilst all of the content has been written by the partners, we don’t actually perform any of the coding necessary to make it from a document to a webpage. No doubt we could spend our time learning how to create and upload a website – but the truth is, this isn’t our area of expertise.
Imagine you meet a new person at work who is trying to perform the same role as you. How could they possibly understand the intricacies of your work unless they had been you? Yes – you can read lots of information on the internet and try to decipher the best parts of real information and bogus mis-information. But ask yourself one important question – could one of us perform your job effectively by reading on the internet what it is you do?
Above all else your Accountant should be someone you value as an integral part of your business success. It is vital you have an excellent one-to-one relationship with them. Admittedly this is built up over time, but always make sure you feel confident the person you are communicating with fully understands your needs and those of your business.
The checklist below will give you an indication of why you need an Accountant.
- They will save you time
- They will save you money
- Accountants can remove the burden of bureaucracy
- Freedom to get on with more important parts of your life
- Make you feel more comfortable about the direction your business Is heading
- Someone to trust and bounce ideas off for your business
- Avoid common business errors and mistakes they will have seen before from other clients
Many contractors hold the view that recruitment agencies don’t provide value for money. Well this can be true of some agencies however using a good agency to secure a contract can be very cost effective.As a contractor there are two ways to find a contract
- Using a recruitment agency
- Finding a contract for yourself
What’s involved in finding a contract for yourself.
Firstly, you need to find time to research the companies with contract opportunities that suit your skill sets which means trawling through umpteen job sites and job boards and knowing where to look.
If you are already in a contract and looking for your next one then it’s very difficult to find the time in the working day while you’re at the client site to cold call HR departments of potential clients, after all you are getting paid by the hour by your current client and they are not going to be very happy if your phone is glued to your ear all day or sneaking off to the corridor every ten minutes.
If you have no experience in selling then it can be a daunting prospect. You may be an expert in the field that you’re in but are you an expert sales person?
The biggest challenge is developing contacts. These days the majority of HR departments in multi-national companies have preferred supplier agreements with agencies and will only take on a candidate if they come through one of the agencies on their preferred supplier list and therefore they won’t even entertain an individual approaching them direct – ‘If you’re name is not on the list you can’t come in’.
So why use a Recruitment Agency?
You can look at recruitment agencies as your sales force, working for you on a commission basis. The nature of the recruitment agency business model is to make money by being paid commission for successfully placing candidates with clients, so it’s in their financial interest to find you a contract as quickly as possible.
The agencies spend a lot of time and money in developing contacts and building relationships with clients. They compete with each other to get on preferred supplier lists of clients which involves a lot of wining and dining and jumping through hoops.
Clients also want the security that if a candidate doesn’t work out then the agency is obliged to find another with the relevant skills. It may be possible to earn more money if you sourced your own contract and missed out the ‘middle man’.
However, what you have to ask yourself is whether you have
- The contacts
- The sales expertise
- The time
- The knowledge
Even if you managed to by-pass the preferred supplier lists it could take months for you to find a contract on your own, during which time you probably won’t be earning money. The time being out of a contract looking for a new one could well be more costly than the margin the experts at a recruitment agency charge their client.
We recommend that all businesses have professional indemnity, Public liability and Employer’s liability insurance to lessen commercial risk and strengthen your position from an IR35 viewpoint.
For business insurance we recommend QDOS, a specialist insurance broker: forbesyoung.qdosconsulting.com
Taxes, VAT and IR35
How is my Corporation Tax Calculated?
Corporation Tax is that tax payable by a company on its taxable profit in the company’s accounting year. Currently the corporation tax rate is 19%.
The calculation of the amount of corporation tax due is quite complex. You first need to work out the ‘taxable profit’. In basic terms – this is how it works.
You start with your company’s pre-tax profit figure (sometimes known as ‘profit before tax’) in your company’s financial accounts for a financial year.
Sales – Expenses = Pre-tax Profit.
- add back any depreciation charges you’ve included in your accounts
- deduct your capital allowances
- add any other relevant income or chargeable gains
- deduct any other relevant deductions, reliefs, allowances or losses
- apply the relevant tax rate(s) to calculate your gross Corporation Tax payable
- deduct any relevant tax credits and any Income Tax already deducted from interest income your company received (for example the tax deducted by your bank before it paid you interest)
The above can get quite complex – the good thing is that it’s your accountant’s job to calculate this for you.
To arrive at the amount of Corporation tax due you apply the corporation tax rate to the Taxable Profit.
Taxable Profit x 19% = Corporation Tax charge.
In theory then – the higher your expense figure, the lower the taxable profit, therefore, the lower your corporation tax.
When is Corporation Tax due?
The deadline to pay your Corporation Tax is :-
- 9 months and 1 day after your company’s Year end.
For example, if your company’s year end runs from 1 April 2017 to 31 March 2018,
- pay your Corporation Tax for that period by 1 January 2019
- file your Company Tax Return for that period by 31st March 2019
Your accountant will complete the corporation tax return (CT600) accompanies by your corporation tax computation. The tax return has to be filed (online) with HMRC along with your company’s financial accounts. Most accountants nowadays use special software to complete and file the CT600 and file the accounts online.
You can generally reclaim VAT on goods you bought up to four years before you registered for VAT, and services you bought up to six months before you registered. You must have evidence to back up that the expense was for the business in case HMRC investigate and typically have receipts. If you operate the VAT Flat Rate Scheme (FRS) your company cannot reclaim VAT on any of its expenses from the date that the company registers for FRS.
One of the most confusing aspects of being a contractor is the myriad of different taxes your company has to pay. In reality, there are really only four areas you need to be concerned with and two of these will already be familiar to you as an employee and member of the public. Below, we have listed all four and given each one a brief explanation. One important note – when we say HMRC, this is the current term for what used to be called The Inland revenue.
- PAYE (or Pay As You Earn) – paid by your company
- VAT (or Value Added Tax) – paid by your company
- Corporation Tax – paid by your company
- Personal Tax – paid by you personally
This is the tax your Limited company pays over to HMRC for the tax and national insurance on a salary. If you have been an employee for any length of time, you will be familiar with the deductions seen on a monthly payslip. These are deducted from your salary and the employer pays them to HMRC. Exactly the same principle is applied to a company director. A salary is agreed between the Accountant and Director – resulting in tax and national insurance being paid to HMRC on that salary. The two important factors to be aware of are that tax of this kind is calculated using HMRC tax tables – and is directly related to the level of salary. Secondly, the company pays it “on behalf of” the Director. The recipient of the salary is not required to pay the tax and national insurance themselves.
It is a legal requirement for all business with an annual turnover of more than £70,000 to register for VAT. The current rate for VAT is 20% in the United Kingdom – a figure which puts us in line with most of Europe. Once registered, you will be required to add 20% onto all of your sales invoices. This extra 20% is then paid over to the VAT office once every quarter. You would be right in questioning the validity of VAT – especially as you receive it from your client and then pay it to HMRC. You also have to remember the client claims this VAT back from HMRC after being charged by you. In effect – the VAT money just goes around in a circle and is not really a tax at all.
In conclusion – the only people that really have to be concerned with VAT – are ourselves as consumers, as we cannot claim it back from HMRC.
Put very simply – this is likely to be the single largest tax your company will pay. It is payable 9 months and 1 day after your year end and is only paid once per annum. The current rate for corporation tax is 20% of your net taxable profit. We could fill a whole book on how this calculation is arrived at, but for the purposes of this guide the following formula will give you an indication.
Total net sales – expenses and costs (not dividends) = Net profitNet Profit x 19% = Corporation Tax.
Every year we complete a set of Financial statements for our clients and calculate their corporation tax liability. This is then filed with HMRC and they send you a bill for the corporation tax – it’s as easy as that.
Personal Tax (also known as your self assessment)
Whereas the first three taxes are all directly related to your Limited company, personal tax is actually related to you as an individual. Basically – it is a list of your personal income from 6th April in one year to 5th April of the next. You can think of it as a summing up of all your personal income and then a figure provided for what you owe HMRC personally. The return is filed once per annum. There are so many different aspects to a personal tax return, it would be impossible to list them all in this introduction. However, the typical self assessment return will include salary, dividends and personal bank interest received. Every company director needs to complete a personal tax return and your Accountant should do this for you. Important note – under no circumstances should you ever prepare and file your own return. If your Accountant allows you to do this, they cannot have taken your personal tax planning very seriously.
Just as a final footnote, let’s leave VAT aside for the moment. Part of the enjoyment of running your own Limited company is seeing how the other three taxes interact with each other. Logically – the higher your salary (it’s an expense) – the lower your corporation tax. One of the fundamental roles of your Accountant is to plan the three taxes for you and make sure they fit in with your lifestyle.
I have often been asked if a contractor closes down their company can they avoid IR35 investigations? Ie if the company no longer exists, it and the owner/director can’t be investigated.
It should be born in mind that HMRC have the right to restore a closed (or dormant) company if they have reason to believe that the amount of tax owed makes it worthwhile doing so. Closing a company requires that the contractor submits a final return to HMRC and that can be investigated for PAYE compliance – which can develop into an IR35 case – up to 12 months after the actual closure date.
Also should HMRC suspect incorrect information has been provided they have up to six years to investigate a company’s records – and if they suspect fraud or negligence, this extends to 20 years. So simply closing the company does not mean you won’t be investigated.
Although HMRC have a fairly modest record of winning IR35 cases, should they succeed then a significant amount of money may need to be repaid. This will certainly be the unpaid PAYE/NI taxes plus interest from the start of the investigated period. Under the provisions of Regulation 72, if HMRC conclude that you had deliberately misstated your PAYE/NI position, as opposed to simply making a mistake over it, they can also impose penalties of up to 100% of the unpaid tax.
More importantly, Regulation 72 allows HMRC to pursue the director of the company personally for any outstanding debts provided they have firm evidence that said director was in a position to exercise some control over the affairs of the company. In other words, the owner/director/worker of “one person ltd companies” are not protected from personally from having to pay the total debt.
The chances of a closed company being investigated may be small, but they are real. Closing the company does not offer any protection from IR35 and my advice is not to close down your company and start off a new one to try and avoid IR35 investigations.
Graeme Bennett ACMA MBA
When you become a company directors, regardless of whether your draw an income from the company, you are obliged by law to register for Self Assessment. Your accountant will assist you with this once your company is incorporated.
Self Assessment involves completing a return each year to 5 April detailing all your income, tax paid any any allowable deductions and forwarding to HM Revenue and Customs. HM Revenue and Customs then use this to assess whether you have any further tax to pay.
In the case of a company directors, you would usually enter your salary and dividend income from your company along with any further income you receive i.e. rental income and also any pension contributions you make/receive.
HM Revenue and Customs, as you may be aware, are encouraging everyone to submit Self Assessment Tax Returns Online. This can be done via their website, or via specialised software.
Tax Returns must be submitted by 31 October if filing by paper, or 31 January if filing online.
HM Revenue and Customs have recently implemented a new penalty system for late submission of tax returns, or late payment of the tax liability. This penalty system is particularly strict and financially harsh.
Your Forbes Young accountant will prepare your tax return and ensure that it is filed in advance of the deadline – no penalties incurred!
You need to continue to operate as an independent business in the workplace where you are not under the client/end client’s control eg you can undertake the work as you see fit, as a specialist where the method of work shall be your own within the reasonable direction of the client.
The contract is to be carried out by your company (not necessarily you specifically), so your company will always have a right to substitute the worker within reasonable parameters.
Continue to have a series of limited individual projects each with a start and end date, so that there is not one ongoing contract. It is strongly advised that the contract is for the completion of a particular project, or have some form of deliverable that is consistent with a discrete piece of work that is not ongoing, rather than a general description for a fixed period.
Your company’s contract should contain a clause for immediate dismissal eg if the worker is found to be unsuitable, have a Right of Substitution clause and there should ideally be a No Mutuality of Obligation clause.
Your company’s contract should NOT of course contain benefits for its workers such as paid holiday, paid sick leave and training courses.
General advice in managing your business so that you will be seen to be in business on your own account and therefore give an indication that you are operating outside of IR35 is listed below:
- Advertising and Marketing (eg in Yellow Pages/Press/Internet)
- Company actually having its own insurances (eg P.I.I., Public Liability/ Employers Liability/Sickness Cover).
- Company actually uses its own capital and equipment to carry out services
- Company spends money on training its employees
- Company enters into a contract for services in which invoicing is the method of payment
- The work is carried out at times and locations to suit you (not just the end client)
- Try and carry out work for different clients over the same period
- Try not to work alongside other employees of the end client’s /have the same line manager as them because the Revenue will view this as you having become integrated into the workforce.
- Try and employ other Consultants in your business if at all possible – this will give you an automatic substitute, regarding certain aspects of the work at least
- Make sure you have your own headed stationery/business cards
- Make sure you have your own office area/equipment/business telephone
- Show that contractually you are entering into risk eg with regard to correcting errors in your own time, using own capital and equipment
- Being registered for VAT
As specialists, we offer ongoing advice to our clients as well as fully written-up IR35 Contract Reviews.
Normal scheme is where VAT is collected on company sales @ standard rate of VAT (currently 20%) and pay this across to the Customs & Excise less the VAT that your company has incurred on its expenses.
FRS (Flat Rate Scheme) is where VAT is collected on company sales @ standard rate of VAT but pay across to the Customs & Excise at a given rate on the gross turnover ie sales value + VAT (from 1/4/17 this rate for nearly all of of our clients will be 16.5% with reduction to 15.5% in the first year).There is no allowable deduction for input tax on expenditure (except for capital items over £2000).
The FRS aims to simplify VAT Accounting for small businesses. The scheme is available to most businesses whose taxable turnover (excluding VAT) is expected to be less than £150,000 in the next 12 months and total business income less than £187,500. The scheme can continue to be used until VAT inclusive annual turnover exceeds £225,000.Whether or not to apply depends on the relationship to forecast Vatable income Vatable expenditure.
Unless your supplies are zero-rated or outside the scope of VAT (eg veterinary services, welfare services) all sales invoices raised on a UK client should include VAT.
If your company is invoicing a foreign client (eg a Dutch or an Irish Company) then no VAT is applicable. All receipts from clients should of course be covered with a sales invoice. There are no exceptions – so whether the receipt is for work carried out, reimbursed expenses, car mileage allowance etc etc all company sales/receipts must have a VAT invoice.When recovering expenses from a client you should not charge VAT on top of VAT eg if you have incurred a cost of £100 plus VAT = £120, the total of your sales invoice should be exactly the same (£100 plus VAT) – and not £120 plus VAT.
Failure to recover VAT from clients will lead to you being responsible to HMRC for payment when they come out to inspect your records – they also regularly impose a fine on top of this.