FREELANCERS HANDBOOK. Prepared by Beever and Struthers Chartered Accountants and Business Advisors

Transcription

1 FREELANCERS HANDBOOK Prepared by Beever and Struthers Chartered Accountants and Business Advisors 2011/2012

2 Beever and Struthers Chartered Accountants Providing all accounting and taxation services for contract workers from formation to final accounts. Contact Details Beever and Struthers St George's House Chester Road Manchester M15 4JE Tel No: Fax No: General Website: Main Contacts: Phil Hollinshead (accounts) e: Jim Dutton (tax) Clara Torres (tax) e: e: B&S Financial Management Limited Providing independent financial advice for pension schemes, life cover, permanent health and sick pay schemes, mortgages and personal investment advice. Contact Details B&S Financial Management Limited St George s House Chester Road Manchester M15 4JE Tel No: Fax: Main Contacts: Idris Davies Stuart Johnson John Hall e: idris.davies@beeverstruthers.co.uk e: stuart.johnson@beeverstruthers.co.uk e: john.hall@beeverstruthers.co.uk - 1

3 BEEVER AND STRUTHERS FREELANCERS HANDBOOK CONTENTS AN INTRODUCTION TO FREELANCE CONTRACTING GOING LIMITED ADVANTAGES AND DISADVANTAGES OF FREELANCE CONTRACTING POSSIBLE METHODS OF OPERATION... 5 SETTING UP IN BUSINESS OBTAINING THE COMPANY COMPANY DOCUMENTATION VAT REGISTRATION OPENING A COMPANY BANK ACCOUNT SETTING UP PAYE TAX FORMS OTHER TAX MATTERS NOTEPAPER OPERATING THE COMPANY TAX AND THE BUSINESS BUDGETING TAX AND DRAWINGS PAYMENT OF TAX BUSINESS EXPENSES MAKING WITHDRAWALS FROM THE COMPANY WHO DOES WHAT? BOOKKEEPING APPROVED MILEAGE ALLOWANCE PAYMENTS (AMAPs) TAX CHARGES FOR COMPANY CAR USERS IR WHAT IS IR35? EMPLOYMENT OR SELF EMPLOYMENT THE STATUS TESTS AVOIDING IR HOW TO CALCULATE THE EXTRA TAX DUE UNDER IR THE ARCTIC SYSTEMS CASE OTHER MATTERS SAVINGS AND INVESTMENT CONTRACTING OVERSEAS RESUME AND TIPS ADDITIONAL SERVICES Appendix of blank forms - 1

4 AN INTRODUCTION TO FREELANCE CONTRACTING If you have read Going Limited, our short guide to Personal Service Companies, then you may already have some idea about why you would wish to operate through your own limited company. This handbook goes into more detail. You can read this through to gain more background in all areas or you can read just those sections which interest or affect you. In case you have not read "Going Limited" this is reproduced as the first section of this handbook as a general introduction. 1 GOING LIMITED Tax legislation gives you only two options for carrying out agency contract work - either working for the agency as an employee on PAYE or carrying out the contract through a separate limited company. If you intend to contract for longer than six months it is probably beneficial to work through your own company, but we will carefully review your individual circumstances to ensure you make the choice of business medium (self employment, company, partnership etc) that is right for you. We are a firm of qualified Chartered Accountants with specialist expertise in dealing with workers operating in the Information Technology and engineering fields. We can advise you and lead you through the initial steps to set up in business and then look after your accounts on an ongoing basis. This enables you to concentrate on your work and maximise your after-tax income with no need for you to have any specialist accountancy knowledge. We will give you appropriate advice at every stage in the life of your business. QUESTIONS AND ANSWERS Q1. What is IR35 does it affect me? A. IR35 is a piece of tax legislation which took effect from April The legislation means that the Revenue can tax some freelancers as though they are employees of their clients. Contractors caught by IR35 pay significantly more tax and national insurance contributions, further reducing their take home pay by up to 25%. In the 2007 Budget the tax and National Insurance advantages of Managed Service Companies (MSCs), used by many freelancers to avoid IR35, were also abolished. Companies formed by us are carefully structured to avoid the MSC issue. Q2. Why may it be better to work through a limited company? A. Surprisingly income tax is only a secondary consideration. The prime reason for working through your limited company is to minimise national insurance - typically saving around 10,000 per year. Income tax savings vary with the particular circumstances of the individual

5 Q3. Why does national insurance affect me so much? Income tax is a much bigger figure in relation to my current earnings. A. In normal staff employment the major National Insurance contribution is paid by your employer and you do not see it. In contracting the end user of your services agrees a total price for your services. National Insurance and taxes have to come out of this figure so you become responsible for Employer s National Insurance of 13.8% as well as your own National Insurance Contribution of 12 or 13%. Q4. How does having my own limited company help? A. By having your own limited company National Insurance can be avoided on a sizeable part of your income. You pay National Insurance on your salary from your company but not on dividends paid to you or any other shareholders. With your own company you can control how much is paid out under each of these headings and you will be advised how to do so to your best advantage. Q5. So is there no income tax advantage? A. Most people find that they can make substantial tax savings, but the savings vary considerably depending on individual circumstances and choice. We can show you the best ways to make savings based on your circumstances. Q6. Will I be self-employed? A. No. You will be an employee of your company even if you are the sole director, as it is the company that is operating the business. You will be a PAYE employee of your own company and your status will be unchanged for the purpose of state pensions and other social security benefits. Q7. What happens about my tax and national insurance contributions? A. You will be paid net by the company. The company will make the appropriate deductions for tax and national insurance and then pay these over to the Government, normally on a quarterly basis. We calculate the net sums due for you. Q8. Give me an example A. Example A is a person on PAYE, example B is the worst position that could be achieved by a person on a limited company basis and example C is the position that could be achieved by a person with a non-working spouse or partner being allocated part of the income from the limited company

6 EXAMPLE A EXAMPLE B EXAMPLE C Total potential income 98,000 98,000 98,000 National insurance 16, Corporate and personal tax 24,799 28,821 19, ,945 29,171 19, Net after tax income 57,055 68,829 78,386 COSTS Accountancy fees - 1,200 1, Net spendable income 57,055 67,629 77,186 ===== ===== ===== Minimum saving over PAYE basis - 10,574 20,131 ===== ===== ===== In both examples B and C no expenses (other than typical accountancy fees) have been allowed for. Therefore the actual tax saved may be higher than the illustration. These examples show the absolute minimum savings that will be made by operating through your own limited company; the actual savings are likely to be much more as your daily commuting expenses would be tax deductible. These apply for the year to 5th April 2011 and may subsequently change. Working as an employee you would need a pre-tax income of over 137,000 to be left with a spendable income of 77,186 as in Example C. 2 ADVANTAGES AND DISADVANTAGES OF FREELANCE CONTRACTING There are many reasons why an individual may be attracted to freelance contract work, but in general the advantages fall into two distinct areas: i) Financial advantages a) Due to the nature or urgency of the work most employers are prepared to pay substantially higher rates to freelancers than to staff employees. The employer sees a benefit as he is not responsible for holiday pay, sick pay, redundancy, pensions or other job related expenses. b) Operating through your own limited company brings in your full gross income and, correctly managed, you can maximise your net spendable income. This handbook is designed to show you how to achieve these benefits. As tax is not deducted at source from your income you can also control the timing of tax payments to earn more interest on these funds

7 c) Travelling expenses and the extra cost of living away from home (subsistence expenses) are usually tax deductible. This can make all the difference to the economic viability of taking on work far from home. ii) Non-financial advantages a) The chance to gain experience from a variety of work in a situation where successfully changing jobs on a regular basis enhances your CV. b) Enjoy the freedom that comes from effectively being "self-employed" - the freedom to take holidays when you want and even take extended holidays between contracts for example. These advantages are mirrored by their disadvantages: iii) Financial disadvantages a) You will almost certainly need an accountant, who will charge for their services, but if they don t save you several times their fee in good advice then you have the wrong accountant. b) You need to take active management of your business to make reserves for holidays, sickness, pensions etc. These may not appear urgent and so receive low priority, but this could be a costly mistake. You may have lost substantial life-cover, which existed for death in service in your old employment. In addition you may have to make important decisions concerning your existing pension rights, which may significantly affect their future value. c) We have experience of the special circumstances of contract workers and are uniquely positioned to advise on these matters. An initial financial health check forms part of our set up procedures. Where necessary our in-house financial services company, Beever and Struthers Financial Management Limited can provide independent advice on the best-cost options. We would recommend that you talk to one of our financial advisers to ensure that your financial requirements can be met in the future. iv) Non-financial disadvantages a) You will need some involvement in the day to day running of the company affairs. b) You need to exercise self-control to ensure you have enough money to pay taxes when they fall due

8 3 POSSIBLE METHODS OF OPERATION There are two possible methods of operating when entering a contract: i) as an employee of an agency (on PAYE). ii) between your own limited company and an agency or the end user of your services. A question often asked is "Can't I be self-employed?". The answer is "no" because specific tax legislation prevents an individual, even one currently self-employed, from being treated as self-employed by an agency. Tax legislation forces the agency in every case to be the employer of the freelancer for the period of the contract and to deduct PAYE and National Insurance as for any other employee. This legislation (Part 2 Chapter 7 ITEPA 2003) also covers any other circumstances e.g. partnerships which might be used to try to get round it. If you do nothing your status will be that of an agency employee as follows: i) Agency employee The individual automatically becomes an agency employee for the period of the contract. The agency must pay a lower rate to cover the cost of the employers share of National Insurance, currently 13.8%, which they are obliged to pay on top of the gross salary paid to you. In addition full tax and national insurance will be deducted from your salary as with any other employment, and none of the possible advantages (travelling expenses, tax savings etc) of running one's own business will accrue to an agency employee. ii) Limited company Except where the contract is for a very short period (say less than six months) and you have no intention of continuing to do contract work then the route of forming a limited company when starting your contract career makes financial sense. You obtain a suitable limited company and it is the limited company and not the individual who enters into a sub-contract arrangement with the agency to provide the services to the third party client. This avoids any direct association between the agency and the individual, so you will not be an agency employee but become an employee of an independent limited company subcontractor. You will normally also be a director of the company. This in itself brings little benefit, the major benefit arising from your other position as a shareholder of your own company. In business terms it is the company that is "self-employed" and will achieve significant National Insurance savings plus some possible tax benefits. As the owner of the company such benefits accrue indirectly to you. As shareholders, your spouse (or partner) and yourself can take dividends free of Employer s NIC (saving 13.8%) and Employee s NIC (saving at least a further 12%). This is in addition to the Income Tax savings described in this guide

9 Umbrella Company (Composite Company) With the abolition of the tax and National Insurance advantages for Umbrella Companies, also called Composite or Managed Service Companies (MSCs), we can no longer recommend this business arrangement. The rest of this handbook assumes that you will choose to follow the route of having your own limited company and then describes the procedures in more detail. SETTING UP IN BUSINESS What will happen when you start in business? 4 OBTAINING THE COMPANY Normally we are responsible for obtaining a suitable company for you, as this is likely to cost less than doing it yourself. The alternatives are to directly approach a company formation agent or form a company through a lawyer. After verifying your identity and address, and that of any other intended directors, from a passport etc, in accordance with the Anti Money Laundering Regulations 2007, a new company can be incorporated within two working days with your own choice of company name. However, we would check any names before application to ensure there are no problems with that name. You should bear in mind that after formation another week to ten days are usually required to complete the other initial formalities of opening a bank account and VAT registration. Companies formed in Scotland are different to those formed in England and Wales and cannot have their registered office changed from one country to the other but we can obtain either for you. We presently charge 198 (inc VAT) for company formations and our initial meeting and advice on set-up, including the appointment of company officers and shareholders, the completion of the initial registration forms for VAT, PAYE and Corporation Tax and Income Tax purposes, and assistance in opening the company s bank account. In order to comply with the requirements of the Companies Act and the Registrar of Companies the following forms will be completed: i) Application to Register a Company (IN01) ii) Appointment of Director (Form AP01) and Company Secretary Form (AP04) From the 6th April 2008 each newly formed company is obliged by law to appoint one or more separate individuals to be Director. It is no longer necessary to appoint a Company Secretary but we recommend you do. The Director would normally be you, and the Secretary can be a spouse, close friend or relative. The Company Secretary needs no detailed knowledge of Company Law

10 iii) Notification of Registered Office (AD01) The company is required to file its registered office address at Companies House and file any change. This is the official address of the company for the service of all legal documents and can be different from the trading address of the company. All formal statutory correspondence and some tax correspondence will be sent to this address. This is usually your home address and this will not affect the status of your home as a private residence. iv) Issue of Shares (SH01) The shareholders own the company and by law there must be at least one shareholder although most companies are formed with two or more. If it is advantageous in order to save tax we change the initial two issued shares into one "A" share and one "B" share enabling different amounts of dividend to be paid to each shareholder. This is particularly important in spreading income between spouses/partners to avoid higher rate tax and is a matter that will be discussed with you at an initial meeting. The Arctic Systems case showed that properly undertaken these arrangements are entirely lawful and effective. v) Notification of Accounting Reference Date (AA01) The company must notify the Registrar of Companies of a year-end date to which it will draw up its financial statements. This will normally be a year from starting trading rounded off to the nearest month end. There is no tax or other advantage to any particular year-end but you may wish to nominate an accounting date for other reasons. 5 COMPANY DOCUMENTATION After completing the various statutory forms to obtain your company the following documents will be sent to you: i) Certificate of Incorporation This is the birth certificate of the company. The Certificate of Incorporation is an important document and every agency your company works for is likely to wish to see it, as will the bank, to open an account in the company name. In strictness the certificate should be clearly displayed in a public place at the registered office of the company but this requirement is never enforced. ii) Memorandum and Articles of Association This is a small booklet comprising the constitution and rulebook of the company. It sets out the objects for which the company was formed, its powers in conducting its day-to-day business and indicates the share structure of the company and the original subscribers to the company. Copies of the Memorandum and Articles are - 7 7

11 required by the bank, H M Revenue & Customs and may be requested by any others who intend to provide finance to the company or rent premises etc. Your name will not appear in the Memorandum and Articles as these are a copy of the original filed at Companies House on formation and so contain the names of the formation agents, but this in no way affects your ownership of the company. iii) Statutory books These comprise various registers showing names of shareholders, directors, company secretary and minutes of important meetings of the company. These are really a requirement of larger companies with numerous owners and managers. For small companies the only practical requirement is to ensure that external records at Companies House are updated as appropriate. We do this for you. 6 VAT REGISTRATION There are very few circumstances where you would not want to register for VAT. If your annual turnover is 73,000 (from ) or more, registration is compulsory. If your annual turnover will be less than 73,000, voluntary registration has definite advantages in that: VAT on sales can be placed on deposit until it is due for payment each quarter. VAT on company purchases can be reclaimed. We will contact our VAT Department and complete an application for VAT Registration on your behalf. Your VAT registration number will be sent to you direct from HM Customs & Excise shortly thereafter. During the period before the VAT Registration is processed you can bill your customers but with the VAT element. Once your VAT number is supplied you can claim from your customers the VAT missing from the earlier bills. Following VAT registration, we also arrange for the online filing of quarterly VAT returns. FLAT RATE SCHEME This simplifies VAT Returns by enabling companies to calculate the VAT payment as a percentage of total turnover (including VAT), and is available to companies whose estimated annual VATable turnover (excluding VAT) does not exceed 150,000. The flat rate percentages are based on trade sectors and include the following: - 8 8

12 Flat Rate Trade Sectors (since ) Trade sectors Flat rate to Flat rate from Computer and IT Consultancy or Data Processing Civil or structural engineering (including Engineering Design) 13% 14.5% 13% 14.5% Management Consultancy 12.5% 14% Business Services not elsewhere listed 10.5% 12% Social Work 10% 11% A 1% reduction applies for the first year after initial VAT Registration. Your customers are charged VAT at the standard rate, presently 20%. You pay VAT at the appropriate flat rate percentage on the gross invoiced amount. It is not normally possible to claim back the VAT, as input tax, on the things your company buys. If however it buys an expensive capital asset with an invoice value, including VAT, of 2,000 or more, you can also claim the input tax on your VAT return in the normal way. The Flat Rate VAT saving on a turnover of 80,000 is usually over 3,000 in the first year. 7 OPENING A COMPANY BANK ACCOUNT You must open a bank account in the company name, and we can help you to do this easily. Opening the account with your normal bank will prevent delays, as banks are now obliged to make greater checks on new accounts opened by people not previously known to them. You will have to complete an account opening form and the bank will need sight of the Certificate of Incorporation and will keep a copy of the Memorandum and Articles. Always ensure that the bank does not keep the original certificate of incorporation of the company and that this is returned to you. Company accounts are classified as business accounts and bank charges will be levied even if in credit so you should open both a current account for day to day transactions and a deposit or high interest account which will be used to save funds for payment of VAT and tax bills. We recommend the opening of two bank accounts to ensure that funds set aside for tax or day-to-day surplus funds earn interest to counter bank charges made on the current account. The company will receive gross income but you will be paid net so the company will always have sizeable funds and should never need an overdraft. At your leisure you can then consider opening accounts with other specialist financial organisations that may not make charges or may pay interest on all credit balances

13 8 SETTING UP PAYE We will arrange the set-up of an online PAYE scheme to cover the salary element of your drawings. In order to do this we may need you to complete an online authorisation form (FBI 2), we will also need your P45, which you should receive when you leave employment or when you sign off from unemployment. If you do not have a P45 for any reason then you need to let us know immediately and we will complete an application for a tax code-number (Form P46). 9 TAX FORMS When the Registrar of Companies forms a new company they advise HM Revenue & Customs and it is presumed that your company has started in business at that point in time. You will then start to receive large amounts of unsolicited mail from HMRC that should all be promptly passed on for us to deal with. The most important item is Form CT41G, which requests the initial setting up details for the business. Please do not try to deal with the Revenue direct even if the matter seems straightforward as generally they attempt to use such occasions to obtain other information, which may later be used to your disadvantage. 10 OTHER TAX MATTERS We will also ask you to complete tax mandates (Forms 64-8) for both yourself and the company. These will to allow HM Revenue & Customs to correspond directly with us, in respect of yourself and the company. We will complete Self Assessment Tax Returns both for you and the company, as necessary. We may not receive tax pay-slips so if you are unsure whether to pay anything send the pay-slip to us for checking. 11 NOTEPAPER There is no need to spend money on professionally printed stationery for the company unless you wish to do so. Often a computer will produce all that is required for your purposes. The following information must appear on your letterheads and invoices etc: i) The full name of your company including the word 'Limited' or 'Ltd'. ii) Your company's registered number. iii) The country in which your company was incorporated. iv) The address of the Registered Office. If you also have a different trading address it is usual to put the Registered Office address in small print at the bottom of the page

14 If you are using a trading name or style instead of the official company name then the official company name must appear somewhere on the letterhead. This is usually in small print at the bottom of the notepaper. It is usual to put the names of the directors on your letterhead but you do not have to. If you do then you must include all the directors names and not just some of them. For invoices you may use pre-printed invoices or letterheads or a pre-numbered invoice book, which is obtainable from any good stationers. These need to contain a date and company registered number along with any other information you wish to include. You do not have to put your VAT number on letterheads but it must be shown on invoices. OPERATING THE COMPANY You are now ready to start in business and make money. Read through sections then complete your own budget using the model in section TAX AND THE BUSINESS The biggest practical difference you will find is that tax is not deducted from your company s income when it is paid by its customers. This puts the onus on you to calculate how much salary to pay yourself and when. We will show you how to handle this area, and make all the calculations for you, completing the appropriate returns, as part of our service. PAYE deductions from your salary will usually be payable quarterly, and we will write to you quarterly, to advise you how much tax to pay. Other taxes are payable annually and, again, we will advise you in good time, how much to pay. It is important to understand that you will still be paid net of tax. You should notice little practical difference, as money paid out of the company into your personal bank account is yours to spend or do with as you wish. Tax monies are left behind in the company bank account from which to make payments, from time to time, to the Inland Revenue as we advise. Being a Director means nothing more than being a senior employee, so for legal purposes little will change and you will still in paid employment, and your tax and national insurance will be deducted at source by your new employer company. The major difference is that your salary will become only a small part of the total net income you will draw from the company. The main part will be dividends. There will be two separate taxpayers, you, and the company, but cheques to HM Revenue & Customs will almost exclusively be written by the company from the company s account. You will know that PAYE and NI contributions are deductible from the salary element of your drawings from the company, but in addition there will also be Corporation Tax payable by the company on its profits

15 i) Taxes on salary drawings These comprise two separate items as follows: a) PAYE (Pay as You Earn) You will be paid a small net salary as a director each month. After PAYE Income Tax has been deducted by the company the salary is paid to you. This tax is paid over to the Inland Revenue quarterly by the company on the 19th of the month following the end of each calendar quarter i.e. 19th April, 19th July, 19th October and 19th January. b) National insurance contributions (NIC) Class 1 NI Contributions will also be deducted from your monthly salary as with your present employment. This is still the same in nature as your previous NI Contributions and is all you need to pay to keep up your NI history and maintain your entitlement to the full range of Social Security benefits. In addition the company is also liable to pay the Employer s NIC on your salary. Both sets of contributions are paid to the Inland Revenue along with PAYE Income Tax on the same dates as above. ii) Taxes on the Company Corporation Tax (CT) The company will be taxed on its profits. Company profits represent income from the agency less your salary and other deductible expenses. The small profit s rate of Corporation Tax has been reduced to 20% from 1 April This tax is due nine months after the company s year-end. From 1 April 2011, companies will have to submit their company Tax Returns online and pay Corporation Tax other than by post. Please find more information about non-postal payments at the below link: To enable the company to have enough cash to pay its CT bill it is important that you always leave at least 1/4 (25%) of the company s estimated profits within the company when drawing dividends. iii) Other personal taxes a) Higher Rate Income Tax on dividends To calculate how much dividends may be paid to yourself (or another shareholder) before you become liable for higher rate tax it is necessary to take into account your other income and to be aware that dividends taken are treated under the taxman s rules as net of tax. From the figure of 42,475 (which comprises the personal allowance of 7,475 and the basic rate band of 35,000) deduct your other income. This will normally be your expected gross earnings for the year (6 April 2011 to 5 April 2012) usually 8,500, plus any earnings and P11D benefits in the year from any previous job

16 42,475 Less gross earnings 8,500 Previous gross earnings 18,500 Other income Gross bank interest , ,325 ====== The figure of 15,325 represents the gross dividends which can be taken before higher rate becomes due. This gross dividends figure must be converted from gross to net to give the amount which can be transferred from the company s account to your own. 15,325 x 9/10 = 13,792 If you have already taken some dividends but now want to take more these must be deducted. If for example you have already transferred 12,000 as dividends from your company s bank account to your own. Less dividends (net) previously taken 12, ,792 Maximum net dividends which can be 1,792 taken free of income tax ====== If more dividends than this are taken further tax at the higher rate will become due. This can be calculated as 25% of the excess dividends taken. If your total income exceeds 150,000 in the year, the higher rate of tax will be approximately 36% of the excess dividends taken. If your spouse/partner is a B shareholder then dividends may be applied to her after applying the same calculation. This may greatly increase the aggregate total amount of dividends which may be taken free of personal tax. If you are in doubt call Jim Dutton or Clara Torres

17 13 BUDGETING TAX AND DRAWINGS To explain this let us look at the following example of a freelancer earning 1,850 per week for a 46 week working year 2011/2012. The end column shows the total tax that will be paid out of the company either as its own corporate tax or by way of sums deducted from your salary. Company income (net of VAT) 85,100 EXPENSES (net of VAT) Director's Salary 8,500 } Employers NIC 197 Mileage Allowances 1,500 Stationery, postage and telephone 300 Books, journals etc 100 Pension Scheme 3,600 Accountancy fees 1,200 Use of home as office 104 Sundries , Net company profit before tax 69,443 Tax etc } 555 Corporation tax due (20%) 13,889 13, Net after tax profits available as dividends 55,554 Dividends drawn net to private bank account 50, RETAINED PROFITS 5,554 ===== TAX ETC 14,444 ====== 14-14

18 Tax will be paid on the two separate sources of income during the year being the salary element as follows: PAYE PAYE is calculated on a salary of 8,500 Less: personal tax free allowance 7, Total taxable salary 1,025 ====== Income tax due 20% on 1,025 = ====== NIC Employers contribution on 8, Employees contribution on 8, TOTAL TAX AND NIC ON SALARY DRAWINGS 555 ====== Secondly, tax is payable by the company on its own profits. Where these are paid out as dividends the tax credit attached to the dividend is only 10% (of gross). As long as you are only liable to tax at the basic rate there is no further liability. The 10% tax credit is not repayable. Corporation Tax Total Corporation Tax due is 69,443 x 20% = 13,889 ====== = 15-15

19 Additional personal taxes In this particular case part of your income would fall to be taxed at the higher rate on dividends of 32.5% so a charge for Higher Rate Tax (HRT) would arise. This would have to be paid by the individual and not the company, as it is a personal tax liability. This is calculated as follows: Salary gross 8,500 Net dividends 50,000 Tax credit at 1/9 (of net) 5, Gross dividends 55, Total gross income 64,055 Less: personal tax free allowance 7, Taxable income 56,580 Basic rate tax band 35, Excess income 21,580 ===== Higher rate tax payable on dividends ( 21,580 x 32.5% less 10% tax credit) 4,856 ===== Total tax payable in this situation would be: Payable by the company NIC (Employers Contribution) 197 Corporation Tax 13, ,086 Payable by the individual PAYE (Income Tax) 205 NIC (Employees Contribution) 153 Higher Rate Tax 4, , ,300 ======= In this example total tax of 19,300 represents 18.9% of the VAT inclusive turnover of 102,120. So as a rough guide around 19% of your income will go to meet tax bills at one time or another. This proportion can sometimes be reduced to under 14% by sharing dividends with a spouse or partner

20 14 PAYMENT OF TAX AND NI CONTRIBUTIONS UNDER PAYE We will follow through the same example as above to show when tax is payable. If you started trading through the company on 1st April 2011 and were withdrawing funds evenly throughout the year tax would fall due as follows: 19th July 2011 PAYE/NIC th October 2011 PAYE/NIC th January 2012 PAYE/NIC th April 2012 PAYE/NIC st January 2012 Corporation Tax 13, st January 2012 Higher Rate Tax 4, , ======== 15 BUSINESS EXPENSES UK tax legislation contains little detail of what comprises tax-allowable expenses. It is mainly through past legal cases by individual taxpayers, and which are technically only binding on that individual, that guidance has been given. These cases give an indication of what may be allowed but often there is also a similar decision that may be cited which goes the other way. The expenses position of contract workers is very complex. The Inland Revenue is undertaking a greater number of detailed investigations into claims for expenses to see if they can be challenged. You will be claiming your expenses on an ongoing basis from your company, but these expenses can be challenged at a later date by HMRC, to see if they can be taxed on you personally as a benefit. This usually happens several years after the event, and you may then be unable to recall all the circumstances. In effect you are obliged to prove yourself innocent in these circumstances, so if such a challenge were to arise, you must ensure that any papers you hold contain sufficient information to support your case

21 The general rule is that business expenses are allowable and private expenses are not. There is no clear legal definition of what items are, or are not allowable, and it is open to interpretation of the circumstances, in each individual case. In an owner-controlled business it may be impossible to demonstrate whether the motivation for expenditure was a business or private purpose where there is some form of personal benefit to the proprietor. The following can only be a guide to the types of expenditure that are often claimed. They are not a guaranteed list of expenditure that you should claim or which will be allowed by the taxman in specific circumstances. ALLOWABLE EXPENSES COMMENTS Director s gross salary Spouse s/partner s salary having regard to duties performed. Employers NIC Only if actually paid, and not excessive Including Class 1A NIC on company car and fuel benefits Motor expenses See note i) Travel and Accommodation expenses Personal Incidental Expenses Staff Christmas Party etc Employer Supported Childcare See note ii) Note these expenses rules are much more generous than for staff employees. 5 per night allowance for each night spent working away from home (in addition to the Travel & Accommodation above). 10 outside the UK Up to 150 spent per employee not taxable. If the costs exceed this - full amount taxable. See note vii Printing, stationery and postage Computer related costs Books, magazines and subscriptions Bank charges and interest Telephone charges Software & Consumables Business related only For company bank accounts For telephone lines in the company name. Private lines (see note iii) 18-18

22 Mobile phones contracted by the company Protective and safety clothing Eye tests and glasses etc Pension scheme contributions One mobile provided per employee, line rental and call costs paid for by the company High visibility jackets, waterproofs etc If your work requires you to use a VDU or computer the cost of an eye test is a tax deductible expense. In addition if the test indicates a need for glasses or contact lenses solely for use with the computer used in the course of your work the cost of the glasses etc is also tax deductible. If however the test indicates a general need for glasses etc only the part of the cost of the special prescription for computer use will qualify but the remainder will not. Where contracted by company for an Inland Revenue approved scheme (see section relating to B&S Financial Management Limited) Accountancy Fees VAT on expenditure Charitable Donations Professional Indemnity Insurance (PII) Employer s Liability Insurance Training Costs Company Closure If not VAT registered If paid under gift relief rules To protect if sued for negligence by a client. Also amounts paid in settlement of such claims. Deductibility can depend on your IR35 status. Seek advice from our tax department. When your company is dissolved, currently 21,200 per couple can usually be taken in cash, tax-free by most spouse/unmarried partner companies. The excess is normally taxed at only 10% Please contact us for further information

23 NOT ALLOWABLE Private or domestic expense COMMENTS See note iv) Lunches Entertaining expenses Political donations Parking fines, motoring fines or clamping Clothing No tax deduction even if business related Except for specific protective or safety clothing Capital assets Special allowances see note v) Company formation costs Personal insurances, life insurance Although this is not an allowable expense on the company you may claim it from the company in your expenses if you paid it personally prior to formation. See note vi) Keyman Insurance Permanent Health Insurance 20-20

24 The following notes relate to the references on the previous pages concerning expenses. i) Motor Expenses Company Cars Generally it is not tax-efficient to run a company car unless it is particularly green. The tax and national insurance payable on the private usage of a normal company car, and charged on the individual is usually greater than the company tax saved by charging all running and depreciation costs of the car against the company. Where the car is new or almost new and there is large private use and little business use, then a company car may make sense. More information about the excellent tax saving on low-emission cars is given at page 26. Mileage Allowances In cases where a reasonable amount of business mileage is envisaged it will be better to use a privately-owned car for business purposes and claim a tax-free mileage rate from your company. As the majority of your travel is likely to be tax-allowable mileage to and from your working site it is difficult to envisage circumstances where the mileage allowance is not the best option. The Inland Revenue set these tax free rates each year under a scheme called the AMAP Scheme. Current HMRC approved mileage rates are 45p per mile on the first 10,000 miles (counted from the 6 th April each year) and 25p per mile thereafter. Other rates are: Motor Cycle 24ppm, Cycle 20ppm and Car Passenger 5ppm. Parking, congestion charges and road tolls can be claimed in addition to the mileage allowances for business journeys. ii) Travel & Accommodation Provided that during the lifetime of your company you work at more than one site you will be able to claim the costs of travelling from home to site and if relevant the costs of staying away (subsistence expenses) for as long as you do not expect to be at that site for two years or more. If you have a series of contracts for the same site you can claim the expenses until you sign a contract that will take you over the two-year limit. For example if you sign a seven month contract after working for eighteen months at the same location you will no longer be able to make a claim for expenses for that final contract. On the other hand if you sign a contract that expires one day before the two-year limit you can claim the expenses for the entire period of this contract up to the two-year limit. If you concurrently have more than one place of work, but spend less than 40% of your working time there (i.e. typically not more than 2 days a week) the two-year rule is unlikely to apply to your commuting (add subsistence) expenses to and from that place so you will be able to claim commuting expenses beyond the two year point. Overnight hotels costs when working away from home are tax exempt

25 iii) Telephone If your home telephone or contract mobile is in your private name the company may pay the entire bill but a proportion will be taxed on you for the private use element. To avoid being taxed on a private telephone benefit we suggest you just claim for business calls through the company and pay the rental and private calls personally. Any personal benefit from a mobile phone contracted in the company s name is exempt from tax. iv) Use of home as office An allowance may be available in respect of certain home expenses where it can be demonstrated that they have increased as a result of working at home. This is an adjustment we will put in your accounts and you should not claim a proportion of these bills as an expense. You cannot claim a proportion of your Council Tax as this relates solely to your private occupation. v) Capital expenditure Expenditure on computer and other equipment, other than cars, can be written-off for tax purposes at the rate of 100% a year, up to a limit of 100,000 per year. Legislation will be introduced in the Finance Bill 2011 to reduce the maximum amount of annual investment allowance to 25,000 from April vi) Life Assurance Premiums do not normally qualify for tax relief but it is possible to arrange Life Assurance which does - please contact us for advice. vii) Employer Supported Childcare Payment for childcare costs can attract tax breaks if the following conditions are met: The childcare is provided under a contract between your company and the childcare provider. The child is your child or stepchild, and maintained wholly or partly at your expense, or a child for whom you have parental responsibility. The childcarer is either registered or approved. The tax break is 55 per week ( 243 per month) for each employee, not per child. If both parents are employees of your company both can benefit in respect of the same child. From 6 April 2011 the amount free of income tax and NICs has been reduced to 28 per week for higher rate taxpayers and 22 per week for additional rate taxpayers. The charges will only affect people joining an employer s scheme on or after 6 April Your child will qualify up to 1 st September following his or her 15 th birthday, or if your child is disabled, up to 1 st September after his or her 16 th birthday. In addition to nursery care, after-school care, music lessons, dance classes and sports coaching can also qualify in some conditions are met. These arrangements may reduce any Tax Credits you currently claim

26 16 MAKING WITHDRAWALS FROM THE COMPANY Your company s agency will make payments to your company and not to you so you need to consider how to control and account for withdrawals from the company s bank account. There are five ways in which funds are drawn from the company's current account. These are as follows: i) payments representing tax-allowable company expenses ii) withdrawal of net-of-tax salary iii) withdrawal of net-of-tax credit dividends iv) payments of VAT and taxes v) transfers to deposit account for tax reserves As outlined in the example, tax is payable on your salary and dividend withdrawals. The first charge on company funds will be for tax-allowable business expenses. After these expenses you would next withdraw your net salary and the balance of the remaining aftertax profits would support your dividend drawings. i) PAYMENTS REPRESENTING ALLOWABLE COMPANY EXPENSES It will be possible to pay certain expenses directly from the company s bank account e.g. telephone bills, accountancy fees. You will have an invoice as a supporting voucher to these expenses and this will identify the VAT content contained within the payment. Other direct expenses such as spouse s salary and company pension payments will have no voucher and have no VAT content. If you are in doubt as to whether a direct payment contains VAT e.g. car finance payments then you should refer to the initial agreement for guidance or failing this ask us. Where expenses cannot be met by direct company payment you should pay these first yourself and you should complete an expense sheet each month covering such items that you will then present to the company who will write a cheque to you to reimburse your payment. The effect is that all allowable expenses have ultimately been paid out of the company funds before taxable payments to you are considered. If you regularly incur business expenses with third parties e.g. buying petrol for a company car then you may wish to consider using a credit card. This could be either a company credit card or a personal card exclusively for company use. Tax-allowable business expenses would be paid with the credit card and the monthly bill paid with a company cheque. You would need to keep the supplier invoices for the expenditure to prove the expense and to analyse the VAT content, if any, of each item on the statement

27 It is best practice for the company to purchase items in its own name and pay for these direct with a company cheque. The reason is that certain expenses incurred directly in the company name for business purposes may not need to be disclosed on the annual expenses return to H M Revenue & Customs on form P11D. ii) WITHDRAWAL OF NET SALARY Each month the company will pay to your personal bank account an amount representing your net-of-tax salary. In this example your net salary would be approximately 678. As this varies by a small amount each month and can change at Budget times we normally suggest that you withdraw the same round figure each month. iii) WITHDRAWAL OF NET DIVIDEND The balance of net funds due to you will come by way of net dividend payments from the company. The pattern of withdrawal is very much based on personal choice and is under your control. You need to exercise discipline to ensure that there is enough money left in the company to pay the appropriate amount of tax. Around 20% of the profits need to be retained for corporation tax so 80% can be withdrawn as dividends over the year. The way you operate the company will follow the trading example above. The company will bank gross fees plus VAT but as VAT will eventually be paid out, the company only ends up retaining the net fees. The next payments are business expenses followed by your net salary and PAYE and NIC. This leaves in the company bank account its pre-tax profits, which split 20% for tax and 80% for you as dividends. You may chose to draw dividends whenever you like i.e. regular payments or irregular amounts at irregular times. The withdrawal of dividends is under your control. iv) PAYMENT OF VAT AND TAXES From your records you will be able to calculate and pay over VAT each quarter or annually. This is the normal way in which contracting companies operate but if you wish we can keep your ongoing records and calculate your VAT returns for you for an extra charge. We will advise you quarterly of the sums due for PAYE and NIC payable by the company and you will write the appropriate cheques to the tax man. We will also inform you of Corporation Tax based on dividends drawn and this can be saved in your company s tax reserve account

28 17 WHO DOES WHAT? Our service is designed to be comprehensive and cost effective. Our system enables you to manage your business and have day-to-day control of those areas that you can handle, while not have to worry about the areas requiring specialist knowledge which are dealt with automatically by us. The following is an illustration of what would happen in a typical company, from the start-up situation to the subsequent ongoing tasks during the yearly cycle, with an indication of who would normally be responsible for dealing with those tasks. We would initially liaise with you to set up your limited company as discussed above and then show you what you need to do on a regular basis to run the business. Typically this would be: You B&S Frequency to do to do Set up accounting records with you INITIALLY X Advise on the level of your personal drawings ("your salary") from the company and how to split this Review records and assist in completion of your online VAT Return as necessary INITIALLY EVERY 3 MONTHS X X You will control the day-to-day affairs of the company and run the company s bank account so you will need to keep basic records of what you are doing. You will need help only in technical tax matters so things will run as follows: You B&S Frequency to do to do Pay salary MONTHLY X Calculate and pay dividends MONTHLY X Reimburse expenses MONTHLY X Maintain accounting records MONTHLY X Prepare and submit VAT Returns QUARTERLY X Maintain payroll QUARTERLY X Calculate PAYE/NIC liabilities QUARTERLY X Calculate CT from Dividends drawn QUARTERLY X 25-25