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: [email protected] e: [email protected] e: [email protected] - 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

29 There are a number of matters that only arise annually but they tend to be the most important. At the end of the tax year on 5th April there are returns to be made to the taxman and at the company s year-end annual accounts are required. You B&S Frequency to do to do Prepare annual accounts for shareholders and for filing at Companies House ANNUALLY X Prepare corporation tax computations ANNUALLY X Complete corporation tax return Form CT600 ANNUALLY X Complete your personal Self Assessment Tax Return ANNUALLY X Complete Employer s Annual Return (form P35) and submit after 5 th April ANNUALLY X Complete Return of Benefits and Expenses for employees (form P11D) after 5 th April ANNUALLY X Complete and submit the Annual Return of the company to Companies House ANNUALLY X In addition we can offer other services should you require them e.g. tax planning for Inheritance Tax and other special situations, raising funds, bookkeeping and general financial health checks. 18 BOOKKEEPING You will be operating a personal services company with a limited number of transactions so record keeping should not be a major task. This can easily be handled manually and a simple system is shown as an example. You may prefer to use a spreadsheet or accounting package and we will be happy to advise if required. It is important to understand that the company bank account is a business account and should not be used as your personal account for paying private transactions. These should continue to be paid for out of your private account that will be funded by planned withdrawals from the company

30 The simplest records arise when the company bank account fully reflects all business transactions so bookkeeping consists solely of detailing the bank statements. These will need to identify the VAT content of each deposit or withdrawal to enable the quarterly VAT return to be completed. Alternatively if you use the flat rate scheme (see below) the VAT content is not required and this will much simplify your record keeping. To keep matters simple you should not withdraw cash from the company account. This cuts out the need for a second set of records to record petty cash transactions in addition to bank transactions. The model records consist of the following items: i) a monthly transaction sheet detailing each bank deposit and withdrawal and reconciling these movements to the balance on the bank statements ii) iii) iv) a VAT summary of the monthly transaction sheets to produce figures for the quarterly or annual VAT return. Unless you use the flat rate scheme (see below) a sample expense sheet detailing the monthly claim a business mileage log detailing the claim on the expense sheet v) a drawings schedule to enable tax calculations to be made for you Blank examples of these documents are contained in the appendix so you can copy these for future use. When completing a VAT return you need to consider those expenses where all the VAT cannot be reclaimed because part of the expense is considered to be private. This is likely to be either VAT on your private telephone bill or VAT on private use of a company car. You need to estimate a percentage of VAT to disallow for the private use of home telephone. For company car users the amount of VAT disallowance is a fixed sum for private petrol that can be obtained from the VAT booklet you have been sent. Again this does not apply to those using the flat rate scheme. We also attach details of the approved rates for business mileage claims and the benefit details for company car users. If you are using the VAT flat rate scheme you need only to charge VAT at the full rate (presently 20%) to your customers. When completing your VAT Return you simply apply the relevant Flat Rate Scheme percentage to your gross sales and remit this amount to H M Revenue and Customs

31 19 APPROVED MILEAGE ALLOWANCE PAYMENTS (AMAPs) These are Inland Revenue approved mileage rates for using your own vehicle on company business and it is recommended that you use them. If you claim at any other rate you may be liable to tax and will have to keep full records of all expenditure with receipts. The Inland Revenue fixes the mileage rates each year. The rates applying to claims for business mileage for the 2011/12 tax year are as follows: Car or Van Motorcycle Cycle Up to 10,000 miles 45p per mile } 24p per mile 20p per mile Over 10,000 miles 25p per mile } The first 10,000 mile rate restarts on the 6 April each year. The rates are designed to cover all costs such as petrol, depreciation, insurance, road tax, servicing and spares so you cannot make separate claims over and above these rates. You can however claim non-mileage related expenses such as parking, congestion charges and road etc tolls in addition. A mileage log detailing each business journey must be maintained to evidence the claims made. An example of a mileage log is contained in this handbook. 20 TAX TIPS FOR COMPANY CAR USERS If you are thinking of having your company buy a car and making it available for both your private and business use, there are likely to be substantial tax disadvantages for all models of cars except low-emission vehicles, and some double cab pick ups. Low Emissions Cars For cars with CO2 emissions of 110g/Km or less, for a basic rate tax payer the annual personal tax charge is only about 2% of the cars cost i.e. 120 for a car costing 6,000. If your petrol is paid for by the company, the personal tax charge could be increased by as little as 376 a year ( 489 for diesel). The company will get full Corporation Tax relief for: the cost of buying the car (the tax relief is given in full in the year of purchase) the cost of buying the fuel the other motor running costs e.g. Insurance, maintenance etc. Tax relief for these costs is given in the year of purchase significantly reducing the company s tax bill for that year. The car can be provided for a family member including a teenager, as the actual private usage is disregarded in calculating the tax payable. The appropriate percentage for a car provided to an employee/director with a CO2 emissions figure between 1-75g/km is 5%. Double Cab Pick Ups Double Cab Pick Ups with a payload of 1000kg or more are another tax efficient company vehicle. The Personal Income Tax charge for a Basic Rate Payer is 600p.a. ( 3,000 x 20%) and a further 110 ( 550 x 20%) if fuel is also provided for all qualifying pick ups. The vehicle s cost, CO2 emissions and actual private usage are all disregarded in calculating the tax payable

32 IR35 21 WHAT IS IR35? Prior to April 2000 a worker could provide services to clients, through a company he owned, drawing only a small salary and taking the remaining profits as dividends (on which no National Insurance Contributions are payable), split between his wife or partner (saving Income Tax at the higher rate). In April 2000 the tax rules were changed to try to eliminate these tax & NIC savings where the worker provides personal services. The coalition government has announced they are reviewing the IR35 rules. Where personal services, are provided through a company you own, the IR35 rules broadly say that: If you (the worker) personally perform services for a business carried on by another person (the client) but the services are provided not under a contract directly between you and the client but through your own company, and the circumstances are such that, if the services were provided under a contract directly between you and the client, you would be regarded for income tax purposes as an employee of the client. The effect being that the fees generated by you for your company, subject to some limited deductions, rather than just the low salary actually taken, are taxable & chargeable to NIC (by your company) as if those fees received by your company, were your personal salary. The issue is therefore whether you, the worker would be regarded as an employee of the client using the existing legal tests of employment and self-employment, but applying these tests to the hypothetical contractual arrangements directly between you and the client. These arrangements normally comprise the contract of employment between you and your company, the contract between your company and an agency, and the contract between the agency and the end client. 22 EMPLOYMENT OR SELF EMPLOYMENT The Contract The terms of a contract can be written, oral or implied or a combination of all three. In deciding what a contract says the Revenue may wish to see not only the contract itself but also handbooks and procedures manuals etc in addition to evidence of oral and implied terms

33 Working Arrangements Where the parties to a contract do not behave in the way described by the agreement the Revenue take the view that they can look at the working relationship rather than be bound by the written contract, which they say, may bear little resemblance to reality. Working practices are less relevant where there is a written contract that contains all the terms of the agreement between the parties. It is therefore important that written contracts are prepared and that they are as comprehensive as possible. New Developments There have recently been a number of court cases where the terms of the contract between the company and the employment agency (the lower contract) fell outside IR35, but the terms of the contract between the agency and the end client (the upper contract) did not. These cases were decided by the courts on the basis of the terms of the upper contract i.e. that the chain of contracts fell within IR35. To minimise this risk of the upper contract terms being different from the lower contract terms, you should seek a clause in your contract (the lower contract) requiring that the upper contract is in all material respects the same as your lower contract. 23 THE STATUS TESTS These tests are not contained in the legislation but have developed over time as cases have been argued in the courts, but as the cases concerned have not until recently involved IR35 many are not entirely appropriate; and as a result their application to IR35 may be uncertain. The Major Tests The Right To Send A Substitute If an individual does not have to do the job personally but can send a substitute he is not an employee, personal service being an essential requirement of employment. A contract that gives your company the absolute right to replace you with another worker without the client s permission being needed is, if combined with a similar right of substitution in the contract between the agency and the end user of your services, probably the strongest indicator that the contract is not within IR35. The Revenue has said, that a right that is limited only by a requirement to substitute a worker of suitable experience and ability is also acceptable. Letters to this effect from the agency and the end user can be very helpful. It is not necessary to actually send a substitute, or to have a one available (although this makes your case stronger) but merely to have the right to do so. It is however important that your company is responsible for paying the substitute

34 Control The level and type of control by the engager over the worker has historically been a factor in deciding whether the contract is one of employment. Rights of control were divided into control over what, where, when and how the work is done. More recently the courts have dealt increasingly with skilled and professional workers over whom control is necessarily more limited. As a result the control test has declined in importance but is still a factor. What is done. The right of a client to move the worker to areas of higher priority is highly indicative of employment. When and where the work is done. If the client can control when and where the work is done the worker is more likely to be an employee. If the nature of the work or security issues dictate where the work is done, this is likely to be neutral in determining IR35 status. How it is done. This can be a strong indicator of employment but where skilled professionals are involved and the complex nature of the work, rather than the client, dictates how the work is done, this does not point to employment. It is important to note that it is the client s right of control over these aspects which may be an indicator of employment and not the exercise of that control. Mutuality of obligations Mutuality of obligations is a fundamental aspect of a contract of employment and is considered alongside personal service and control to be one of the three fundamental criteria for the existence of a contract of service. Mutuality of obligations is a concept developed over the years through the courts. It relates to the ongoing relationship between the parties and involves a high level of commitment to each other. In an employment relationship the employer is obliged to provide work or pay and the employee is obliged to accept it. However, the mere offer and acceptance of a specific piece of work does not amount to mutuality of obligations in the context of employment status. There must also be an obligation on the employer to offer ongoing work and the employee to accept such work if offered, either during the course of the Contract of Service or once the contract is over. We have argued for the last few years that mutuality of obligations must be present in the arrangements for IR35 to apply to them and that if it is lacking IR35 simply cannot bite. In January 2010, the first tier tax tribunal ruled in favour of a taxpayer. The victory was due to a lack of Mutuality of obligations. The trinity of personal service, control and mutuality had first to be considered before the other factors. It is only necessary to go to the second stage of considering all the other status criteria if personal service, control and mutuality are all fulfilled. If they are not, the status will not be one of employee and the argument need go no further

35 The In business on own account test This test draws a distinction between an individual who works under the control of and as part of the business of another and the individual who goes it alone and sets up on his own account, bearing responsibility for the success or failure of the enterprise, regard being had to the worker s exposure to bad debts and the amount spent on organising, obtaining or carrying out the work. This test can be helpful to individuals with highly marketable skills, evidenced by a high rate of pay, who contract over time with numerous different customers. Other Factors Significant financial risk and opportunity to profit from sound management The tests of taking on significant financial risk, and the opportunity to profit from sound financial management, are a strong indicator of self-employment. Incurring significant amounts on training expenses to provide skills, which are hoped to be used in future engagements, can indicate financial risk. If your company agrees to perform work for a fixed sum, and therefore stands to lose if the work is done incorrectly, or it has to be put right at the company s own expense, and to profit if the work is done quickly and efficiently, is an indicator of self-employment. For this test to be conclusive evidence of losses being suffered, or insurance being in place to cover such losses, may be required. Minor Factors Provision of equipment The provision by your company, of significant equipment, which is essential to carry out the task, can be a significant indicator but it is unlikely that these conditions would be met in the case of an IT specialist. Payment terms Whilst being paid a fixed sum on a project basis is typical of self-employment, payment by unit of time is usually inconclusive. Intention of the parties The Revenue has stated that the intention can be decisive but only where the relationship of the parties is ambiguous and the other factors are neutral

36 Notice Period Lack of a notice period is indicative of non-ir35 status. Length of Engagement In general, the longer the engagement, the more likely the contract will fall within IR35 and the shorter the engagement the less likely. This is because the engager will, over time, want to, or need to, exercise greater control of the worker. Additionally the worker may become integrated into the engager s business in a manner indicative of employment. SUMMARY: EMPLOYMENT OR SELF-EMPLOYMENT There follows a brief summary of pointers that would indicate self-employment and some caveats on each: Test Try to establish Watch out for Control The work is not subject to control by the client. You have agreed to do a specific job to an agreed standard and after that it is up to you how, when and where the job is done This will be the most difficult area to satisfy. Go as far as you can with it, and accept that some will never work. Substitutes and helpers Mutual obligations Equipment Financial risk Method of payment You have a right to substitute a suitably qualified alternative, or engage help. This should be an explicit contractual right Both parties declare that they do not wish to create or imply any mutuality of obligations whatsoever, either during the course of this Contract for services or during any period when contracts are not available Equipment fundamental to the task is important You need to make profit other than by doing more hours Quoting fixed prices for a specified task May be difficult to establish. If you can you must be responsible for the substitute and their quality of work. You must pay them. A key condition but one which the other side will readily accept. Again difficult. Do not accept free equipment provided by the client. You will be closer to employment. Fixed price contracts are the only way. Do you want this? Your costs are probably not sufficient to swing this factor. Payment by the hour or day is indicative of employment 33-33

37 Other rights Exclusive services Rights of dismissal Part and parcel of the organisation No rights to normal employee benefits You can work for as many organisations as you wish You are engaged for a particular task. No rights of dismissal apply You are an independent expert, not part of the company paying you You will usually satisfy this. Do not accept what would otherwise be benefits in kind. Useful but not conclusive. If you work full time this is not practical. Clients may be unwilling to accept this. It is often part of their control aspects. If you work in a team with company employees you will need to show that you differ substantially from them. 24 AVOIDING IR35 It is important to implement a sound comprehensive written contract (that is, a contract which contains all the terms of the agreement between the parties), which embodies as many of the favourable factors above as possible i.e: gives your company the final say over the appointment of a substitute worker. gives the agency/client as few rights of control as possible. Indicates a lack of mutual obligations. affords your company the opportunity to profit from sound financial management etc. Also note that IR35 liability is largely decided on a contract by contract basis, so it is important that we review and amend if necessary, each proposed new or varied contract, before it is signed, dated and implemented. Maintain records to show that the contract is being followed. Invoices should show the provision of services not the supply of personnel. Record any instances of unsatisfactory work and its correction

38 Letter of Clarity If your work is undertaken through an agency rather than directly with the client, the Revenue will take the view that the terms of contract between the agency and the client are as important as the terms of the contract between your company and the agency in deciding your IR35 status even though you are not a party to the agency/client contract. In addition that contract may not be made available either to you, or the Revenue. Whether your company s contract is with an agency or directly with the client, if your contract is not fully explicit, or important factors are not covered, it will be helpful in establishing improved IR35 friendly terms, to send a suitable letter of clarity to the agency and/or the client, and obtain from them, if you possibly can, written confirmation of agreement. This should be done at the time of the contract or soon afterwards to avoid arguments later. The more factors in your favour, evidenced in writing by the other party, the more likely you are to send the Inland Revenue away in search of an easier target. A specimen letter is shown below

39 SPECIMEN LETTER OF CLARITY CONFIRMING CONSULTANCY APPOINTMENT Dear I write to clarify and confirm the arrangements between my company..ltd, and. (the agency or client). This is to confirm that...ltd, (your company), is providing services to. (This is to show that services not personnel are being provided) These services consist of. (description of services). They commenced on.(date) and can be terminated by either party at any time/with.. days notice / are contracted to continue until at least.. (date). My company has the right to select and send a substitute to carry out the services specified in the contract in place of the named individual. (A good substitution clause is very effective in avoiding IR35, the lack of a right of substitution should be avoided) My company has the right to sub-contract the services to another party. (A right to subcontract would again be very effective in avoiding IR35) My company has the right to subcontract the services and/or send a substitute; the client agrees that he will accept a substitute or subcontractor if the latter has the skills to carry out the services specified in the contract. (This slightly more limited right of substitution is also acceptable to the Revenue and should be established if it is not clearly stated in the contract) The basis of payment for the contract is: (select one only) on a project basis and for a fixed sum which has been agreed in advance, (Project based payment carries the opportunity to profit from sound management and can be effective in avoiding IR35, other bases of payment are fairly neutral). or, on a project basis for a fixed sum, although adjustments to that fixed sum can be negotiated. My company s representative does not work as part of a team that includes members of your staff. (It can be helpful to show that you are not part and parcel of the client s business operation.) 36-36

40 My company s representative can choose which hours he works as long as he gets the job done within the agreed period, (This points towards non IR35, an agreement to work the client s normal hours points the other way). The work can be carried out as my company chooses, but within the requirements of the project, including reaching necessary quality standards. (This level of control is acceptable, but any agreement to be subject to the clients day to day control as to how the work is carried out should be avoided) My company carries the risk that work, which is not to specification, is rectified at my company s own expense. (The significant financial risk and ability to profit from sound financial management, which would result from agreeing to put right defective work at your own expense, is a strong pointer towards non IR35. You may for commercial reasons not wish to agree to this) We hereby confirm that the above summary reflects the true nature of the contractual relationship of the parties during the period. For and on behalf of the freelancer: Name:. Signature:. Date : For and on behalf of the agency/client: Name :.. Signature :. Date :

41 25 HOW TO CALCULATE THE EXTRA TAX DUE UNDER IR35 Your company will operate PAYE and pay NICs in the usual way on any salary paid during the year and report any taxable benefits to us at the tax year end. Your company will also need to work out (with our help) if any additional tax and NICs on IR35 contract work will be due for payment on 19th April following the end of the tax year. The Calculation Cash received (by your company) in the year (ended 5 th April) X from IR35 work (excluding VAT paid by the customer) (but include VAT retained if under the Flat Rate Scheme) Expenses & non-cash benefits from the client. X X Less 5% Deduction Less: Salary and Employer s NIC already paid Expenses allowable on IR35 work Company Pension contributions (approved) Subscriptions to professional bodies Professional Indemnity assurance premiums (X) (X) (X) (X) (X) (X) Total Expenses and Deductions Bonus for IR35 purposes including Employers NICs (X) X == Expenses Allowable for IR35 work The 5% deduction This allowance, being 5% of the total income from IR35 work is intended to cover all of the expenses of running the company including accountancy fees and Companies House filing fee. Although for this deduction it is not necessary to show how or even if the expenditure has been laid out it is necessary for the company to record all its expenditure for its accounts. Expenses Allowable See the travel and accommodation notes in Section

42 26 THE ARCTIC SYSTEMS CASE HM Revenue & Customs (HMRC) have not had the success they anticipated in raising additional taxes from freelancers by the IR35 rules. As a result they have sought other ways to raise taxes from one-man companies. HMRC have unsuccessfully tried to use a new and controversial view of old legislation (formerly known as Section 660A) to prevent the tax benefits of splitting dividends payments with spouses in husband and wife owned companies. This is normally done to equalise income levels and so avoid higher rate tax. The effect of S660A is to tax all the dividends as if they belonged to one spouse thereby increasing income for tax purposes and pushing the individual into higher rates that much quicker. In simple terms the person seen to be earning all the income will be taxed on all the income. The House of Lords has ruled against the Revenue and in favour of the taxpayer. The law is not expected to be changed in the foreseeable future so dividend splitting through the use of appropriate shareholdings remains an excellent way of tax saving. If you require further information please contact Jim Dutton or Clara Torres for advice. OTHER MATTERS 27 SAVINGS AND INVESTMENT Loss of benefits When you change from an employed status to a contract worker are likely to lose many company benefits such as non-contributory pension scheme, medical insurance and death in service benefits. Even though you may consider contracting as a short-term career, your earnings will be high. It is important that you recognise that part of your earnings need to be put back into preserving these benefits

43 B&S Financial Management Limited is authorised to provide independent financial advice and is regulated by the Financial Services Authority. B&S Financial Management Limited St Georges House Chester Road Manchester M15 4JE Telephone number: Contact names: Idris Davies Stuart Johnson John Hall e: e: e: The majority of financial advisors are not familiar with the freelancer market and so rarely understand the special circumstances of contract workers. Beever and Struthers set up a separate limited company, B&S Financial Management Limited, to provide further tax planning and independent financial advice to our clients. The following areas of tax planning and financial advice should be discussed with an advisor at B&S Financial Management Limited. It is important that you discuss any insurance/pension contracts before entering into them as our financial services division can ensure that these apply to your freelancer status and that you are making full use of the tax advantages available. Please feel free to contact them direct or we can arrange an appointment for you. a) Pension Planning Pension planning is the major consideration for anyone entering the contracting market today, as it offers no direct pension benefits. Making pension contributions through a limited company can achieve major tax planning advantages. The rules regarding pension schemes for freelancers are complicated and you need to be aware of all the options and their effects. In addition, for many people contracting may be short-term and steps are required to safeguard the contributions made during the relatively short time that you may be contracting. The uncertain long-term nature of contracting poses unique questions about the type of financial advice that should be given. Changes in pension legislation since A Day (6 April 2006) mean that a review of all existing pension schemes is recommended. b) Permanent Health Insurance (Income Protection) Many freelancers are very concerned about what would happen if they were unable to work as a result of an accident or illness. Permanent health insurance contracts provide a replacement of income during periods of incapacity. The particular nature of contract workers and their methods of payment complicates this provision and specialist advice is needed to ensure full cover is available

44 c) Life Insurance Did you know that arranging life cover for yourself can be treated as a legitimate business arrangement and, with your company paying the premiums, there is also the potential of reducing your company s Corporation Tax liability? Often substantial life cover benefit will be lost when you cease work with a large company. Life insurance can be arranged for family protection or in conjunction with loans etc. d) Investments Offshore investment products and other personal investments can further enhance the tax efficiency of your company and personal savings. e) Critical Illness Cover Invariably clients will have life cover in the event of death, but what would be the implications for your business and family if you were to be diagnosed with a critical illness. A critical illness plan can provide a financial buffer in such circumstances. f) Mortgages It can often be difficult to secure the most competitive mortgage deal when you become a freelancer as few mortgage providers understand your remuneration structure. B&S F M Ltd have many years experience in dealing with both new mortgages and remortgages for freelancer clients and will be able to secure for you the most competitive deal. 28 CONTRACTING OVERSEAS An increasing number of individuals are looking at contract opportunities overseas. This is a complicated area and a number of factors have to be considered before deciding whether to undertake such a contract either as an individual or through your limited company. In certain jurisdictions the use of other offshore structures may be advisable. It is impossible to give anything other than the most general of information, as this is a constantly changing area. It depends on the interplay of tax legislation in the UK with that of the overseas country and is subject to alteration at either end by reference to different dates. There is generally less scope for advantageous tax planning if you carry out a contract in another EEC country due to the amount of reciprocal European legislation. Normally the further away, and less sophisticated the country, the more likely there is to be a substantial tax advantage. These are often arranged for your benefit by the agent as an incentive to carry out the contract. When you work overseas the normal pattern of operations described above will change substantially. Your company will always be liable to UK taxation no matter how long you work overseas. There will only be an advantage in using the company if you can eliminate the profits by taking all your drawings as a salary that is either tax free or taxed at an advantageous rate

45 The matters that need to be considered with any overseas contract are: i) the agency will dictate whether it is willing to deal with you or your company, whatever the merits or demerits for tax purposes. ii) you may well have a responsibility to make a tax return for the same period both overseas, and in the UK, but normally there is a double taxation agreement in force, which ensures that you pay tax in only one country. iii) the tax rules of other countries may not recognise your company s corporate status and may look through the arrangement to deal with you as an individual. iv) foreign tax rates may be higher than those in the UK, and you may wish to make yourself a UK taxpayer. It is important that you seek advice from Jim Dutton or Clara Torres as early as possible as it will rarely be possible to rearrange your affairs once they have been set up. 29 RESUME AND TIPS i) Your salary does not have to represent any particular proportion of your total income. The lower the better to save National Insurance, and dividends can be as large as you wish. On the other hand only salary ranks for pension tax relief purposes so your salary needs to be sufficient to make adequate pension payments. ii) You do not have to pay dividends every quarter. The directors can declare a dividend as frequently as they wish which is usually each month. iii) You are not self-employed but are an employee of your company. iv) Having only a small salary will not affect your ability to obtain a mortgage. Borrowings will be based on your total income including dividends. v) Dividends do not count as earnings for pension purposes. Only salary counts. Specialist advice is required and is available through Beever and Struthers Financial Management Limited. vi) Never deal direct with the Inland Revenue no matter how simple the query may seem. We handle all contact with the Revenue

46 30 ADDITIONAL SERVICES We are a firm of Chartered Accountants and are also able to provide a range of other services. These include: PAYE and NIC Audits Periodically HMRC will seek to examine your company s records of payments to employees. Whilst they will look at the payroll records the exercise is primarily designed to look at the tax-free expenses claimed to see if they should be taxed and to check your IR35 status. This is a very complex area and you should always ask us to deal with this at our office. Contact Jim Dutton. Do not be tempted to deal with this yourself. Tax Planning As we complete your personal tax returns we will have an input into your recurring tax affairs. We are also available to look at special or one-off situations such as Inheritance Tax planning, general financial health checks, substantial asset acquisitions or disposals, planning for retirement or other situations, as you require. Fundraising We can advise and assist in the raising of funds from routine asset finance to complex business plans. We have regular contacts with lenders and can often introduce you to sources of funds that you would not normally come across. Investment advice From our knowledge of your personal affairs we can advise on investment planning to maximise after-tax returns. Our independent financial services company, B&S Financial Management Limited, can provide detailed comparisons throughout the market and arrange suitable investments on your behalf

47 MY COMPANY LIMITED DRAWINGS SCHEDULE NAME: A PERSON Amount of net monthly payment to private bank account 4,000 ===== This is what used to be your net pay and comprises the amount paid into your personal bank account for your normal living expenses. This becomes the following company payments: Net salary 678 A Secretarial salary - B Net dividend A share 1,661 C B share 1,661 D Total drawings as above 4,000 ===== The four amounts A, B, C and D must be withdrawn individually from the bank each month. PLEASE RETURN THIS FORM WITH THE STARTING DATE OF YOUR DRAWINGS TO: Beever and Struthers Chartered Accountants St George's House Chester Road Manchester M15 4JE 44-44

48 MY COMPANY LIMITED RECORD OF BANKINGS (VAT OUTPUTS) BANKING INVOICE DATE CUSTOMER/DETAILS NO. GROSS VAT NET Anyagency Limited , Anyagency Limited Thenextagency Limited etc etc etc etc etc etc etc etc etc etc etc etc Newagency Limited Newagency Limited , , END OF VAT QUARTER TO , , , ======= ======= ======= Opening bank balance 3, Bankings as above 14, , Payments in the period 13, Closing bank balance 4, ======= 45-45

49 MY COMPANY LIMITED RECORD OF BANK PAYMENTS (VAT INPUTS ) CHEQUE DATE DETAILS NO GROSS VAT NET Course fees Registrar of Companies Bank charges Directors expenses A Person net salary S/O A Person net dividend Mrs A Person net dividend etc etc etc etc etc etc etc etc etc etc etc etc A Person net salary S/O A Person net dividend Mrs A Person net dividend END OF VAT QUARTER TO , , ======= ====== ======= 46-46

50 MY COMPANY LIMITED EXPENSE SHEET NAME: A PERSON PERIOD OF CLAIM: OCTOBER 2011 DESCRIPTION TOTAL VAT INC. ANALYSIS OF NET EXPENDITURE MOTOR EXES TRAVEL & ACCOMM OTHER Postage Telephone calls Technical books Computer Supplies Software Stationery Technical magazines Hotel (re interview) Mileage 325x45p T O T A L Cheque drawn for total expenses... Date... Attach vouchers for all expenses 47-47

51 31 st T O T A L 325 MY COMPANY LIMITED BUSINESS MILEAGE LOG NAME: A PERSON PERIOD OF CLAIM: OCTOBER 2011 DATE DETAILS OF JOURNEY MILES 1 st Visit to Beever and Struthers 44 2 nd 3 rd 4 th 5 th Trip to Site 56 6 th Trip to Site 56 7 th 8 th 9 th 10 th 11 th 12 th Bank Meeting th 14 th 15 th Trip to Site th 17 th 18 th 19 th 20 th 21 st 22 nd 23 rd 24 th Shop visit for computer supplies th 26 th 27 th Interview Birmingham th 29 th 30 th 48-48

52 MY COMPANY LIMITED. MINUTES OF A DIRECTORS MEETING HELD ON 31st December 2011 at The Registered Office.. PRESENT A Person. DIRECTOR Mrs A Person. SECRETARY A) A total dividend of 2,490 was declared in respect of the A Ordinary Shares B) A total dividend of 2,490 was declared in respect of the B Ordinary Shares BY ORDER OF THE BOARD.. A Person DIRECTOR 49-49

53 Revised May 2011