Category: IR35

That’s Scotch Tax!

Scottish Tax

On the 15th September HMRC issued the following announcement…

Depending on the level the Scottish Parliament sets the rate at Scottish taxpayers may pay a different rate of Income Tax to the rest of the UK.

Some of the Income Tax collected under the Scottish rate will fund the Scottish government and the rest will fund the UK government.

The Scottish rate of Income Tax doesn’t apply to income from savings such as building society interest or income from dividends. This rate will stay the same for all taxpayers across the UK.

The Scottish government is expected to announce the proposed Scottish rate of Income Tax for the tax year 2016 to 2017 in its autumn 2015 draft budget.

HM Revenue and Customs (HMRC) will collect the Scottish rate of Income Tax on behalf of the Scottish government.

Identifying Scottish taxpayers

It’s where you live, not where you work, that decides whether you’re a Scottish taxpayer.

You’ll pay the Scottish rate of Income Tax if:

  • you’re resident in the UK for tax purposes, and
  • your main residence for most of the tax year has a Scottish postcode

HMRC will contact potential Scottish taxpayers before April 2016. If the address HMRC holds for you is in Scotland you’ll be classed as a Scottish taxpayer. It’s your responsibility (not your employers’) to notify HMRC if you change your address.

Your April 2016 tax code will begin with the letter ‘S’ to show you’re a Scottish taxpayer.

If you pay your Income Tax through your wages (known as Pay As You Earn) HMRC will advise your employer to treat you as a Scottish taxpayer so you don’t need to do anything.

The Scotland Act 2012 contains the full definition of a Scottish taxpayer but where residency is not straightforward these examples of ‘close connection’ will help you.

National Insurance contributions are unaffected by the introduction of the Scottish rate of Income Tax.

Scottish Rate of Income Tax Calculator – click here

According to the Telegraph in August

Nicola Sturgeons’ rhetoric suggests she is planning to revive Labour’s ailing fortunes in Scotland, where it was all but wiped out in the general election, by veering Left and attempting to regain the party’s traditional working class support.

Among the policies she said she supported were a 50p top rate of income tax for people earning more than £150,000 and removing independent schools’ charitable status.

But the Tories said her blueprint would “send Scotland back to the 1970s” and warned it would merely result in an exodus of “wealth creators” south of the Border.

It will be interesting to see what the Scottish Parliament does to tax rates and whether or not its a success for Scotland.

steve@bicknells.net

Contact Us

A new type of employment status

The Office of Tax Simplification – Employment Status Report – March 2015 suggests we could see a new type of worker being created, part way between Employed and Self Employed. We could also see the term office holder removed from legislation.

Contractor Weekly reported – This involves the introduction of a new category of worker, a ‘third way’ between the employed and self-employed, acknowledging that some workers do not fit easily into either of the two traditional positions and that they should be subject to a modified set of tax rules. Freelancers might fall into this ‘third way’ and who might be seen as people who have chosen this route of working and want certainty over their status.

Click on this link to read the Employment Status Report

Will this solve the IR35 problem? who will it defined? what should the rules be?

Workers

 

steve@bicknells.net

New reporting requirements for intermediaries

with computer

An intermediary is any person who makes arrangements for an individual to work for a third party or be paid for work done for a third party. An employment intermediary is also commonly referred to as an agency.

From 6 April 2015, intermediaries must return details of all workers they place with clients where they don’t operate Pay As You Earn (PAYE) on the workers’ payments. The return will be a report (or reports) that must be sent to HM Revenue and Customs (HMRC) once every 3 months.

Agencies will be required to let HMRC know the following details:

  • Contractor’s name, address, date of birth, etc.
  • PAYE reference.
  • National Insurance number.
  • How the contractor was engaged during the period (i.e. was he working via a limited company).
  • The duration of each assignment.
  • Details of the contractor’s limited company (e.g. company registered number).
  • How much was paid to the contractor.

The regulations will give HMRC information that will enable it to decrease false self-employment and abuse of offshore working. This will help HMRC to:

  • support intermediaries that comply
  • penalise intermediaries that don’t comply
  • make sure the right tax and National Insurance is paid by people working through intermediaries
  • reduce unfair commercial advantage

Here is link to the full reporting requirements – Legislation Link

This is the link to consultation – Consultation

steve@bicknells.net

Would an online IR35 test help?

Tablet

The Term “IR35” became established following a Budget press release issued by the Inland Revenue on 23rd September 1999. That press release was called “IR35”. At its simplest, IR35 is the way in which the taxman closed a loophole that was allowing many contractors and freelance professionals to avoid paying large amounts of Tax and National Insurance.

In 2012 HMRC put forward the Business Tests but they haven’t been as successful as first thought.

Here are the 12 tests, scores shown in()

  1. Business premises (10)
  2. PII (2)
  3. Efficiency (10)
  4. Assistance (35)
  5. Advertising (2)
  6. Previous PAYE (minus 15)
  7. Business plan (1)
  8. Repair at own expense (4)
  9. Client risk (10)
  10. Billing (2)
  11. Right of substitution (2)
  12. Actual substitution (20)

A score less than 10 is high risk and a score more than 20 is low risk. Fail the test and it could cost you a great deal in tax.

In general the key test tend to be:

  1. Substitution
  2. Control
  3. Financial Risk

HMRC launched the ESI (Employment Status Indicator) a while ago.

The recently published Minutes of the IR35 Forum’s last meeting held on 24th July reveal that HMRC are keen for contractors to be able to assess their employment status by way of the Employment Status Indicator (ESI) tool.

Will this resolve the IR35 Status problems?

 

steve@bicknells.net

Are you ready for the OTS to check your employment status?

And now round two of justify it

Contractor Weekly reported on th 29th July 2014…

As part of the ongoing mission to create a simpler and fairer tax system the Office of Tax Simplification (OTS) has been tasked with carrying out reviews of employment status and also tax penalties, with a view to producing a report in time for next year’s Budget.

According to the OTS, the boundary between employment and self-employment no longer reflects modern working patterns, particularly in recent years. Many people have multiple jobs and can be classed as employed in one whilst self-employed in another. The rise of the freelancing business model has also caused some to suggest this is a ‘third way’ between employment and self-employment.

A worker’s employment status, that is whether they are employed or self-employed, is not a matter of choice. Whether someone is employed or self-employed depends upon the terms and conditions of the relevant engagement.

Many workers want to be self-employed because they will pay less tax, this calculator gives you a quick comparison between being employed, self employed or taking dividends in a limited company.

HMRC have a an employment status tool to help you determine whether a worker can be self-employed or should be an employee http://www.hmrc.gov.uk/calcs/esi.htm

It will be interesting to see the report that the Office of Tax Simplification (OTS) produce, especially if they find a ‘third way’

steve@bicknells.net

Doctor, Doctor, I think you should be an Employee

Young Doctor with stop sign

A report in the Telegraph on the 14th July 2014…

Dozens of NHS executives face possible investigation by HM Revenue and Customs after they refused to answer questions about their tax arrangements, it can be revealed.

An investigation has identified 86 senior health service officials paid off-payroll who have refused to give assurances to their employers that they are paying the correct level of income tax and national insurance.

They are paid through service companies – arrangements that allow public sector employees to be paid as contractors through private companies, potentially cutting their tax bills.

http://www.telegraph.co.uk/health/healthnews/10966314/Dozens-of-NHS-executives-face-tax-inquiry-into-off-payroll-earnings.html

Monitor found 30 foundation trusts had issues to resolve in their report of the 10th July 2014:

  • 20 foundation trusts have 1 or more senior employees paid through an off-payroll arrangement, and they are waiting for responses after asking those employees for assurance about their tax arrangements
  • 23 foundation trusts (including some of the 20 above) still have at least 1 board member or senior member of staff with significant financial responsibility employed through an off-payroll arrangement
  • of these 23 trusts, 9 are facing wider issues relating to their performance which they have explained is affecting their ability to recruit and retain permanent skilled staff; this resulted in the need to use interim off-payroll contracts to attract high-performing staff to help improve the foundation trust’s situation
  • as a result of their performance issues, these 9 trusts are facing current enforcement action by Monitor, which is unrelated to their use of off-payroll employment
  • out of those 23 trusts, the other 14 which are not facing enforcement action have plans to end off-payroll arrangements by the end of the year

Will this end the use of PSC’s in the NHS?

steve@bicknells.net

RTI Declarations – Service Company

And now round two of justify it

It’s time to run your first RTI PAYE year end and you have your own limited company, how do you answer this question?

Service Company ‘Yes’ if you are a service company – ‘service company’ includes a limited company, a limited liability partnership or a partnership (but not a sole trader) – and have operated the Intermediaries legislation (Chapter 8, Part 2, Income Tax (Earnings and Pensions) Act 2003 (ITEPA), sometimes known as IR35). Otherwise indicate ‘No’.

The question is now a bit more specific, which is great, because you will only answer ‘Yes’ if you have operated IR35.

steve@bicknells.net

Key Points from the Autumn Statement 2013

Tax Money

The Chancellor George Osborne presented the Autumn Statement to the House of Commons on 5th December 2013 and things are getting better, economic growth forecasts for this year have more than doubled from 0.6% to 1.4% but the austerity plan is set to continue.

Here is a summary of the key announcements:

Business Rates

Business rate increases in England will be capped at 2% in 2014/15 (they were set to increase by 3.2%) and businesses will be able to pay over 12 months rather than 10.

The Retail Sector will also get a £1,000 discount in 2014/15 and 2015/16, this applies to pubs, cafes, restaurants and charity shops with a rateable value below £50,000.

A reoccupation relief of 50% is being introduced for up to 18 months on premises that have been empty for a year or more and it will apply from 1st April 2014 to 31st March 2016.

Small Business Rate Relief has been extended to April 2015 under the scheme small businesses with a rateable value of £6,000 or less can get 100% relief, the relief is scaled down to zero on rateable values of £12,000 and there is a lower multiplier on rates between £12,001 and £17,999.

Income Tax

As previously announced the personal allowance will be £10,000 for the tax year 2014/15.

From April 2015, a spouse or civil partner who is not liable to income tax will be able to transfer £1,000 of their allowance to a basic rate tax paying spouse and as a result save £200 in tax.

State Pension Age

By 2020 it will be 66, by 2028 it will be 67 and by mid 2030’s 68, then in 2040’s 69.

Capital Gains Tax

The annual exempt amount will be £11,000 for individuals for 2014/15.

But there was an exemption for principle private residence  letting for 36 months and from 6th April 2014 it will be reduced to 18 months.

Consultation will start in April on non-residents paying capital gains on property disposals.

Individual Savings Account (ISA)

The limit will rise to £11,880 for 2014/15 and of this £5,940 can be invested in cash ISA’s

Mortgage Guarantee Scheme

The scheme started in October will run for 3 years and end in January 2017.

Buyers will only need a 5% deposit and the government and the funder will guarantee 15% of the loan in return for a fee.

IR35

Legislation will be tightened from April 2014.

Anti-avoidance

A range of measures were discussed in addition to IR35 and these included:

  • Partnership Tax
  • Controlled foreign companies
  • Charities
  • High risk tax avoidance schemes
  • Dual contracts

Other headline measures

  • Employers NI for under 21’s to be scrapped in 2015
  • Rolling back green levies to allow an average saving of £50 on energy bills
  • Free school meals for infants
  • Scrapping of 1% above inflation rail fare increases
  • Electronic tax discs
  • Abolition of next years 2p per litre fuel duty rise

 

steve@bicknells.net

 

IR35 HMRC Enquiries increase – are you at risk?

Scaring amounts

On the 25th November 2013, the House of Lords Select Committee on Personal Service Companies met with Rowena Fletcher (Deputy Director with special responsibility for the Employment Status Team) and Robin Wythes (Team Leader of the Employment Status Team).

You can read the full minutes by clicking on this link http://www.parliament.uk/documents/lords-committees/Personal-Service-Companies/uc131125Ev1FletcherWythes.pdf

HMRC estimate there are 200,000 Personal Service Companies in the UK compared to their estimate in 1999 of 90,000. Interestingly, HMRC admit to employing 8 Occupational Phychologists through Personal Service Companies. The risk to the Exchequer is valued at £475 million and  despite the large increase in PSC’s this estimate hasn’t changed since the introduction of IR35 in 1999.

In 2012-13 opened 256 enquiries into cases believed to be high risk and the tax year 2013-14 112 cases were opened in the  first 6 months. In 2011-12 only 59 cases were opened.

Currently it is taking 28 weeks per enquiry which is faster than in previous years when it took between 110 and 140 weeks.

Currently only 5 cases under investigation which are expected to go to tribunal.

HMRC have 40 specialist staff working on IR35 Compliance, they had 1,200 calls in 2012-13 requesting advice and 80 detailed contract reviews were sought. If a contract review is carried out HMRC will issue a written certificate of opinion, the committee was assured that any contract review is totally confidential and not passed to the compliance team.

So are you happy that your PSC would be safe if HMRC carried out an enquiry?

steve@bicknells.net

 

 

Why retainers are bad for consultants

Scaring amounts

A retainer fee is a fixed amount of money that a client agrees to pay, in advance, to secure the services of a consultant or freelancer. The fee is typically not associated with the success of a project or based on achieving particular results. A retainer is often paid in a single, lump sum, or on an ongoing basis (typically monthly or quarterly). [About.com – Consulting/Freelance]

The problem is that retainers create mutuality of obligation (MOO).

The significance of mutuality of obligation is that it determines whether there is a contract in existence at all. Without mutuality of obligation there can be no contract of any kind.

 

Only when the basic requirements for mutuality of obligation have been identified is it possible to then consider whether the contract is a contract of employment or a contract for Services (self-employment).

 

The basic requirements as to the mutual obligations necessary to determine whether there is a contract in existence at all are:

 

  • that the engager must be obliged to pay a wage or other remuneration, and
  • that the worker must be obliged to provide his or her own work or skill.

 

These basic requirements could be present in either a contract of service or a contract for services and, on their own, will not determine the nature of a contract.

According to HMRC, the irreducible minimum requirements for a contract of employment are:

  • the requisite mutuality of obligation present;
  • a sufficient degree of control being exercised on the part of the engager;
  • other provisions of the contract being consistent with a contract of employment

The very nature of a retainer fee arrangement attaches to it obligations, i.e. for the client to pay the freelancer an ongoing fee in return for the expectation by the client for the contractor to make themselves available, normally at short notice.

 

It’s almost impossible to argue that retainer fees would not fall within IR35 and be treated as Deemed Payments.

In order to stay outside of IR35 you will need to carefully consider the contract and identify employed status factors that will put you outside of IR35.

steve@bicknells.net