IR35 - Update 2015

IR35 - Where are we now?

IR35 remains a very hot topic.  Following the OTS (Office of Tax Simplification) review of IR35 and the Government’s commitment to keep IR35 and improve the way it is administered by HMRC we have seen lots of changes including:

• Creation of the IR35 Forum
• Complete review and rewrite of HMRC’s IR35 guidance
• New IR35 HMRC compliance approach with 5 specialist HMRC IR35 teams
• Lots more IR35 investigations
• Trial of the Business Entity Tests
• Improved promotion and communication of IR35
• Launch of HMRC’s IR35 contract review service and helpline
• New Assurance processes for IR35 for those in the Public Sector
• Office Holder tax rules changed

We have also seen the review of the use of Personal Service Companies by the House of Lords Select Committee earlier this year.

Pilot and the report
 
All these new IR35 processes have recently been subject to review and the IR35 Forum has now published their report on the new processes.  This report also aims to address many issues raised by the House of Lords Select Committee.

Key findings in a nutshell
 
Much has already been done to improve the administration of IR35 and there is more to do on many of the areas identified for improvement.

The Business Entity Tests will be abolished with effect from April 2015.  The tests were designed to indicate the level of risk of an IR35 investigation, rather than being any sort of status test.  However, it became clear that the tests were of little use to the typical contractor or Personal Service Company user with most of them falling into the “high risk” band.  Worse still it was found that the tests were being manipulated and various web sites sprung up offering to rent virtual offices to contractors and all sorts of additions (at a fee) to gain a “low risk” score.  Because the tests are all about the risk of IR35 HMRC investigation, achieving a low risk score does NOT mean that IR35 does not apply.  So it’s goodbye to the BETS and not before time.

IR35 Investigations.

• If you receive a Business Records Check letter from HMRC that asks whether IR35 has been considered please note that you have on your hands a full blown IR35 investigation.
• If you ask HMRC for an extension of time to gather all the information they will grant this and confirm the extension within a formal “Notice to Produce”. 
• These enquiries are not being confined to IR35 and you will likely have an expenses and benefits enquiry at the same time.
• Without exception HMRC are interviewing the end client for their views on the day-to-day working practices.
• If you contract to the end client via an agency, you cannot rely at all on the clauses in the agency contract in isolation to support an outside IR35 decision.
• You must always take an in-depth look at what you are actually doing.  Any sort of IR35 opinion based on the terms and conditions set out in the written contract alone is meaningless.  This applies even where you have a direct contract i.e. no agency.
• Consider getting some sort of confirmation of the true terms and conditions from the end client, as part of your normal review process and certainly ahead of any technical submission to HMRC.
• 50% of all IR35 current enquiries are into those providing services to the Public Sector. . We have seen numerous investigations in the traditional government departments e.g. DWP, MOD etc but it is clear that this is now being extended into the NHS, BBC and local authorities.
• Finally don’t panic and seek specialist help.

IR35 Contract Review Tips for you

• Always look in detail at the actual working practices.
• Make sure you are certain who the end client is – this is often unclear when multiple agencies are involved in the contractual chain.
• Make sure the working practices match the written contract.
• In agency cases try to seek sight of the “upper” contract between the agency and the end client.
• Consider a confirmation of arrangements in the event of a future IR35 investigation.
• IR35 is not a once made in or out decision.  It has to be considered for every single contract or extension entered into.

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Tax relief at Christmas

Tax Relief at Christmas

As thoughts turn to all things Christmassy, I thought I would write a few words on tax issues relevant to the forth coming festive season. I hope this will give you some ideas while planning treats for your customers and staff!


 Christmas Parties

• The cost of a staff party or other annual function for employees is an allowable tax deduction for businesses. This does not apply to sole traders and business partners of unincorporated organisations.
  
  As long as the function meets the following criteria, there will be no chargeable taxable benefit for the employee:

• It must be open to all employees, or to all at a particular location.
• The cost per head must not exceed £150. If more than one annual function is provided the aggregate cost per head must not exceed £150. Partners and spouses of employees are included in headcount when calculating the cost per head of attendees.
• If the £150 limit is exceeded staff will be taxable in full on total cost per head for them and their partner/spouse also attending.
• Cost is calculated as the total cost of the party or function including any transport or accommodation provided and VAT.
  
  
  

VAT is recoverable on staff entertaining expenditure but this does not extend to staff partners/spouses so input VAT will need to be apportioned.

Client Entertaining

Client entertaining (i.e. hospitality of any kind) is never an allowable deduction for business tax purposes and input VAT cannot be recovered on it.

Business Gifts

Gifts to customers are only allowable as a tax deduction if:

• The total cost of gifts to any one individual per annum does not exceed £50 and
• The gift bears a conspicuous advert for the business and
• The gift is not food, drink, tobacco or exchangeable vouchers.
  
  

However samples of a trader’s product are allowable even if they are food, drink or tobacco. 

Gifts to Staff

In some cases HMRC will consider a benefit exempt on the grounds that the cash equivalent of the benefit taxable on the employee is so trivial as to be not worth pursuing. HMRC have conceded that an employer may provide an employee with a seasonal gift such as a turkey, an ordinary bottle of wine or a box of chocolates and this will be considered an exempt benefit. However, a case of ordinary wine or bottle of fine wine or a hamper is unlikely to be considered trivial.

This concession also applies to seasonal flu jabs which are also considered trivial but your employees may not be quite so appreciative of the “gift”!

Some employers give staff vouchers at Christmas; these are subject to tax and NI on the individual.

Christmas Bonus for staff

This will count as ordinary earnings and be subject to PAYE and NI as if it were additional salary.

 I hope this has given you some ideas and information on festive tax matters.

Mark

Tax on classic company cars

As mentioned in our mileage versus company car blog, if you purchase a car through your Limited Company and it is available for private use, (for example you park it at your home) then you have a taxable benefit. As a recap this is calculated from taking the price of the car if it was brand new, known as the list price, and multiplying it by a percentage based on the CO2 emissions of the car.

However, if you have car that was registered before the 1^st January 1998, then there would be no CO2 data, making it impossible to calculate the taxable benefit. Cars that fall into this category are known as “Classic Cars”. HM Revenue & Customs have an alternative way of calculating the percentage based on the engine size -15% for engines up to 1400cc, 25% for 1401cc to 2000cc and 35% for any engine larger or if it has a rotary engine. Just like with the CO2 percentages, you add 3% if the car is a diesel.

But that’s not all, if the current market value, i.e. how much the car is currently worth, is at least £15,000 and also higher than the list price of the car (which is possible depending on how old the car is) then you would use the cars current value instead of the list price.

Fuel benefit is the same as regular cars, with the figure for 2013/14 being £21,100 which is multiplied by the above percentage.

If you have a company car that falls into the requirements to be a classic car, and you would like help calculating any benefit that may be due, please get in touch.

Mark

Zero-hours contracts

Research from The Chartered Instistute of Personnel and Development (CIPD) suggests that the use of zero-hours contracts is becoming widespread throughout the UK. The research, widely reported in today’s press, states that the CIPD estimates around 1 million workers to be on zero-hours contracts. But what are zero-hours contracts and what are the implications of using them for your business? When is it appropriate to use them and what rights do employees on zero-hours contracts have? Below we tackle these questions and assess the advantages and disadvantages for you and your staff.

Q. There has been a lot of talk on the news about zero-hours contracts. What is a zero-hours contract?

A. A zero hours contract is a contract of employment where the employee is not guaranteed a minimum or maximum number of hours of work. However, there is an expectation that when the employee is offered work by the employer they will accept the work offered.

Q. When can I use a zero-hours contract?

A. Zero-hours contracts are often used where there are peaks and troughs in a business which makes it difficult to provide employees with weekly contracted hours, for example, in the hospitality and leisure industry or the healthcare sector.

Q. What happens if someone I originally employed on a zero-hours contract starts working a certain number of hours each week in the business?

A. If an employee works regular hours each week over a period of time, then there is an argument to say that these hours could become their contracted hours and that they would no longer be a zero hours employee.

Q. What rights does someone employed under a zero-hours contract have?

A. Someone employed on a zero-hours contract is an employee. This means that after two years’ continuous service (if they were employed on or after 6th April 2012) they would have the right to claim ordinary unfair dismissal at an Employment Tribunal. They are also entitled to the National Minimum Wage, paid holidays and, if they qualify, Statutory Sick Pay.

Q. If an employee on a zero-hours contract isn’t working out, can I just stop offering them work?

A. No. As mentioned above, they are employees and as such, depending on their length of service, they may have employment rights.

Q. How do I calculate holiday pay for an employee engaged on a zero- hours contract?

A. Where an employee doesn’t have any regular hours then their holiday pay is calculated based on their average pay over the previous 12 weeks. If they did not earn anything during one week, then you should add in the pay from the week before the 12th week to bring the total up to 12.

Q. Is a zero-hours contract the same as a casual worker agreement?

A. No, a casual worker is engaged to work for an employer either on a one-off basis for a short period of time, or on an ad-hoc, as required, basis. They usually have no regular pattern of days or hours of work. The employer does not guarantee the casual worker any minimum amount of work within any given period of time.

The casual worker is free to accept or decline the offer of work, which means that no mutuality of obligation exists in the working relationship.

Q. What are the advantages and disadvantages of a zero hours contract for you and your employees?

A. For the employer

Advantages:

This type of contract can allow you to manage your business needs more efficiently and with greater flexibility.

These types of contracts can be appropriate when you have unpredictable levels of work, the work is irregular or the need for work is very short term. When you know that you have work to offer it would be good if you could provide the employee with as much notice as possible.

There is a mutuality of obligation in that the employee is obliged to work upon the demand (subject to certain exception like holidays) and the employee is obliged to come to work subject to a minimum notice requirement.

Disadvantages:

The downsides for using this type of contract are that the contract will be a contract of employment as opposed to a contract of services and that the employee will accrue continuity of service (whether or not they are actually working) and thus gain over time.

For the employee

Advantages:

The main benefits for the employee of a zero hours contract is that it may suit their personal circumstances and suit individuals who want occasional work.

It also gives the employee continuity of service and allows them to accrue statutory unfair dismissal and redundancy rights as well as accrue annual leave under the Working Time Regulations.

Disadvantages:

The main disadvantage of this type of contract is that it appears to be very one sided for the employer, as the employee can often be sitting around waiting to be offered work whilst being unpaid and the employee only gets paid for when they work- no regular pay or consistency for them.

If the above affects you and you would like to know more, then please give me a call.

Mark.

Loans to directors (continued)

From looking at the previous blog on this topic, you would know that if you pay back a director’s loan within 9 months, you do not have to pay any additional tax on it.

However, this rule has been used by some companies to recycle balances by repaying a loan within the 9 months, avoiding the s455 tax, and immediately taking out a new loan.

As a result, two new rules have been included in the Finance Bill to prevent these arrangements and these are outlined below.

Two new rules:

The first restriction imposes a 30 day test:

•  If within a 30 day period one or more loan repayments totalling £5,000 or more are made to the company and one or more loans or advances are made to that person (or someone connected to that person), the loan repayments will be ignored by HMRC
  
  
• The loan will therefore be treated as still outstanding and relief will not be given for the s455 tax

The second restriction imposes a less objective test but it is believed that problems may arise if it is not considered early on in the company’s accounting period:

• If there is a balance outstanding from a participator of £15,000 or more prior to a repayment,
  
  
•  At any time after a repayment is made to the company, the company makes a new loan to that person (or someone connected to that person), and
  
  
•  Arrangements had been made to make a new loan or there was an intention for a new loan to be made
  
  
•  The loan repayment will be ignored such that no relief will be given against the s455 tax and payment will be due

The onus is on the company to consider whether the restrictions apply to repayments made after 20 March 2013 and amend its tax return accordingly.

These rules apply from 20 March 2013 and so it is necessary to review any balances outstanding to the company and consider the availability to make repayments so as to not fall foul of the restrictions.

If you need more advice on the above, feel free to call me to help explain.

Mark

Business management tips

It is not enough to complete work for a customer and to invoice them. Sometimes there are problems, such as the customer being slow to pay or even going out of business before you can receive payment. This can cause big problems as you are still incurring expenses while not seeing any income generated for it. In order to assist with this common problem, we have provided a few useful tips below.

·         Ensure that customer terms of payment are crystal clear. Obtain signed terms and contracts which, where possible, contain guarantees of payment.

·         Ensure you fund projects by asking for a payment/deposit up front before work commences.

·         Do not let a customer run up a large debt. Set a credit limit and make sure that the customer understands that work will cease if your invoices are not paid.

·         Borrowing money from banks can be difficult, so be sure to plan for this in advance.

·         If a customer goes bankrupt, (especially with a Limited Company) it will be unlikely that you will see any money for your work, so obtain stage payments and deposits.

·         Try not to rely on a single large customer. A larger number of smaller customers ensures continuity of income and spreads the risk.

·         Look for work with a recurring element to it, for that repeat business.

·         Review competitors prices and the quality of their product or service. Make sure your prices are competitive, and that you provide a better quality product or service.

·         Expect that some customers may cease over the next year, so always be looking for new customers, make use of selective advertising, marketing and existing industry contracts.

·         Cash advances on customer invoices, sometimes called factoring, should only be used as a last resort. There is no guarantee that this will solve your cash flow problems and is really an expensive form of bank borrowing secured by way of a personal guarantee by you. Seek professional advice before going down this route.

·         Where possible, stock should be purchased on a ‘just in time’ basis. The opposite means having your cash tied up in unsold stock, which does not help with cash flow.

If you need any help, or would like further explanation of any of the above, please contact us now.

Mark

Loans to directors

If you are a company director or ‘participator’ and take money out of your company and which is not described as a salary or a dividend, it is classed as a director’s loan.
If your director’s loan account is not paid off in full within nine months after the end of your company’s accounting period:

• You must include details of the loan in your Company Tax Return.
  
  
• Your company must pay Corporation Tax on the loan (s455 CTA 2010) – the current tax rate for directors’ loans is 25% of the loan.

The good news is that you can reclaim the tax when the loan is repaid - often by paying a Dividend to clear the balance outstanding (s458 CTA 2010)

How you do this depends on timing:

• If your claim is made within 24 months of the end of that accounting period you can amend and resubmit an amended Company Tax Return for that previous accounting period.
  
  
• If your claim is made more than 24 months after the end of the previous accounting period you can make a separate claim by writing to HMRC at the same time as you file your Company Tax Return for your most recent accounting period.

The Claim was previously known as a S419 claim (S419 ICTA 1988) but its now covered by S455 and S458 Corporation Tax Act 2010

When writing to HMRC make sure you give them as much information as you can for example:

UTR – Unique Taxpayer Reference

Company Name and Details

Amount being reclaimed

Details of the relevant Corporation Tax Returns on which the Directors Loans are shown

Your Bank Account Details for the Refund

Final comment from Mark

It is always preferable to clear down any outstanding loan accounts as far as possible before the company’s year end.