You may have recently received a reminder from HMRC to make your second self-assessment payment on account for the 2017-18 tax year.  Every year at a4c we are asked what this means by very confused clients (who said tax doesn’t have to be taxing?).

Payments on account are advance payments made towards your personal tax for each tax year.  These are made on 31st January and 31st July.

How much you have to pay is based on your previous year’s tax return, with 50% being paid at each deadline.  So if your tax bill in 2016/17 was £8,000 then you will be required to make the following payments on account:

  • First payment on account 31st January 2018 £4,000
  • Second payment on account 31st July 2018 £4,000
  • Balancing payment (any extra tax due for 2017/18) due 31st January 2019

 

Everyone is required to make payments on account unless:

  • your previous tax return tax bill was less than £1,000; or
  • more than 80% of the tax you pay is deducted through PAYE

Can you reduce your payments on account?

Yes, if you predict that your tax bill in the next tax year is likely to be lower then you can apply for reduced or removed payments on account.

Beware though if your tax bill is not lower and payments on account should have been made then HMRC will charge you late payment interest.

How do you know what to pay?

The SA302 tax summary calculation for 2016/17 will show the first and second payments on account, payable 31st January 2018 and 31st July 2018. If a4c prepared your tax return then you would have been given a copy of this document along with your full tax return.

HMRC may also send a statement of your account in early July as a reminder of forthcoming tax owed.

IR35 Can't be IgnoredIR35 plays an important role in the lives of many of our contractor clients.

If you are a contractor then you need to be aware of this legislation as the cost of getting it wrong can be vast.

At A4C we have composed this IR35 Guide to help you understand how the rules may impact your contracting career.

What is IR35?

IR35 is properly known as the Intermediaries Legislations.

Introduced by the Chancellor of the Exchequer, it was intended to counter tax avoidance by the use of so-called personal service companies (PSCs).  The aim was to prevent workers from setting up limited companies through which they could work as an employee whilst saving on tax.

What do HMRC look for?

They look to see if there is a hypothetical contract in place between the hirer and the PSC enabling disguised employment.

How does HMRC decide if a contract falls within IR35?

There are a series of employment status tests to see if your services have been engaged in a genuine self-employed capacity.

  • Can you hire someone else to do the work at your own expense?

  • Do you risk your own money?

  • Do you provide the main items of equipment for the contract?

  • Do you agree to undertake the contract for a fixed price regardless of how long the job may take?

  • Can you decide what work to do, how and when to do it and where to provide the services?

  • Do you regularly work for a number of different clients?

  • If you make a mistake do you have to correct unsatisfactory work in your own time and at your own expense?

If you can answer yes to the following questions then you should be fine, but may want to seek advice to be on the safe side.

Should you worry if your contract falls within IR35?

Operating through a PSC is not illegal and you can undertake contracts which fall inside IR35, but if you do you must pay full tax and national insurance.

Recent publicity surrounding ‘off payroll’ payments within the BBC, the student loan companies and service providers to the London 2012 Olympics means that the focus is back on IR35.  HMRC frequently asks are these individuals genuinely in business of their own accord or simply using these payment vehicles to avoid their full tax and NI obligations?

HMRCDo HMRC undertake investigations?

In recent years HMRC has raised a number of IR35 challenges, although it is well know that they have won very few.   Most likely because of the legislation being poorly written and hard for courts to apply.

As a result of this there has been significant investment in the way IR35 investigations are administered and therefore it is important that contractors know what IR35 is, whether they are caught by this legislation and the impact it could have, as the chances of winning future reviews are expected to swing significantly in HMRC’s favour.

On a positive note, HMRC has acknowledged that there is a lot of uncertainty in the contracting sector surrounding IR35.  They agree that it is clear who definitely falls outside of IR35 and those who definitely fall inside IR35 but there is a huge grey area in the middle.

In the 2012 budget the government announced that measures would be developed to improve IR35 and as a result new guidance is being given to help contractors identify if their contract is high, medium or low risk.  These bands are defined by new Business Entity Tests, there are twelve in total each awarding different scores:

  1. Business premises
  2. Professional Indemnity Insurance
  3. Efficiency
  4. Assistance
  5. Advertising
  6. Previous PAYE
  7. Business plan
  8. Repair at own expense
  9. Client risk
  10.  Billing
  11.  Right of substitution
  12.  Actual substitution

The scoring system tells you which band you fall into:

  • Less than 10 points – High risk
  • 10 to 20 points – Medium risk
  • More than 20 points – Low risk

 

So let’s think about what you need to get that peaceful night’s sleep…

Business premises

You can score a lovely 10 points if you have business premises which are not at your home or the client’s premises.  It doesn’t matter how swanky your barn conversion or German huf house is, if it’s at your home address you don’t get the 10 points.  Rent a desk in a serviced unit with supporting evidence to prove it and the points are all yours!

Client risk

You can score 10 more points if you were unable to recover funds for work completed within the past 24 months.  This bad debt should be around 10% of your annual turnover.  This one seems a little strange because if you manage your contracts professionally and only take those contracts you consider to be ‘good payers’ then you wouldn’t qualify for these points.  However if you frequently get asked to leave contracts for poor performance followed by unpaid invoices then you can assume you’ve got these points in the bag!

Billing

There are 2 points available if you invoice for your services and negotiate payment terms.

And so the list goes on…

A low risk rating by HMRC will give you a 3-year period of grace, assuming you told the truth and don’t change the business model.  You can obtain this formal rating by having your contract reviewed via the IR35 helpline and contract review service.

Conclusion

The lesson to learn from all of this is that HMRC do not say that hirers cannot engage contractor’s services ‘off payroll’; they accept that there is a valid need across the public and private sector.  Their concern is simply that the PSC’s are legitimate and organised formally.

For more information visit http://www.hmrc.gov.uk/ir35/ or give us a call o:

01737 652 852

Following the recent economic climate many previously employed professionals who have found themselves made redundant have made the decision to switch to a future career as a contractor.  There are considerable work / life benefits in opting for this career path but it can seem a little daunting too if you have been an employee for most of your working life.

When starting out as a contractor you are likely to secure your first few contracts through a recruitment agency and therefore we have given you the following information relating to the payment options available to you.

contracting through a recruitment agency

1. PAYE through the agency

In this scenario you become an employee of the agency, which is the more traditional ‘temp’ model.  Tax and National Insurance contributions are deducted at source.  You will be paid weekly or monthly on submission of a timesheet.

This is suitable for short term assignments and is the route that most mainstream temporary workers adopt.  As an employee you are entitled to full statutory rights and benefits and can expect an approximate net take home pay of 66%.

2. PAYE through an umbrella company

Umbrella companies have been around for many years but are relatively unknown to most temporary workers.  Through this model you are employed by the umbrella company and as above Tax and National Insurance contributions are deducted at source (along with the umbrella’s fee).  With this route you are able to reclaim limited expenses which can help to reduce the tax and NI you pay.

This is a tax efficient route if you are only planning on taking very short term contracts or are only temping whilst looking for a permanent role.  Once again you are entitled to full statutory rights and benefits and can expect an approximate net take home pay of 72%.

3. contracting through a personal service company (PSC)

This is the traditional contracting route and allows you to trade through your own limited company.  The Company engages with a client (i.e. the recruitment agency or end client) providing your services, an invoice is submitted for the work carried out and you are responsible for managing your business and personal tax affairs.

As a limited company contractor you claim legitimate business expenses, pay yourself a low annual salary and take dividends on the profits generated by the business.  Dividends are free from National Insurance and as a result you can expect a net take home pay of around 85%.

what’s best for you?

Most contractors choose option 3, however operating through a personal service company is not a decision to be taken lightly.  As the director of the limited company you will have legal responsibilities and will need to commit to the long term running of your company with the intention of making a profit and paying all tax obligations as required.

We have plenty of experience helping contractors decide if this route is for them, including valuable guidance surrounding the IR35 legislation.

Once you’ve decided to take the plunge we can help you incorporate your company, register with the necessary authorities and put the processes in place to maintain compliant accounts from day one.

We will give you the tools required and simple instructions, all you need is a computer or laptop and a few minutes each week. You then pass your records over to us and we’ll do the rest.

To find out more give us a call on 01737 652 852 or submit an enquiry with your telephone number and we’ll call you back!

Are you claiming all the expenses you’re entitled to?

Monday morning, grab a coffee on the way to the station.  Purchase a trade magazine while waiting for a connecting train.  Post a letter on the walk into the office.

Sound familiar?

Work hasn’t even begun and yet you’ve already incurred expenses that can be reclaimed against your tax bill.  But how many of these little things do you forget to record?

A few pounds here and there soon add up and in our experience can amount to more than £5000 over the course of the year!

At a4c we have teamed up with Xero, beautiful accounting software, which allows clients to record expenses on the go.  Simply use your smart phone or tablet to photograph the receipt, enter the details of the expenses including the amount, a brief description and upload the picture.

Our team of accountants has real-time access to your accounts and can advise at the end of the month or quarter how much you need to take from the business to cover any personal costs incurred.  These payments are made free from tax and NI.

Expense examples

HMRC has a comprehensive list of acceptable expenses that can be claimed, but here is our reminder of the most common items:

  • Business mileage, when using your own vehicle can be reclaimed at 45p for the first 10,000 miles by car (different values for motorbikes / bicycles).  Petrol receipts are not needed but you must record the journey postcodes.
  • Car parking charges (not fines) can be reclaimed.  Receipts should be retained but minor values entered into a parking meter can be claimed without proof.
  • Clothing can be reclaimed but ONLY IF used for work and identified with a permanent logo or corporate embroidery.  Sorry you can’t claim for that sharp new suit!
  • Disability equipment can be claimed, as long as it is also available to all other employees with a disability.
  • Food & drink expenses (also known as subsistence) can be claimed for meals taken whilst away from your normal place of work (i.e. your registered office or principal place of work).  Receipts must be retained.
  • Homeworking can be reclaimed at £4 per week, without proof of costs.  If you predominantly work from home then this value can be increased with supported evidence.  See our dedicated working from home – expenses guide for more info.
  • Incidental expenses incurred when staying away from home can be claimed at £5 per night, without receipts, to cover the cost of laundry, phoning home etc.
  • Mobile phone calls can be reclaimed when they appear on an itemized bill. Note that if the phone is owned personally then line rental cannot be reclaimed.  (If you have a limited company then it is far better to have the mobile phone tariff through the business than personally).
  • Overnight accommodation – if you stay away from home on business then the cost of your hotel or B&B can be reclaimed.  Remember to keep the invoice as proof.
  • Public transport can be reclaimed for business related trips.  Either retain your ticket / receipt or ensure that your Oyster statement details journeys taken, dates and costs.
  • Postage costs for business related correspondence.
  • Stationery such as envelopes, pens, notepads and other minor office equipment.
  • Subscriptions and professional fees are classified as legitimate expenses, HMRC provides a comprehensive list of the approved bodies here https://www.hmrc.gov.uk/list3/index.htm
  • Tools can be reimbursed but only if the tools are used for work purposes only.
  • Training courses attended and paid for in line with work can be also be reclaimed.

 

The key point when it comes to claiming an expense is to ensure that the cost was incurred

“wholly, necessarily and exclusively”

in line with business duties and that you have the required proof, such as a receipt or invoice.

A4C – On your side

Supporting you in matters such as expenses and tax efficient ways of taking money from your business is just a small aspect of our service.

If you require further information give us a call on 01737 652 852 or use the enquiry form on the right.

The importance of InsuranceIf you are the director of a limited company then you really can’t afford to trade without purchasing insurance to protect your business and financial interests.

The level of cover you need will depend on your industry sector but a policy is often not as expensive as you might think.

Here are examples of policies you may want to consider.

Professional Indemnity Insurance

Professional indemnity insurance can help to protect you if claims are brought against your limited company by a client due to a problem with the work you have done for them.

  • This type of policy will offer compensation to correct a mistake
  • Or cover any legal costs due to negligence, such as giving incorrect advice or making a mistake in your work.

 

Free Insurance QuoteProfessional indemnity cover is often a contractual requirement and if you are a contractor undertaking assignments through a recruitment agency then it is likely that you will need to provide policy documentation before commencing work or being paid.

Public and Employer’s Liability Insurance

This type of policy will protect you against claims where injury or death has been suffered by third parties or employees, and claims where you are alleged to be responsible for damage to third party property.

Free Insurance QuoteThe cost of these policies is relatively low and if you have employees working for you then you really can’t afford to skip it.

IR35 Reviews

You may have read our IR35 Guide, or you are likely to have heard of IR35 from contracting colleagues or online forums, the fact is if you know about IR35 then you probably know that you cannot afford to avoid taking steps to protect yourself.

There are different insurance options available depending on your attitude to risk and budget.

Free Insurance Quote

Qdos CoQdos Consulting - Insurance for Contractorsnsulting

At a4c we have teamed up with Qdos Consulting, one of the best-known insurers in the market for contractors and freelancers.

For a free, no obligation quotation visit: https://a4cgroup.qdosconsulting.com/

Avoiding the “salary trap”

Many directors withdraw funds from their limited company using a low salary / dividend combination.  The benefit being a preferential tax position and no National Insurance to pay on dividends.  However be aware that it’s becoming more common for HMRC to argue that where a director uses the company account to pay a personal bill, it counts as salary.

How can you disprove this argument and save money in the process?

Here’s an example taken from our Accounting & Taxation periodical which you may find interesting:

Director’s loan

One of our subscribers, the only director and shareholder of a company, came under fire from HMRC because he used his company’s bank account to make payments to the building firm which was adding an extension to his home. The maximum he borrowed at one time was £12,000 and all the money was repaid during the same tax year and just two months after the company’s accounting year ended. Our subscriber’s accountant reported the arrangement as a loan although there was no formal paperwork to prove it.

HMRC’s salary trap

The tax inspector reviewing the company’s accounts took a different view to the accountant. He suggested that the payments were additional salary on which the company should have accounted for PAYE tax plus employees’ and employers’ NI. If the inspector was right, the extra tax and NI due would be significant.

Example

The company’s accounts were prepared showing that at the year end the director owed £12,000 to his company. The accountant’s view was that the £12,000 was an interest-free loan which gave rise to a taxable benefit in kind (BiK). The accountant worked out that the tax payable by the director on this would amount to less than £100. This BiK was reported on Form P11D and our subscriber declared it on his tax return.

Tax enquiry

Based on what he saw in the company’s accounts and Form P11D, the tax inspector started an enquiry and issued a demand for PAYE tax and NI on the £12,000 drawn by the director. This ran to several thousand pounds. Naturally, our subscriber appealed, but the inspector dug his heels in and pressed for full payment.

HMRC’s view

According to the inspector, his view is backed up by legislation which says any payment made by a company to or on behalf of a director that can be construed as “money or money’s worth” counts as pay and PAYE must be applied. We’ve seen this argument before and while it’s difficult to dispute the logic in practice, HMRC’s official guidance takes a partially different view.

Tip 1.

If an inspector suggests that payment of a personal bill by your company is subject to PAYE tax, firstly point them to HMRC’s guide for employers, Booklet CWG2 . This says that such an arrangement is a BiK and so not subject to PAYE tax. But the bad news is that it counts as salary for NI purposes meaning both employers’ and employees’ contributions are due.

Tip 2.

You can avoid NI by arranging for personal bills to be invoiced in your company’s name instead of yours. This dodges the “money’s worth” trap because when your company pays the bill it’s meeting its own debt not yours. What’s more, if you reimburse your company for the bills within three months after the tax year in which it paid them, you won’t be taxed on a BiK. In effect you’ll have had tax and NI-free use of company money.

CREDIT: Tax Essentials for Advisors

At a4c our view is to avoid the salary trap altogether and not pay personal expenses from your business account.  Keep your financial affairs and those of the business entity truly separate.

If you need additional funds for a building project at home or other unexpected costs then investigate whether declaring a dividend would be a more suitable option.

To talk through your choices don’t hesitate to give the lovely team at a4c a call on

01737 652 852

or email info@a4cgroup.co.uk.

Everyone in the UK is responsible for paying tax, this money then funds the UK’s public services.  It is your responsibility to ensure that you pay the right amount of tax and on time, otherwise you could face serious penalties.

Paying tax to HMRC

Sometimes people running their own businesses experience genuine financial difficulties which means they cannot pay their tax, if you find yourself in this position then the worse thing you can do is ignore the payment demands.

The best way for you to avoid having problems paying your tax is to plan ahead, so that you know when your payments are going to be due and can manage your cash flow so that you have the money to pay your bill.

cash flow

Cash flow is the movement of money in and out of your business. To pay your bills on time you must make sure that you have enough cash to do so.

A number of simple ways to improve your cash flow are:

  • negotiating better payment terms with clients
  • keep your spending under control until you know what you can afford
  • getting a loan from a bank

tax

The most common taxes you will need to make provisions for are Self-Assessment Tax (on your personal income), Corporation Tax (on limited company profits), Value Added Tax (on sales, if you are VAT registered).

deadlines

Each tax has a different deadline for filing your return and paying what you owe.  HMRC will write to you with details of your deadlines and you would be wise to set reminders in your diary.

if you can’t pay

If you are due to make a payment soon, and think that you might have difficulty paying, you should:

  • pay as much of the bill as you can by the due date
  • consider what you can do to raise the money to pay the rest of the bill
  • contact HMRC as soon as possible as they may agree extra time for you to pay

don’t ignore the problem

If you owe tax and cannot pay, the worse thing you can do is ignore HMRC’s demands for payment.  Failure to pay by the deadlines may result in HMRC taking legal action to recover what you owe.

let a4c help you

Whether you are a sole trader, partnership or limited company director a4c are on hand to help you manage your personal and business tax affairs.

Of course it goes without saying that we will prepare your accounts accurately and on time.

In addition, if we spot ways for you to improve your cash flow or generate more income then we’ll be working hard to help you reach your full potential.  And don’t worry, we know that financial accounting can sometimes seem like a foreign language that’s why we will happily explain things and answer your questions without any of the usual accounting stuffiness!

For more information give us a call on 01737 652 852 or email info@a4cgroup.co.uk.

Understanding childcare tax breaks

Each parent in the UK is entitled to employer-supported childcare with a tax and NI free exemption of up to £55 per week or £243 per month.  This is a Government-supported scheme, designed to make childcare more affordable for working parents. The benefit can be offered in three ways:

  1. Childcare vouchers
  2. Directly contracted childcare
  3. Workplace nurseries

Childcare vouchers

The benefit is available to all parents with children under 15 years old who pay for childcare, whether it’s for a nursery, child minder, breakfast / after school club or even holiday camps.

Typically the benefit is worth around £900 per year, so if both parents are entitled to tax and NI free childcare support then as a family that’s a saving of £1800!

Can contractors benefit?

Yes, if you are a contractor working through a limited company then options 1 or 2 are available to you.

Childcare vouchers

Many contractors opt for childcare vouchers as you can take the full tax-free allowance each month and save them up for use in the future (perhaps because your child is too young or if your childcare costs fluctuate throughout the year due to school holidays).

However the companies that provide the vouchers do charge an admin fee, which can be anything from 3% to 10%!

Try looking at http://www.busybees.com/ or http://www.kiddivouchers.com/.

Directly contracted childcare

The alternative solution is for your limited company to contract directly with the nursery.  This means paying the childcare from the business bank account on receipt of an invoice.  However, in this scenario if you don’t use your full tax-free allowance each month the remaining benefit is lost.

Be aware that your limited company can pay the full value of your childcare costs, however if this exceeds the tax free limits then the additional amounts will be treated as a benefit in kind and subject to tax and NI deductions.

Things to consider

  • The conditions are that the childcare provider must be approved (i.e. cannot be a friend or member of your family).
  • Your limited company must pay for the childcare, either by buying the vouchers or contracting directly with the childcare provider, you cannot pay for the cost personally and claim it back as an expense.
  • If you claim working tax credits then childcare vouchers may affect the amount you receive. Use the HMRC’s online calculator to help you decide whether overall you would be better off
  • If your PAYE income falls into the high rate tax bands then you won’t receive the full benefit.  Broadly speaking, basic-rate taxpayers can receive up to £55 a week (or £243 a month), higher-rate taxpayers can receive up to £28 a week (or £124 a month) and additional-rate taxpayers can receive up to £25 a week (or £110 a month).  The earnings assessment is based on pay and benefits from your limited company and does not include dividend payments and therefore many contractors are still able to receive the full allowance of £55 a week.

More questions?

For more information or to discuss your personal or business tax affairs give a4c a call today or send an email to info@a4cgroup.co.uk.

March, the last month in the current tax year – Don’t miss out on last minute tax saving opportunities.

Tax Saving at Year End for ContractorsAs a limited company director you should make time to evaluate your earnings so far this year.  You can then establish if you’re able to take further advantage of the current tax rates & allowances, before they change on 6th April 2105.

We’ve written this short contractor end of year tax planning guide to help you evaluate your current tax position.

You can then use the suggestions below to assess any tax saving options that might be available to you.

Firstly make a list of your earnings in the 2014/15 tax year.

Remember to include:

  • Salary
  • Dividends
  • Property rental income
  • Pension income
  • Self employed earnings
  • Capital gains
  • Interest received
  • Foreign earnings

 

Next, work through the tax bands below to see where your income level sits:

Tax Band

Tax Rate

Basic rate

£0-£31,865

20%

Higher rate

£31,866 – £150,000

40%

Additional rate

Over £150,000

45%

Dividend ordinary rate

£0-£31,865

10%

Dividend upper rate

£31,866 – £150,000

32.5%

Dividend additional rate

Over £150,000

37.5%

(Most people’s Personal Allowance in 2014/15 is £10,000)

 

Finally, using our tips below, decide what action you want to take and do it quickly, before it’s too late!

*************************************************

Contractor End Of Year Tax Planning

£10,000 Personal Allowance

This is the amount most people can earn tax free, between 6th April 2014 and 5th April 2015.

For most limited company directors this tax free allowance will have been used up by your salary payments.  If not then consider paying yourself an end of year bonus.

Remember that you may have National Insurance to pay, but we can help with this calculation.

Any unpaid expenses?

Your limited company should reimburse you for any legitimate business expenses that you have paid for personally (such as mileage, professional subscriptions, home working allowance start up costs etc).

Therefore if you haven’t repaid yourself these costs throughout the year, you can extract this money from your company now, free from tax.

Remember that all expenses must be “wholly, exclusively and necessarily” incurred in the performance of your duties, check out our Expenses Guide for more info.

Tax Free Dividends

If your only income in the 2014/15 tax year will come from your £10k salary and dividends then you can take up to £28,678 in dividends without having any personal tax to pay.

Remember that dividends are the distribution of profits from your limited company – after Corporation Tax.  So technically you’ve paid the tax already.

If you haven’t taken £28,678 in dividends and you have available profits in the company then you should consider taking the difference before 5th April 2015.

Dividend Timings

Dividends are considered part of your income for personal tax purposes either when they are paid or when they are declared (the earliest date applies).

This means that you can declare dividends in the 2014/15 tax year to fully utilise your allowances, but you could actually take the money out of your business bank account in a later tax year.

£100k Personal Allowance Reduction

If your income exceeds £100,000 during the tax year your personal allowance will reduce by £1 for every £2 earned, until £120,000 which in most cases is when it’s removed altogether.

Therefore if your income levels are close to this and you would normally take dividends with your salary at the end of March, you might want to consider delaying the payment until 6th April, thereby making the dividend payment fall into the next tax year.

Of course if your earnings are expected to remain the same or even increase in the 2015/16 tax year then you push the problem forward, but this is wise tax planning if it looks like you might have some time on the bench in the future!

Pump up your pension…

If your personal income is likely to push you into the higher tax band then pension contributions are a great way of reducing your liability, as well as saving for your future.  If paid from the limited company they also reduce it’s Corporation Tax bill so win : win!

If you don’t yet have a pension in place and need some advice then get in touch as we work with a number of contractor specialist Independent Financial Advisers who would be happy to help you – call 01737 652 852.

Profits don’t have to be taken!

Don’t feel that you always have to remove available profits from your limited company.

If the money is not a necessity to fund your living requirements then you can leave the profits in the business and declare dividends in later months or years.

Remember as a contractor you may need to keep reserves to support you in between contracts, known in the sector as a war chest for time on the bench!

How and when is personal tax paid?

If, based on the above, you have personal tax to pay then you will need to declare this in your 2014/15 self assessment tax return.  This needs to be filed with HMRC, with your tax paid, by 31st January 2106.

Don’t worry we will remind you about this at the start of the summer.

Further reading…

We hope this information has been useful (and not too confusing).

For more information on self assessment tax returns visit the newly produced HMRC guidelines at https://www.gov.uk/self-assessment-tax-returns.