What is Class 2 National Insurance and do Landlords need to pay it?

You make Class 2 National Insurance contributions if you’re self-employed to qualify for benefits like the State Pension.

Most people pay the contributions as part of their Self Assessment tax bill.

You pay Class 2 if your profits are £6,515 or more a year

ClassRate for tax year 2021 to 2022
Class 2£3.05 a week

So for the whole year that’s £158.60

Are you running a business?

You have to pay Class 2 National Insurance if your profits are £6,515 a year or more and what you do counts as running a business, for example if all the following apply:

  • being a landlord is your main job
  • you rent out more than one property
  • you’re buying new properties to rent out

If your profits are under £6,515, you can make voluntary Class 2 National Insurance payments, for example to make sure you get the full State Pension.

You do not pay National Insurance if you’re not running a business – even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.

As soon as you reach state pension age, you stop paying Class 2 NIC if you carry on working. You only have to pay them on any earnings that were due to be paid to you before you reached state pension age.

In addition Companies who own properties don’t pay national insurance, national insurance is only paid by employees and the self employed.

Class 2 NI would also not apply if you use a letting agent to collect the rents – average fees would be 15%, even if it is a relative or your own company as then your role will only a passive investment role.

The key case on this topic is Rashid v Garcia (Status Inspector) (2002) Sp C 348

Decision released 11 December 2002.

National Insurance – Class 2 contributions – Self-employed earner – Landlord – Taxpayer had income from letting property – Claim for incapacity benefit – class 2 National Insurance contributions paid to qualify for benefit – Revenue took view that property rental activities did not entitle taxpayer to pay class 2 contributions as he was not carrying on business – Benefit refused – Whether taxpayer was self-employed earner carrying on business – Social Security Contributions and Benefits Act 1992, s. 2, 122.

The taxpayer had four properties income £10,942.

It was estimated that the taxpayer spent two to four hours per week on managing the properties and members of his family acting on his behalf spent 16 to 24 hours per week. The Special Commissioner considered this was insufficient activity to constitute a business so no Class 2 NI was due.

Back in 2015 HMRC did try to get Landlords to pay Class 2 as explained in our blog Should Landlords pay Class 2 NI? – Steve J Bicknell Tel 01202 025252

HMRC Examples NIM23800

Samantha lets out a property that she inherited following the death of her great aunt. This will not constitute a business.

Bob owns ten properties which are let out to students. He works full time as a landlord and is continually seeking to increase the number of properties he owns for letting. Bob is running a business for NICs purposes.

Claire owns multiple properties that are let. She spends around half her working time carrying out duties as a landlord and is not looking to increase the number of properties she owns. If the only duties that Claire undertakes are those normally associated with being a landlord, then this would not constitute a business.

Hasan purchases properties using “buy to let” mortgages. He places all letting duties in the hands of a property letting agent who acts as landlord on his behalf. If the only duties that the property letting agent undertakes for Hasan are those normally associated with being a landlord, then this would not constitute a business.

steve@bicknells.net

What is the Tax Treatment of Abortive Property Investment Costs?

Most investors, whether personal landlords or companies, will have suffered some abortive costs for deals that failed.

The nature of the costs will be capital for investors.

BIM35325 – Capital/revenue divide: general themes: abortive expenditure

Expenditure that would have been capital had it been successful does not change its character merely because in the event it is abortive. ECC Quarries Ltd v Watkis [1975] 51TC153 was concerned with costs incurred in an unsuccessful planning application.

If the application had succeeded the expenditure would have been capital. In the event the application failed; no asset was acquired or modified (and the company did not rid itself of any disadvantageous asset).

What this means is that property investors don’t get any tax relief for abortive fees.

This can be extremely bad news as the case of Hardy v Revenue & Customs [2015] UKFTT 250 (TC) a 10% deposit was paid and the outcome was that HMRC disallowed the claim for relief, the taxpayer appealed and the appeal was dismissed.

It seems unfair but the seller who receives the deposit treats it as a capital gain and pays tax on it.

If a property trader/developer had suffered the loss of the deposit and the costs was ‘wholly and exclusively’ for the purpose of the trade, the expenditure might be an allowable deduction from profits.

steve@bicknells.net

  

What is a Family Investment Company/SMART Company? What do HMRC think about them?

Companies can have multiple classes of shares and the shares can have different rights. These rights cover:

  • Voting
  • Capital Growth
  • Income via Dividends

This can be of particular benefit to families, the topic is covered in a free publication you can download from our website

Family Investment Companies (FICs), sometimes called Smart Companies, are particularly useful for Inheritance Tax (IHT) and have been used for over a decade as an estate planning tool.

In its simplest form parents lend money to the company and the company is owned by their adult children, but FIC’s can be structured to go beyond that with different assets and share classes.

They are a great alternative to partnerships which are taxed at income tax rates allowing faster growth as Corporation Tax is 19% and income tax can be as high as 45%.

Capital Gains Tax is paid at Corporation Tax Rates (19%) and they don’t suffer from 10 year anniversary or exit charges that are applied to Trusts.

The only slight downside is that extracting profits from a company will incur tax for the individual.

Over a period of time the income and capital shares will be moved to younger members of the family and the older members will retain the voting rights.

HMRC Family Investment Companies Unit

HMRC have been investigating FICs since 2019 and have now stopped, their findings are published in the meeting minutes 13th May 2021

In the research we undertook there was no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours. As with any analysis of a taxpaying population, the same broad range of tax-compliance behaviours were observed, with no evidence to suggest those using FICs were more inclined towards avoidance.


Tax risks related to FICs
The key findings in relation to the tax risks associated with FICs are outlined below:
• The use of FICs appears to be a planning strategy, often with the primary objective generational wealth transfer and mitigation of Inheritance Tax.
• There is some diversity in the way that a FIC is structured and managed, creating tax risks and compliance activity across a variety of tax regimes, including Inheritance Tax, Capital Gains Tax, Stamp Duty Land Tax and Corporation Tax.


Conclusions
The team have been subsumed into WMBC and FICs are now looked at as business as usual rather than having a dedicated team

steve@bicknells.net

What are Assets and how does depreciation work?

What is a Fixed Asset?

Fixed Assets generally include Buildings, Computers, Office Furniture, Plant, Equipment, and Vehicles. The Accounting Standards generally refer them as ‘Property, Plant and Equipment’ and in Published Accounts Assets are often called ‘Tangible Fixed Assets’.

Most business set a rule for what value an item has to be before its treated as a fixed asset, for example it might be items costing more than £200, below that value the items might be expensed in the P&L.

Fixed Assets must have a life beyond the current accounting year, for example a computer might have a life of 3 years or more.

The reason we capitalise the items and turn them into a fixed asset is so that we can apportion/spread the cost of the asset over its useful economic life. This means the accounts get a fair allocation of cost each year.

This is not the same as the tax treatment, many assets qualify for Capital Allowances and of those many might qualify for the Annual Investment Allowance. The Annual Investment Allowance gives 100% tax relief immediately.

How are Assets Depreciated?

There are several methods of depreciating assets Straight Line, Reducing Balance, Units of Production and others too. The most commonly used ones are Straight Line and Reducing Balance.

You need to use your judgement to decide the rate of depreciation, for example to depreciate straight line over 4 years you would choose 25%. Rates are normally set for an entire asset class for example Computers as a whole.

Reducing balance works by taking the net asset value and apply the depreciation %

Original Value

Less Depreciation to date (accumulated depreciation)

Net Book Value

Apply Reducing Balance Depreciation %

Every year the current year depreciation is added to the accumulated depreciation the cycle repeats each year.

Depreciation is disallowed as a tax deduction, because you claim Capital Allowances instead.

Business should maintain a Fixed Asset Register listing every asset and its Original Value, Accumulated Depreciation and Net Book Value.

When an asset is sold the value from the asset register need to be used to remove its value from the accounts, any profit or loss on disposal is posted to the P&L.

When an asset is sold there may also be a tax adjustment known as a Balancing Charge, its the difference between the Tax Written Down Value and Fixed Asset Register Written Down Value.

steve@bicknells.net

Are you missing out on Qualifying Interest Relief?

If you pay interest on a personal loan then you used to lend money to your limited company then you can probably claim tax relief on the interest that you pay on your personal loan.

Here are the rules from HS340 – You may be able to claim relief for interest paid or for alternative finance payments where the loan or alternative finance arrangement is used to:

  • buy ordinary shares in, or lend money to, a close company in which you own more than 5% of the ordinary share capital on your own or with associates
  • buy ordinary shares in, or lend money to, a close company in which you own any part of the share capital and work for the greater part of your time in the management and conduct of the company’s business, or that of an associated company
  • acquire ordinary share capital in an employee controlled company if you are a full-time employee – we regard you as a full-time employee if you work for the greater part of your time as a director or employee of the company or of a subsidiary in which the company has an interest of 51% or more
  • acquire a share or shares in, or to lend money to, a co-operative which is used wholly and exclusively for the purposes of its business
  • acquire an interest in a trading or professional partnership (including a limited liability partnership constituted under the Limited Liability Partnership Act 2000, other than an investment limited liability partnership)
  • to provide a partnership, including an limited liability partnership, with funds by way of capital or premium or in advancing money, where the money contributed or advanced is used wholly for the partnership’s business – if the partnership is a property letting partnership, read information about the residential property finance costs restriction
  • buy equipment or machinery for use in your work for your employer, or by a partnership (unless you’ve already deducted the interest as a business expense) – relief is only available if you, or the partnership, were entitled to claim capital allowances on the item(s) in question – if the equipment or machinery was used only partly for your employment, or only partly for the partnership business, only the business proportion of the loan interest or alternative finance payments qualifies for relief)

You cannot claim relief for interest on overdrafts or credit cards.

The limit on Income Tax reliefs restricts the total amount of qualifying loan interest relief and certain other reliefs in each year to the greater of £50,000 and 25% of ‘adjusted total income’.

To claim the tax relief you enter the amount of interest paid on your self assessment return under Additional Information SA101 ‘Qualifying Loan Interest Paid in the Year’.

This could be useful for Property Investors who invest via a limited company. Here is an example

Fred Smith owns his own home worth £500k without a mortgage

He borrows 75% £375k against his home and lends it to his limited company, the interest rate from his broker is 2% cheaper than borrowing in his limited company.

So he could save £7,500 a year interest

He also gets tax relief on the interest that he has paid.

steve@bicknells.net

What are Basis Periods and what will be the impact of Government Proposals to reset them? – Making Tax Digital (MTD ITSA)

Here is an example of how Basis periods work and how they create overlap periods taken from our blog What is Overlap Profit? – Steve J Bicknell Tel 01202 025252

A business commences on 1 October 2010. The first accounts are made up for the 12 months to 30 September 2011 and show a profit of £45,000.

The basis periods for the first three tax years are:

2010-2011Year 11 October 2010 to 5 April 2011
2011-2012Year 212 months to 30 September 2011
2012-2013Year 312 months to 30 September 2012

The period from 1 October 2010 to 5 April 2011 (187 days) is an `overlap period’.

It is a complicated and confusing process and the overlap profit is effectively taxed twice and given back later as tax relief.

There are two ways to gain access to your overlap relief: cease trading or change your accounting date.

The Proposal

The HMRC proposal affects the self-employed, partnerships, trusts, and estates with trading income. The proposal affects unincorporated businesses that do not draw up annual accounts to 31 March or 5 April, and those that are in the early years of trade.

Having carried out a short informal consultation with a range of businesses and tax experts, the government intends to implement the proposed reform ahead of the mandation of Making Tax Digital for Income Tax in April 2023.

The consultation period end on 31st August 2021.

Example

A business draws up accounts to 30 June every year.

Currently, income tax for 2023 to 2024 would be based on the profits in the business’s accounts for the year ended 30 June 2023. Part of the accounts are outside of the tax year, and part of the tax year is not included in profits taxed.

The proposed reform would mean the income tax for 2023 to 2024 would be based on:

3/12 of the income for the year ended 30 June 2023, plus 9/12 of the income for the year ended 30 June 24.

Basis periods are straightforward for the estimated 93% of sole traders and 67% of trading partnerships that draw up their accounts to 5 April or 31 March every year. But if a different accounting date is chosen then the rules are more complex and can be confusing for businesses to understand and apply. The rules can be particularly challenging for new or unrepresented businesses, leading to errors and mistakes in tax returns.

Aligning the basis of assessment for trading income with other forms of income enables wider, simpler reforms to be considered in the future. In particular, transitioning to the tax year basis in the tax year 2022 to 2023 will simplify the introduction and experience of Making Tax Digital for Income Tax. For simplicity, the government proposes a one year transition period, with an option to spread any excess profit arising in that transition period over five years.

The transition tax year would introduce the equivalence rule. This means that businesses can treat the end of the tax year for their tax year basis as any date between 31 March and 5 April.

Alongside this transition, the proposals would mandate that all overlap relief must be claimed in the transition tax year, including any historic transitional overlap relief, or overlap relief generated during the new transition year. No overlap relief would be carried forwards into the new tax year basis, and no new overlap relief would be generated after the transition year.

According to an article in the Law Society Gazzette 13th August

The new rule, proposed by HM Revenue & Customs under the guise of simplification, could generate a badly needed windfall of more than £1bn for the Treasury next year. 

Aligning the reporting date with the tax year would mean that profits that arise in each reporting year would be allocated to that tax year. Currently, profits are taxed for the year in which the business’s accounting period ends. Many partnerships thus end their accounting period on 30 April, allowing them 11 months’ grace. 

In summary

  • The basis period reform will apply from 2023-24.
  • There will be a transition period in 2022-23.
  • Accounting periods that end between 31 March and 4 April inclusive will be treated as ending on 5 April.
  • In the 2022-23 transition year, business profits will be reported from the end of the previous period assessed in 2021-22 up to 5 April 2023. 
    • Businesses with a 31 March 2023 accounting date will report business profits up to that date. This will be deemed to be 5 April 2023.
    • The subsequent accounting period will be deemed to start on 6 April 2023.

steve@bicknells.net

What is Cash Accounting? Accrual Accounting? Traditional Accounting?

Cash Basis Accounting

Under Cash Accounting you only report Sales when you are paid and Expenses when you pay them. This can be particularly useful if your clients take longer to pay you than you take to pay your suppliers.

Its referred to as the ‘Cash Basis’ for Income Tax and ‘Cash Accounting’ for VAT.

The ‘Cash Basis’ for the Self Employed was introduced in April 2013.

You can use Cash Basis if you:

  • run a small self-employed business, for example sole trader or partnership
  • have a turnover of £150,000 or less a year

If you have more than one business, you must use cash basis for all your businesses. The combined turnover from your businesses must be less than £150,000.

Limited companies and limited liability partnerships cannot use cash basis.

From the 6th April 2017, the Finance Bill 2017 made the Cash Basis the default basis for Landlords which means on Self Assessment returns Landlords have to tick a box to use Traditional Accounting.

HMRC believe that Cash Accounting/Cash Basis is a simpler way to prepare accounts for tax returns, in reality, I am not convinced as it can be confusing where there are management fees, rent arrears, costs covering more than a year and mortgage interest.

Joint Ownership can add to the confusion because both owners are free to make their own choice as to whether to use the Cash Basis or Traditional Accounting. The exception to this rule is married couples and civil partners who have to adopt the same approach.

VAT Cash Accounting

VAT Cash Accounting is open to all business types.

Usually, the amount of VAT you pay HM Revenue and Customs (HMRC) is the difference between your sales invoices and purchase invoices. You have to report these figures and pay any money to HMRC even if the invoices have not been paid.

With the Cash Accounting Scheme you:

  • pay VAT on your sales when your customers pay you
  • reclaim VAT on your purchases when you have paid your supplier

To join the scheme your VAT taxable turnover must be £1.35 million or less.

You must leave Cash Accounting when your Turnover hots £1.6 million.

Accrual Accounting and Traditional Accounting

These are the same thing.

The Accruals Method essential follows the principle of matching revenue and expenses in the same period.

Companies must use this method for their published accounts.

S396 Companies Act 2006 (CA 2006) (S404 for group accounts) specifies that the directors of every company have to prepare a balance sheet and a profit and loss account every financial year and that the balance sheet must give a true and fair view of the state of affairs of the company as at the end of the financial year, and the profit and loss account must give a true and fair view of the profit or loss of the company for the financial year.

In order to comply with this Directors need to enter all sales and purchases in the accounts, not just the ones that have been paid.

Accruals refers to including liabilities that you have incurred but not paid for example accountancy fees to prepare the accounts.

There could also be prepayments for things paid in advance such as insurance.

The accounts will also included items such as depreciation.

To give a True and Fair view Company Accounts are prepared to accountings standards such as FRS105 and FRS102 and UK GAAP.

steve@bicknells.net

How do you tell HMRC your business is active? or dormant?

When you form a new limited company HMRC will send you a letter, the letter will tell you the company UTR and it also says ‘you must tell HMRC within 3 months of starting or restarting any business activity’.

Personally I think it would much better if this was covered within the formation process, most people form a companies because they want to start business activity immediately so it would make sense that business are automatically registered or at least able to choose a date on which they will start activity, for example the start of a month, this would avoid HMRC creating multiple returns for the same year, as Corporation Tax returns can only be for 12 month period and companies are rarely formed on the 1st day of a month.

I have seen may situations where businesses forget to tell HMRC that they have started, but do submit accounts and the corporation tax return and HMRC so far HMRC have been ok with this, but that’s no guarantee that they will always be sympathetic.

What does ‘Active’ mean

Generally your company or organisation is considered to be active for Corporation Tax purposes when it is, for example:

  • carrying on a business activity such as a trade or professional activity
  • buying and selling goods with a view to making a profit or surplus
  • providing services
  • earning interest
  • managing investments
  • receiving any other income

What’s interesting is that the definition is slightly different for

  • Other Taxes
  • Company Law
  • Accounting Standards

What does ‘Dormant’ mean

Your company is called dormant by Companies House if it’s had no ‘significant’ transactions in the financial year.

Significant transactions don’t include:

  • filing fees paid to Companies House
  • penalties for late filing of accounts
  • money paid for shares when the company was incorporated

You do not need to tell Companies House if you restart trading. The next set of non-dormant accounts that you file will show that your company is no longer dormant.

Your company will be considered dormant for corporation tax purposes in any of the following circumstances:

  • It is not trading and does not receive any other income. This includes investment income.
  • It is a new limited company that hasn’t started trading yet.
  • It is a flat management company.
  • It is an unincorporated association or charity that owes less than £100 corporation tax.

A dormant company can be, for example:

  • a new company that’s not yet trading
  • an ‘off-the-shelf’ or ‘shell’ company held by a company formation agent intending to sell it on
  • a company that will never be trading because it has been formed to own an asset such as land or intellectual property
  • an existing company that has been – but is not currently – trading
  • a company that’s no longer trading and destined to be removed from the Companies Register

To remain dormant – don’t make payments

  1. If the company pays an invoice for example from the accountant that would make the business active
  2. If the company pays its formation cost then it won’t be dormant
  3. If you have employees you will be active
  4. If you pay dividends you will be active

To stay dormant pay any costs personally and not via the company.

What are the Rules for Clubs

HMRC may treat your club or unincorporated organisation as dormant for Corporation Tax purposes if it’s active but both the following conditions apply:

  • your organisation’s annual Corporation Tax liability must not be expected to exceed £100
  • you run your club or organisation exclusively for the benefit of its members

For each year of dormancy your organisation must not have any:

  • allowable trading losses for which it may want to claim relief
  • assets it’s likely to dispose of, which would give rise to a chargeable gain
  • interest or annual payments to pay out from which tax is deductible and payable to HMRC

When you think your company is dormant

If your company has stopped trading and has no other income, you can tell HMRC that it’s dormant for Corporation Tax.

If you’ve never had a ‘notice to deliver a Company Tax Return’

You can tell HMRC your company’s dormant over the phone or by post.

If you’ve filed a Company Tax Return or had a ‘notice to deliver a Company Tax Return’

You’ll still need to file a Company Tax Return online – this will show HMRC that your company is dormant for this period.

Confirmation Statements

Dormant companies still need to file the annual confirmation statement and the dormant accounts.

How do tell HMRC you are active?

Within 3 months of becoming active you need to tell HMRC, you can do this via the Government Gateway but I think its easier to write to HMRC.

Your letter must include:

  • the company’s name and registration number
  • the date the company’s accounting period started
  • the date to which the company intends to prepare accounts
  • the company’s principal place of business
  • the nature of the business being carried out by the company
  • the name and home address of each director of the company
  • if the company has taken over another business, the name and address of the former business and also the name and address of the person from whom the business was acquired
  • if the company is a member of a group of companies, the name and registered office address of the parent company
  • if the company has been obliged to comply with the Income Tax (Pay as You Earn) Regulations 2003, the date on which that obligation first arose

The letter must be:

  • signed by a company director or company secretary
  • include a declaration that the information is correct and complete to the best of their knowledge

Send your letter to:

Corporation Tax Services
HM Revenue and Customs
BX9 1AX
United Kingdom

What about the self employed and Landlords?

If you earn over £1,000, then you will need to register.

For the self employed use form LC Forms (hmrc.gov.uk)

For Landlords use this form LC Forms (hmrc.gov.uk)

There are other forms for Partnerships

From April 2023 the Self Employed and Landlords earning over £10,000 a year will need file quarterly under Making Tax Digital rules.

steve@bicknells.net

When can’t property investors use Micro Entity Accounts?

Most property investors love Micro Entity Accounts:

  1. No property revaluation – property is shown at historic cost (Mortgage lenders are not affected by this as they always require a property valuation for lending purposes)
  2. Minimal disclosure and no notes
  3. No deferred tax
  4. Most property investors fit within the size criteria
  5. No Directors Report

A company meets the qualifying conditions for a micro-entity if it meets at least two out of three of the following thresholds:

  • Turnover: Not more than £632,000
  • Balance sheet total: Not more than £316,000
  • Average number of employees: Not more than 10

The FRC (Financial Reporting Council) aren’t big fans of Micro Entity reporting due to concerns about the minimal accounts giving a ‘true and fair’ view but the whole reason for FRS105 and Micro Entity Accounts was to simplify reporting for SME’s and they definitely do that.

FRS105 allows Investment Property – see FRS105 Section 12

There are certain companies which can not qualify as micro entities regardless of their size

  • Members of a group preparing group accounts.
  • Investment undertakings
  • Financial holdings undertakings
  • Credit institutions
  • Insurance undertakings
  • Charities

Investment Undertakings

Article 2 of the Accounting Directive – 2013/34/EU as follows:

2(13) ‧associated undertaking‧ means an undertaking in which another undertaking has a participating interest, and over whose operating and financial policies that other undertaking exercises significant influence. An undertaking is presumed to exercise a significant influence over another undertaking where it has 20 % or more of the shareholders’ or members’ voting rights in that other undertaking;

2(14)‧investment undertakings‧ means: a)undertakings the sole object of which is to invest their funds in various securities, real property and other assets, with the sole aim of spreading investment risks and giving their shareholders the benefit of the results of the management of their assets, (b) undertakings associated with investment undertakings with fixed capital, if the sole object of those associated undertakings is to acquire fully paid shares issued by those investment undertakings without prejudice to point (h) of Article 22(1) of Directive 2012/30/EU;

2(15) ‧financial holding undertakings‧ means undertakings the sole object of which is to acquire holdings in other undertakings and to manage such holdings and turn them to profit, without involving themselves directly or indirectly in the management of those undertakings, without prejudice to their rights as shareholders

Is this a problem for Property Investment Companies?

No, most property investment companies are not Investment Undertakings!

I know that sounds odd as it is a property investment and the investment makes it sound like an Investment Undertaking so lets look at this in more detail

  1. Are there multiple shareholders? generally not its often owned by a husband and wife (or civil partners) – if you have lots of passive investors that could make it an Investment Undertaking, we would need to look at the primary purpose of why the passive investors invested
  2. Are there shareholders with no involvement in the operation or management of the business? if their primary purpose was investment then it could be an Investment Undertaking – generally that’s not the case because normally property is funded by loans not shares (if you do use external investors you could fall within FCA regulations)
  3. Are there multiple properties in the same company? This could be seen as spreading the risk which might be an Investment Undertaking but most portfolio investors are seen by HMRC and others as running a property business and they are active in running it, many new investors have multiple companies with a single property in each Company – its better for lenders (charge on property and debenture over company), its better when you sell GCT is based on the share value (net worth) and the purchaser gets very low SDLT 0.5% and may not need to refinance
  4. Is a small property portfolio a risk management strategy? No, the assets are all of the same class so how can it be a risk management strategy!
  5. What about a company with one property used by a related party or member of a group? there is no management or spreading of risk so its not an Investment Undertaking

steve@bicknells.net

How do you account payments received under Off Payroll (IR35)?

If you are a contractor working for the Public Sector or a Large Business you will be assessed against the Off Payroll rules that took effect in 6th April 2021 its a shift in the way the existing IR35 rules are applied.

Who is likely to be affected and what is it

  1. Individuals supplying their services through an intermediary, such as a personal service company (PSC), and who would be employed if engaged directly.
  2. Medium and large-sized organisations outside the public sector that engage with individuals through PSCs. Public sector organisations will also be affected by changes to improve the operation of the reform.
  3. Recruitment agencies and other intermediaries supplying staff through PSCs.

Engagements with small organisations outside the public sector are exempt, minimising administrative burdens for the vast majority of businesses.

A 5% allowance is currently available to those who apply the off-payroll working rules to reflect the costs of administering them. Because responsibility is shifting from the PSC to the engager, this allowance will be removed for those engagements with medium and large-sized organisations. It will continue to be available for engagements with small organisations.

The deemed employer is the person who is responsible for:

  • deducting Income Tax and employee National Insurance contributions and paying these to HMRC
  • paying employer National Insurance contributions and Apprenticeship Levy, if applicable, to HMRC

How is the money taxed when the contractor’s company gets it?

ESM10030 – off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: how the worker accounts for and reports monies drawn from their intermediary

Remuneration

Remuneration (i.e. such as a salary) drawn by the worker from their PSC will be free of PAYE tax and NICs up to the level of the deemed direct payment, where that remuneration can reasonably be taken to be for services of that worker to a public authority or medium or large-sized organisation not in the public sector. This prevents payments being subject to double taxation (see ESM10024).

This how its processed in Moneysoft IR35 – deemed payments – how to include in RTI to HMRC | Moneysoft

Dividends

If the worker is remunerated via a dividend from their PSC, this will also be tax free up to the level of the deemed direct payment, where the dividend can reasonably be taken to be for the services of the worker to a public authority or medium or large-sized organisation not in the public sector. This only applies to dividends paid to the worker who performed the services subject to the off-payroll working rules. This dividend does not need to be returned on the worker’s self-assessment return.

ESM10035 – off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: CT accounting

Example – Corporation Tax

A worker offering their services through a PSC performs services for Major Retail Ltd, a large-sized business. The engagement is within scope of the off-payroll working rules and Major Retail Ltd deems the engagement would be one of employment if it were direct and deducts tax and NICs. For the twelve-month engagement the worker is paid £1,000 per month plus VAT of £200. Each month £400 is taken in tax and employee National Insurance with £600 plus the VAT of £200 paid to the worker’s PSC. The worker takes all £600 as a payroll payment (like a salary) each month without deducting anything further and submits this through payroll on a Full Payment Submission. The PSC has no other income during the year.

Turnover                                            (12 x £1,000)   =   £12,000                    (credit income)

Less Tax and NICs expense      (12 x £400)      =   £4,800                     (debit in profit and loss)

Less Payroll expense                    (12 x £600)      =   £7,200                     (debit in profit and loss)

Profit                                                                                       =   £0

If the worker instead of receiving payroll payments, takes the net amount as dividends there would be taxable profit at the end of the year:

Turnover                                            (12 x £1,000)   =   £12,000                 (credit income)

Less Tax and NICs expense      (12 x £400)      =   £4,800                  (debit in profit and loss)

Profit                                                                                   =   £7,200                  

The PSC also gets relief, this time for corporation tax, to avoid double taxation. This relief is given by s141A Corporation Tax Act 2009. This relief is used when calculating the company’s taxable profit. A deduction equal to net amount received by the PSC, here £7,200, would be made to leave taxable profit of £0. The £7,200 can then be taken as tax free dividends.

If after filing accounts the circumstances change and the engagement should not have been one to which Chapter 10, Part 2 ITEPA 2003 applied, and tax and NICs are refunded, the necessary corrections to the accounts and tax computations must be made to reflect the new position, as the relief would no longer be due.

steve@bicknells.net