Some more key tax and business topics...
Charities: trustees' responsibilities
We outline the main responsibilities of a trustee of a charity with a particular emphasis on accounting and audit requirements. At Certax, we can help maintain your charity's accounting records or prepare the annual report.
It is often considered an honour to act as a trustee for a charity and an opportunity to give something back to the community. However, becoming a trustee involves a certain commitment and level of responsibility which should not be underestimated.
Whether you are already a trustee for a charity, be it a local project or a household name, or are thinking of becoming involved, there are a number of responsibilities that being a trustee places upon you.
We outline the main responsibilities below, with a particular emphasis on accounting and audit requirements.
The charities sector in England and Wales is generally overseen by the Charity Commission. The Commission is a government department that requires the registration of most charities.
The Commission plays an important role in the charity sector and is in place to give the public confidence in the integrity of charities.
All charities need to demonstrate that their aims are for the public benefit, initially as part of their application process to the Charities Commission and subsequently each year at the time they prepare their annual report.
A key part of the Commission’s work is to provide advice to trustees. A great deal of useful advice can be found on the Commission’s website, where there is a section dedicated to Setting up and running a Charity.
Types of charity
Charities can be created in a number of ways but are usually either:
- incorporated under the Companies Act 2006 or earlier (limited company charities)
- incorporated under the Charities Act 2011 (Charitable Incorporated Organisations – CIOs) or
- created by a declaration of trust (unincorporated charities).
Each of these charities need to register and file their accounts with the Charity Commission and limited companies are additionally registered with Companies House.
All charities are affected by the Charities Act 2011, which was a consolidating act bringing together a number of pieces of existing legislation.
The type of the charity will determine the full extent of a trustee’s responsibilities.
Who is a Trustee?
The Charities Act 2011 defines trustees as 'persons having the general control and management of the administration of a charity'. This definition would typically include:
- for unincorporated charities and CIOs, members of the executive or management committee
- for limited company charities, the directors or members of the management committee.
Trustee restrictions and liabilities
In addition to the responsibilities of being a trustee, there are also a number of restrictions which may apply. These are aimed at preventing a conflict of interest arising between a trustee’s personal interests and their duties as a trustee. These provide that generally:
- trustees cannot benefit personally from the charity, although reasonable out of pocket expenses may be reimbursed
- trustees cannot be employees of the charity.
There are limited exceptions to these principles. Where trustees do not act prudently, lawfully or in accordance with their governing document they may find themselves personally responsible for any loss they cause to the charity.
The CC guidance CC3a, ‘Charity Trustee: What’s involved’ explains what it means to be a trustee and how to become one. Trustees have full responsibility for the charity and are required to:
- follow the law and the rules in the charity's governing document
- act responsibly and only in the interests of the charity
- use reasonable care and skill and
- make well-informed decisions, taking advice when they need to.
The Charity Commission publication CC3, ‘The essential trustee: what you need to know’ provides more detailed guidance for both new and existing trustees. The guidance sets out trustees’ duties and responsibilities under seven headings:
- ensure you are eligible to be a charity trustee
- ensure your charity is carrying out its purposes for the public benefit
- comply with your charity’s governing document and the law
- act in your charity’s best interests
- manage your charity’s resources responsibly
- act with reasonable care and skill
- ensure your charity is accountable.
In particular, trustees are under a legal duty to make sure that their charity’s funds are only applied in the furtherance of its charitable objects. They need to be able to demonstrate that this is the case, so they should keep records which are capable of doing this.
There are particular requirements for most charities to:
- keep full and accurate accounting records (and funds requirements are of particular importance here)
- prepare charity accounts and an annual report
- to ensure an audit or independent examination is carried out
- to submit an annual return, annual report and accounts to the Charity Commission (and, for limited company charities, to Companies House).
The extent to which these requirements have to be met generally depends upon the type of charity and how much income is generated.
An important aspect of accounting for charities is the understanding of the different 'funds' that a charity can have. The effective management and control of fundraising is an important trustee responsibility.
Essentially funds represent the income of the charity and there may be restrictions on how certain types of funds raised can be used. For example, a donation may be received only on the understanding that it is to be used for a specified purpose.
It is then the trustees' responsibility to ensure that such 'restricted' funds are used only as intended.
The annual report
The annual report is often a fairly comprehensive document, as legislation sets out the minimum amount of information that has to be included. The report generally includes:
- a trustees' report (which can double as a directors' report and a strategic report, if required for charitable companies)
- a statement of financial activities for the year
- an income and expenditure account for the year (for some charitable companies)
- a balance sheet
- a statement of cashflow
- notes to the accounts (including accounting policies).
Whether or not a charity requires an audit will depend mainly upon how much income is received or generated and their year end. The income limit varies according to the type of charity as follows:
- all charities where income exceeds £1,000,000 require an audit for financial years ending on or after 31 March 2015.
- charities (both incorporated and unincorporated) require an independent examination where their income falls between £25,000 and £1,000,000 for financial years ending on or after 31 March 2015.
- where income is over £250,000 the independent examiner must be suitably qualified.
There are other criteria to consider, particularly regarding total assets, and we would be pleased to discuss these in more detail with you.
There is a comprehensive framework in place that determines how a charity’s accounts should be prepared.
Unincorporated charities with income below £250,000 may prepare receipts and payments accounts.
All other charities must prepare accounts that show a 'true and fair' view. To achieve this the accounts generally need to follow the requirements of the Charities Statement of Recommended Practice (SORP). There are two SORPs in issue at present :
- SORP 2015 (FRS 102)
- SORP 2015 (FRSSE).
These replace the SORP 2005. Both the 2015 versions of the SORP, (FRS 102) and the (FRSSE) are effective for periods beginning 1 January 2015. The FRSSE version of the 2015 SORP is for smaller charities and the FRS 102 version is for those larger charities. For a small charity it will be up to the trustees to choose which SORP will be most suitable for their charity although it should be noted that the FRSSE SORP has a short shelf life and will be withdrawn for financial years beginning on or after 1 January 2016. The two new SORPs can be viewed here.
How we can help
A trustee's responsibilities are many and varied. If you would like to discuss these in more detail or would like help in maintaining your charity's accounting records or preparing its annual report please contact us at Certax.
We are also able to advise on whether or not an audit or independent examination will be required.
Husband and wife businesses
There are tax planning opportunities available to husband-and-wife businesses, but care needs to be taken. Certax can guide you through the options. This article provides an overview...
HM Revenue & Customs (HMRC) has shown great interest in businesses where both spouses are owners (either as shareholders or partners) but one spouse is considerably less active within the business than the other.
Their weapon was the settlements legislation which HMRC will seek to apply where one spouse (the settlor) enters into an arrangement to divert income to the other spouse and in the process tax is saved. There has to be an element of bounty (i.e. “something for nothing”).
On the face of it, all transfers between husbands and wives could potentially be settlements. However, there is a statutory exemption where property passed to a spouse is an outright gift, unless
- the gift does not carry the right to the whole of the income arising (i.e. income could still be payable to either spouse), or
- a gift between spouses is wholly or substantially a right to income.
The legislation is not new, but was originally enacted in the 1930s and brought up to date in the 1990s.
The well publicised case of Jones v Garnett (Arctic Systems Ltd) was decided in the taxpayers’ favour. The House of Lords found that, although the wife’s share in the company was a settlement, it was not caught because it had been an outright gift.
It may be helpful to consider the basic situations which may involve income shifting:
- Main earner drawing a low (non-commercial) salary leading to enhanced profits from which dividends can be paid to spouse shareholder.
- Differing classes of shares enabling dividends to be paid only to spouse paying lower rates of tax.
- Dividends being waived so that higher dividends can be paid to spouse paying lower rates of tax.
- Dividends paid on shares that carry only restricted rights.
Income shifting is less likely to be in point:
- If the shares have considerable capital value.
- If the main earner draws a commercial salary before dividends are declared.
If income shifting is proven:
The income of the lower taxpayer is taxed as income of the donor of the gift (the settlor).
Until the Arctic Systems case was finalised the application of the settlements legislation was largely untested. Several anomalies had been put forward:
- settlements by husbands on wives (and vice versa) are subject to rules which do not apply to settlements between any other relatives or friends. It is therefore discriminatory against married couples
- this approach contrasts sharply with the freedom available to married couples or civil partners in transferring assets between themselves without any capital gains or inheritance tax liabilities
- HMRC are seeking to extend the application to partnerships, even though a partnership share is not a transferable asset
- unlike the view taken by divorce courts, HMRC’s stated approach completely ignored the sacrifices that may be made by the 'non-working' spouse in enabling the business to function at all
- for instance agreement to personal (matrimonial) assets being pledged as security for the purposes of the family business, as well as looking after the home and children etc
- ordinary shares do not carry with them a “right” to income; they carry a right to participate with other shareholders in the running of the company and to share in whatever assets remain in a winding up
- although shares transferred to a spouse may be considered to be substantially a right to income in the early days of a company, a successful company may well grow so that eventually the capital value of the shares may greatly outweigh the dividends received
- a stronger position may be created if husband and wife both subscribe for shares when the company is formed and both are directors from the outset
- make sure all shares carry voting and capital rights
- there is an argument for husband and wife receiving equal directors fees rather than salaries and therefore not being employees, particularly if this is evidenced by a commercial agreement
- the position is also strengthened if husband and wife receive equal dividends
- aim to have the “non-earning” spouses involved in the business as much as is practical, thereby giving full value for any money received
- a company with substantial assets which generate income, or retained profits, is not so likely to be caught.
If you are a husband-and-wife business, the team at Certax can help you. Contact us today.
The National Living Wage and the National Minimum Wage
All employers need to be aware of their responsibilities regarding compliance with the National Minimum Wage. At Certax we can help with a range of business issues.
Anybody working, aged 25 or over and not in the first year of an apprenticeship, is legally entitled to the National Living Wage (NLW).
Despite its name, this new rate is essentially a Minimum wage for over 24s. The Government is committed to increasing this every year.
The NLW rate changes every April, while the National Minimum Wage (NMW) rates have traditionally been revised in October. However, from April 2017 the NMW and NLW cycles will be aligned so that both rates are amended in April each year.
Employers will need to make sure they are paying their staff correctly, as the NLW will be enforced as strongly as the NMW.
The table below shows the current NMW and NLW rates:
|Age||National Minimum Wage||National Living Wage|
|16 and 17||£4.00||-|
|18 - 20||£5.55||-|
|21 - 24||£6.95||-|
|25 and over||-||£7.20|
*Under 19, or 19 and over in the first year of their apprenticeship.
The Government has also announced an increase in both the NLW and the NMW rates from 1 April 2017, as follows:
- £7.50 per hour for 25 and overs
- £7.05 per hour for 21 to 24 year olds
- £5.60 per hour for 18 to 20 year olds
- £4.05 per hour for 16 to 17 year olds
- £3.50 per hour for apprentices (under 19, or 19 and over in the first year of their apprenticeship).
Please note, there are separate minimum rates of pay for agricultural workers. Visit www.gov.uk/agricultural-workers-rights/pay-and-overtime for more information.
Who is covered by the NMW?
NMW applies to all workers, with certain exceptions such as:
- children who are still of compulsory school age
- those who are genuinely self employed
- family members working in the family business
- people working and living as part of a family (e.g. au pairs)
- voluntary workers
How is the NMW calculated?
The Regulations set out a rather complex procedure detailing the calculation of the NMW.
Benefits in kind, expenses, certain allowances and most deductions are not included.
Enhanced payments for particular work will not count, but incentive or profit related payments will be included.
What working time counts for NMW?
Job-related travelling and training time is included. Periods of holiday or absence do not count (even though holiday pay is now obligatory), nor does time taken as rest breaks or industrial action.
What if the pay is not time-related?
Piece workers and other non-time workers (e.g. pub landlords) may come to an agreement with their employer about a fair estimate of hours.
What about Family Businesses?
Although there is an exemption for family members working in the family business, the regulations specifically refer to the employer's family. If the family business (i.e. the employer) is a limited company, then it does not have a family. Even if the family business operates as a sole trade or partnership, the only family members exempted are those who actually live at home.
What about Company Directors?
In common law, company directors are classed as office holders and can do work and be paid for it in that capacity. This is true no matter what sort of work they do and how it is rewarded.
The NMW does not apply to office holders, unless they also have contracts which make them workers.
It is unlikely that a company director will have an implied contract which makes him a worker. The rights and duties of an office are defined by that office, and it exists independently of the person who fills it. Directors can be removed from their office by a simple majority of the votes cast at a general meeting of the company. This contrasts with the rights and duties of an employee which are defined in a contract of employment.
What records have to be kept?
For workers earning in excess of £12,000 per year, employers simply have to keep sufficient records to demonstrate that the NMW has been paid. For workers earning less than £12,000 per year, full details of the NMW calculation must be kept.
Records should be kept for six years.
What rights does the worker have?
Individuals have the right to apply to a court or tribunal for non payment of the NMW. They are also protected from suffering any loss for such proceedings.
Confidential help and advice on the NMW is available from the Pay and Work Rights Helpline: 0800 917 2368 (text phone 0800 121 4042).
Callers can be assisted in over 100 different languages.
These lines take complaints from workers, employers and third parties.
There are six criminal offences relating to the NMW:
- refusal or wilful neglect to pay the NMW
- failing to keep or preserve NMW records
- causing or allowing a false entry to be made in NMW records
- producing or furnishing false records or information
- intentionally delaying or obstructing a compliance officer
- refusing or neglecting to answer questions, give information or produce documents to a compliance officer
The fine on conviction for each offence is up to £20,000 where tried in the magistrates' court (or the Scottish equivalent). The most serious criminal cases are triable in the Crown Court (or Scottish equivalent). This means that employers who deliberately fail to pay the NMW may face a potentially unlimited fine.
The main means of enforcing the NMW are through:
- compliance officers of HM Revenue & Customs (HMRC)
- agricultural wages inspectors for the NMW in the agricultural sector (and the agricultural minimum wage)
- claims by workers before tribunals and courts
HMRC compliance officers will act in response to complaints that an employer is not paying the NMW - whether the complaint is by workers or others. They will also investigate where there may be a risk of non-payment. Since 6 April 2009, HMRC has been able to use the search and seize powers in the Police and Criminal Evidence Act 1984 when investigating criminal offences under the National Minimum Wage Act 1998. Officers may carry out inspections of employers at any time. There is no requirement to provide reasons for an inspection. They must show an identity document on request and have considerable powers to obtain information.
Notice of underpayment
If a compliance officer believes that an employer has failed to pay at least the NMW to a worker, the officer may serve a notice of underpayment, requiring the employer to:
- repay arrears of the NMW to each worker named on the notice
- pay a penalty to the Secretary of State totalling 200% (doubled from 100% with effect from 1 April 2016) of the total underpayment for all the workers shown on the notice as underpaid for pay reference periods starting on or after 6 April 2009, with a minimum penalty of £100 and a maximum penalty of £20,000*
- The penalty will be reduced by 50 per cent if the employer fully complies with all the terms of the notice of underpayment within 14 days of service of the notice
*With effect from 26 May 2015, the maximum financial penalty for employers who flout the NMW has increased to £20,000 per worker.
The employer may appeal against the notice of underpayment within 28 days of service of the notice. An appeal must be made to the employment tribunal (or industrial tribunal in Northern Ireland). If the employer does not comply with the notice of underpayment, HMRC can take a case to a tribunal or County Court (or Scottish equivalent) on behalf of the worker, or prosecute the employer.
Employers who deliberately pay their staff less than the NMW may have their breaches publicised by the Department for Business, Energy and Industrial Strategy.
HMRC have created a Dynamic Response Team which will concentrate on the most complex and high profile cases.
If you are an employer and would like to discuss any aspect of your business, Certax can help you – contact us today.
At Certax we can provide assistance and advice to employers in a wide range of areas. The following is an overview of the rules governing salary sacrifice...
When an employee gives up the right to receive part of the cash pay due under his or her employment contract, this is called a 'salary sacrifice' (sometimes known as 'salary exchange'). It is entirely effective for tax and NIC purposes - the employee is simply taxed on the lower gross pay.
Q. Why would someone give up part of their salary?
A. Usually in return for the employer undertaking to provide some form of non-cash benefit - perhaps on-site childcare, or help with childcare costs, or a better company car.
Salary sacrifice is a matter of employment law, not tax law. However, HM Revenue & Customs will be keen to ensure that each element of an employee's remuneration package is correctly treated in accordance with tax and national insurance contribution (NIC) legislation. Thus tax and/or NICs will be charged on the replacement benefit, if that is what the rules say. However, in some cases the benefit is exempt from tax and NICs, which can mean that the reduction in net cash pay could perhaps be less than the value of the benefit provided.
Where a salary sacrifice is claimed, there must be a proper contractual change evidencing that employees have given up the right to some of their cash pay in return for the benefit. There are two conditions that have to be met:
- The potential future remuneration must be given up before it is treated as received for tax or NICs purposes (it cannot be given up retrospectively), and
- The revised contractual arrangement must be that the employee is entitled to lower cash remuneration and a benefit
In other words, it is not sufficient if the arrangement allows employees to remain entitled to the higher level of cash remuneration and they have merely asked the employer to apply part of that cash remuneration on their behalf.
Before entering into a salary sacrifice arrangement, employees need to consider:
- Their future right to the original (higher) cash salary
- Possible breach of the National Minimum Wage
- Possible reduction of pay below the lower earnings limit which would affect entitlement to contribution-based benefits and statutory sick, maternity, paternity or adoption pay.
If you are an employer and would like to discuss salary sacrifice or any aspect of your business, Certax can help you – contact us today.
Employer supported childcare
Childcare and employer provided childcare vouchers are very popular with both employers and employees alike. If you are in business or you are employed we, at Certax, can advise you on the exemptions available for employer supported childcare.
Employer supported childcare, commonly by way of childcare voucher, is for many employers and employees a tax and national insurance efficient perk. We consider the implications of this type of benefit on the employer and employee.
The workplace nurseries exemption was introduced many years ago. This exempts from tax and NIC the provision to an employee of a place in a nursery at the workplace or in a facility wholly or partly financed and managed by the employer.
Whilst these sorts of arrangements are not that common, the later introduction of a limited tax and NIC exemption for employer-contracted childcare and employer-provided childcare vouchers has been very popular with both employers and employees alike.
Many employers use these childcare exemptions as part of salary sacrifice arrangements; for example, the employee gives up pay, which is taxable and NIC-able, in return for childcare vouchers, which are not. This may save tax and NIC for the employee and NIC for the employer. Such arrangements can be attractive; however care needs to be taken when implementing a scheme to ensure that it is set up correctly. Also, for those on low rates of pay, such arrangements may not be appropriate.
How much childcare can be provided tax and NIC free?
This depends on when the employee joined the employer's scheme. For those who joined the employer's scheme prior to 6 April 2011 the limit is currently £55 a week.
If the employer-contracted care exceeds £55 per week the excess will be a benefit in kind and subject to Class 1A NIC. However, with vouchers, although any excess is also a benefit in kind it is subject to Class 1 NIC via the payroll. As the tax and NIC issues are complex many employers limit their employees' potential entitlement to a maximum of the exempt limit (currently £55 a week).
The exempt limit applies to the full face value, rather than the cost, of providing a childcare voucher, which would normally include an administration fee.
An employee is only entitled to one exempt amount even if care is provided for more than one child but it does not matter that another person may also be entitled to an exempt amount in respect of the same child. As always, there are various conditions to meet but these rules have led to many employers providing such care, particularly childcare vouchers, to their employees.
What about those who join a scheme from 6 April 2011 onwards?
The limit on the amount of exempt income associated with childcare vouchers and employer-contracted childcare for employees joining an employer's scheme will be restricted in cases where an employee's earnings and taxable benefits are liable to tax at the higher or additional rate.
Anyone already in a scheme before 6 April 2011 is not affected by these changes as long as they remain within the same scheme.
What do employers have to do?
To identify the rate of tax an individual employee pays in any one tax year, an employer needs to carry out a 'basic earnings assessment' for any employee who joins an employer-provided childcare scheme on or after 6 April 2011.
Employers who offer or provide employer childcare are required, at the beginning of the relevant tax year, to estimate the 'employment income amount' that the employee is likely to receive during that year.
This is basically the contractual salary and benefits package (not discretionary bonuses or overtime) less the personal allowance if appropriate.
Employers must keep a record of the basic earnings assessment. These records do not need to be sent to HMRC but must be available for inspection by HMRC if required.
The employer must re-estimate the 'employment income amount' for each tax year.
What is the position for the employee?
For 2016/17, the personal allowance for most employees is £11,000 and the basic rate limit will be £32,000, a combined figure of £43,000. The higher rate limit is £150,000.
If the level of estimated earnings and taxable benefits is equal to or below the equivalent of the sum of personal allowances and the basic rate limit for the year (£43,000 as explained above), the employee will be entitled to relief on £55 exempt income for each qualifying week.
If the level of estimated earnings and taxable benefits exceed the equivalent of the sum of personal allowances and the basic rate limit for the year (£43,000 as above) but falls below the limit at which tax becomes payable at the 45% rate limit for the year (currently £150,000), the employee is entitled to relief on £28 exempt income for each qualifying week.
If the level of estimated earnings and taxable benefits exceed the equivalent of the additional tax rate limit for the year (currently £150,000), the employee is entitled to relief on £25 exempt income for each qualifying week
Similar rules apply for NIC purposes.
As the employer has to estimate the employee's tax position each year, the amount of exempt income they can receive may change throughout their period of employment.
The rules are modified where employees join the scheme part way through a tax year. In that case, the earnings review has to be carried out at the point of joining. Basically, the joining employee's salary and taxable benefits need to be pro-rated upwards to estimate the notional annual earnings figure for the employee.
Gaps in payment
An employee can ask to stop receiving childcare vouchers temporarily whilst staying in the employer's scheme; for example, if an employee only works during school term time and doesn't need the vouchers during the school holidays. Basically, as long as the gap in providing the vouchers doesn't exceed 12 months the employee can still be classed as an existing member of the employer's scheme.
This also applies to employees who are on maternity leave, sick leave and those who wish to take a career break, provided that the total length of absence does not exceed 12 months.
HMRC have provided many questions and answers on their website to help both employees and employers and these can be viewed here.
New tax-free childcare scheme
The government plans to introduce new tax incentives for childcare.
The relief will be 20% of the costs of childcare up to a total of childcare costs of £10,000 per child per year. The scheme will therefore be worth a maximum of £2,000 per child (£4,000 for a disabled child). All children under 12 within the first year of the scheme will be eligible (up to 17 for children with disabilities).
To qualify for Tax-Free Childcare all parents in the household must:
- meet a minimum income level based on working 16 hours per week at the National Living Wage
- each earn less than £100,000 a year, and
- not already be receiving support through Tax Credits or Universal Credit.
It is proposed that parents register with the government and open an online account. The scheme will be delivered by HMRC in partnership with National Savings and Investments, the scheme's account provider. The government will then 'top up' payments into this account at a rate of 20p for every 80p that families pay in.
Self-employed parents will be able to get support with childcare costs using the Tax-Free Childcare scheme, unlike the current employer supported childcare scheme. To support newly self-employed parents, the government is introducing a 'start-up' period. During this period a newly self-employed parent will not have to earn the minimum income level.
When will this be introduced?
The government has announced it will introduce Tax-Free Childcare in early 2017. Parents will be able to apply for all their children at the same time, when their youngest child becomes eligible. All eligible parents will be able to join the scheme by the end of 2017.
In September and October 2016 HMRC wrote to regulated and approved childcare providers across the UK, asking them to sign up online for Tax-Free Childcare.
Only childcare providers registered with a regulator can receive Tax-Free Childcare payments.
How does this relate to employer supported childcare?
The existing scheme, Employer Supported Childcare, will remain open to new entrants until April 2018 to support the transition between the schemes. When the new scheme is introduced it will continue to be available for current members if they wish to remain in it or they can switch to the new scheme.
How we can help
If you would like to discuss setting up an employer supported childcare scheme in further detail, please do not hesitate to contact us at Certax.
The Construction Industry Scheme
For those working in the construction industry, the compliance requirements of the Construction Industry Scheme needs to be coped with. At Certax, we can assist you to comply with the onerous requirements of the Scheme.
The Construction Industry Scheme (CIS) sets out special rules for tax and national insurance (NI) for those working in the construction industry. Businesses in the construction industry are known as ‘contractors' and ‘subcontractors'. They may be companies, partnerships or self employed individuals.
The CIS applies to construction work and also jobs such as alterations, repairs, decorating and demolition.
Contractors and subcontractors
Contractors include construction companies and building firms and also government departments and local authorities. Any other business spending more than £1 million a year on construction is classed as a contractor for the purposes of the CIS.
Subcontractors are those businesses that carry out work for contractors.
Many businesses act as both contractors and subcontractors.
Contractors have to make an online monthly return to HMRC:
- confirming that the employment status of subcontractors has been considered
- confirming that the verification process has been correctly dealt with
- detailing payments made to all subcontractors and
- detailing any deductions of tax made from those payments.
The monthly return relates to each tax month (ie running from the 6th of one month to the 5th of the next). The deadline for submission is 14 days after the end of the tax month.
Where a contractor has not made any payments to subcontractors in a tax month it is advisable to make a nil return to avoid HMRC chasing the return or issuing penalties for failure to make a return.
All contractors are obliged to file monthly even if they are entitled to pay their PAYE quarterly.
Subcontractors must give contractors their name, unique taxpayer reference and national insurance number (or company registration number) when they enter into a contract. So long as the contractor is satisfied that the subcontractor is genuinely self-employed the ‘verification' procedure (explained below) must be followed.
Employed or self-employed?
A key part of the CIS is that the contractor has to make a monthly declaration that they have considered the status of the subcontractors and are satisfied that none of those listed on the return are employees. HMRC can impose a penalty of up to £3,000 if contractors negligently or deliberately provide incorrect information.
Remember that employment status is not a matter of choice. The circumstances of the engagement determine how it is treated.
The issue of the status of workers within the construction industry is not a new matter and over the last few years HMRC have been making substantial efforts to re-classify as many subcontractors as possible as employees. The courts have considered many cases over the years and take into account a variety of different factors in deciding whether or not a worker is employed or self-employed. The tests which are applied include:
- the right of control over how, what, where and when the work is done; the more control that a contractor can exercise, the more likely it is that the worker is an employee
- whether the worker provides a personal service or whether a substitute could be provided to do that work
- whether any equipment is necessary to do the job, and if so, who provides it
- the basis of payment - whether an hourly/weekly rate is paid, whether there is any overtime, sick or holiday pay and whether or not invoices are raised for the work done
- whether the worker is part and parcel of the organisation or whether they are conducting a task which is self-contained in its own right
- what the intention of the parties is - whether there is any written statement that there is no intention of an employment relationship
- whether there is a mutuality of obligation; that is, an ongoing understanding that the contractor will offer work and the worker accept it
- whether the workers have any financial risk.
As can be seen from the above, there are a number of factors which must be considered and the decision as to whether somebody should be classified as employed or self-employed is not a simple one.
Clearly, HMRC would like subcontractors to be classed as employees, as this generally means that more tax and national insurance is due. However, just because the HMRC think that somebody should be re-classified does not necessarily mean that they are correct.
HMRC have developed software known as the employment status indicator tool, which is available on their website, to address this matter but the software appears to be heavily weighted towards re-classifying subcontractors as employees. It should not be relied on and professional advice should be taken if this is a major issue for your business. Please talk to us if you have any particular concerns in this area.
The contractor has to contact HMRC to check whether to pay a subcontractor gross or net. Not every subcontractor will need verifying (see below). Usually it will only be new ones.
The verification procedure will establish which of the following payment options apply:
- gross payment
- a standard rate deduction of 20%
- a deduction made at the higher rate of 30% if the subcontractor has not registered with HMRC or cannot provide accurate details to the contractor and HMRC cannot verify them.
HMRC will give the contractor a verification number for the subcontractors which will be matched with HMRC's own computer. The number will be the same for each subcontractor verified at any particular time. There will be special suffixes for the numbers issued in respect of subcontractors who cannot be verified. The numbers are also shown on contractors' monthly returns and the payslips issued to the subcontractors.
Clearly, these numbers are a fundamental part of the system and contractors have to ensure that they have a fool-proof system in place for obtaining and retaining them. It is also very important to give precise details to HMRC because, if their computer does not recognise the subcontractor, the higher rate deduction will have to be made.
From 6 April 2017 mandatory online verification of subcontractors will be introduced.
Who needs verifying with HMRC?
If a contractor is paying a subcontractor they will not have to verify them if:
- they have already included them on any monthly return in that tax year; or
- the two previous tax years.
Contractors have to provide a monthly ‘payslip' to all subcontractors paid, showing the total amount of the payments and how much tax, if any, has been deducted from those payments. The contractor has to provide this for each tax month as a minimum. Contractors are allowed to choose the style of the ‘payslips' themselves but certain specific information has to be provided including the:
- contractor's name and their employer tax reference
- tax month to which the payment relates
- subcontractor's name, unique tax reference or specific subcontractor reference
- the gross amount of the payment
- cost of any materials which have reduced the gross payment
- amount of any tax deductions made and
- verification number where deduction has been made at the higher rate of 30%.
If contractors include such payments as part of their normal payroll system, it needs to be clear that although payslips are being generated for those individuals, they are not employees and have clearly been classed as self-employed.
Are tax deductions made from the whole payment?
Not necessarily. The following items should be excluded when entering the gross amount of payment on the monthly return:
- VAT charged by the subcontractor if the subcontractor is registered for VAT
- any Construction Industry Training Board levy.
The following items should be deducted from the gross amount of payment when working out the amount of payment from which the deduction should be made:
- what the subcontractor actually paid for materials including VAT paid if the subcontractor is not registered for VAT, consumable stores, fuel (except fuel for travelling) and plant hire used in the construction operations
- the cost of manufacture or prefabrication of materials used in the construction operations.
Any travelling expenses (including fuel costs) and subsistence paid to the subcontractor should be included in the gross amount of payment and the amount from which the deduction is made.
The whole system is backed up by a series of penalties. These cover situations in which an incorrect monthly return is sent in negligently or fraudulently, failure to provide CIS records for HMRC to inspect and incorrect declarations about employment status. Late returns under the CIS scheme also trigger penalties as follows:
- a basic penalty of £100 for failure to meet due date of the 19th of the month
- where the failure continues after two months after the due date, a penalty of £200
- after six months the penalty rises to the greater of 5% of the tax or £300
- after 12 months the penalty will again be the greater of £300 or 5% of the tax but, where the withholding of information is deliberate and concealed, it will be 100% of the tax (or £3,000 if greater) and where information is withheld deliberately, 70% of tax (or £1,500 if greater)
- where the return is 12 months late but the information only relates to persons registered for gross payment, the penalty will be £3,000 for deliberate and concealed withholding of information and £1,500 for deliberate withholding without concealment
- where a person has just entered the CIS scheme penalties will be restricted to a maximum of £3,000 in certain circumstances.
Paying over the deductions
Contractors have to pay over all deductions made from subcontractors in any given tax month by the 19th following the end of the tax month to which the deductions relate. If payment is being made electronically, the date will be the 22nd, or the next earlier banking day when the 22nd is a weekend or holiday. If the contractor is a company which itself has deductions made from its payments as a subcontractor, then the deductions made may be set against the company's liabilities for PAYE, NI and any CIS deductions it is due to pay over.
What about subcontractors?
If a subcontractor first starts working in the construction industry on a self-employed basis they will need to register for the CIS.
To register, a subcontractor needs to contact HMRC by phone or over the internet and they will conduct identity checks.
Gross payment status
The rules for subcontractors to be paid gross include a business test, a turnover test and a compliance test. To qualify for gross payment a subcontractor must:
- have paid their tax and National Insurance on time in the past
- do construction work (or provides labour for it) in the UK
- run the business through a bank account.
The turnover for the last 12 month, ignoring VAT and the cost of materials, must be at least:
- £30,000 for a sole trader
- £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership
- £30,000 for each director of a company, or at least £100,000 for the whole company
If your company's controlled by 5 people or fewer, you must have an annual turnover of £30,000 for each of them.
Subcontractors not registered with the HMRC will suffer the higher rate deduction from any payments made to them by contractors.
How we can help
Please do get in touch if you would like further information about the Construction Industry Scheme. At Certax we can advise on the CIS whether you are a contractor or a subcontractor.
How to gain the most from your accounting records
The team at Certax can help businesses to get the most from their accounting records...
How to reduce the time taken in accounts preparation
- File your invoices and correspondence in order
- Record and analyse all your cash, credit card and bank transactions
- Sub-total each page of your cash book and day books, providing totals at the end of each month
- Reconcile your payment analysis book with your bank and credit card statements
- Reconcile PAYE, NIC, and VAT account balances with amounts due to HM Revenue & Customs
- List and total your year end creditors
- List and total your year end debtors
- List your fixed asset additions and disposals made during the year
- List and total your year end stock and work in progress
- Keep backups of your computer records
- Reconcile your principal control accounts including sales, purchases and bank accounts
Are your records accurate and reliable?
- All income is recorded and banked promptly
- All recorded expenses are authorised and valid
- All recorded debts are recoverable
- All your liabilities are identified and recorded when they are incurred
Do your records give you adequate information for taking management decisions?
You should know:
- The return you are obtaining from your investment in the business
- Whether you will be able to meet your liabilities as and when they are due
- The extent to which you could attract or increase outside finance
- Your fast and slow moving stock lines
- The levels of gross profit from your product lines
- The extent to which additional working capital will be required to finance an expansion in trade
Could your accounting systems be improved?
Does the structure of your business minimise our accounting work? It may be more effective and cheaper to structure an expanding business as a company with branches or divisions rather than as a group of separate companies.
Do you discuss with us the other financial services we are qualified to provide?
We can help you plan your tax affairs in the most tax efficient way when you:
- Invest in your business
- Sell your business, land, or property
- Enter into pension planning
- Organise your estate for inheritance tax planning
If you are a business and would like help with getting the most from your accounting records, contactCertax today.
How long should you keep books and records?
At Certax we are often asked by our clients about how long books and records should be kept. Here is an overview...
There is no simple answer to this question because different types of record are covered by different types of legislation, as shown by the following summary:
Value Added Tax
By law, VAT records have to be kept for six years unless HM Revenue & Customs (HMRC) allows a shorter period. Any request you make to keep records for a shorter period must be accompanied by a full explanation of why it is considered impractical to keep the records.
HMRC recommends that pay records be kept for at least three years after the income tax year to which they relate.
For periods before the start of self assessment HMRC can issue an assessment at any time up to six years after the end of the chargeable period to which the assessment relates. There is no limit in cases of fraud or wilful default. All business records must be retained for a period of (broadly) six years.
Under corporation tax self assessment, accounting records must be preserved for six years from the end of the accounting period.
With regard to the statutory books, there are no specific requirements, but the Companies Act states that an entry relating to a former member of the company may be removed from the Register of Members 10 years from the day he or she ceased to be a member.
The requirement for the Register of Directors and Secretary to include details of past directorships held within the preceding five years has been removed with effect from 1 October 2009.
Documents relating to Government grants must generally be kept for four years from receipt of the grant. Where grant aid is still being received, no documents should be destroyed without consulting the relevant Government department.
Employers’ Liability policy certificates
The former requirement to keep Employers’ Liability policy certificates for 40 years has been replaced by guidance. Businesses are reminded that their potential liability for illness and injury at work does not end when the policy expires. Records should be retained to ensure that any future claim can be met.
Limitation Act 1980 - general periods
The 1980 Act allows an action to be brought on a contract for up to six years from the event (e.g. breach) that gave rise to the claim.
Where a contract is under seal (or deed), the time limit is twelve years.
These periods govern how long invoices and other documents should be retained as evidence in case of a claim by, or against, another party.
Taking into account the various requirements outlined above, we recommend that you keep all records for at least six years after the end of the accounting period or tax year.
If you would like more assistance on any aspect of your accounts, the team at Certax can help you. Contact us for more help.
Tax relief is available on certain capital expenditure in the form of capital allowances but the amount of these allowances can vary depending on the type of asset acquired. At Certax, we can provide advice on maximising tax relief for capital expenditure for your business.
The cost of purchasing capital equipment in a business is not a revenue tax deductible expense. However tax relief is available on certain capital expenditure in the form of capital allowances.
The allowances available depend on what you're claiming for. In this factsheet we give you an overview of the types of expenditure for which capital allowances are available and the amount of the allowances.
Capital allowances are not generally affected by the way in which the business pays for the purchase. So where an asset is acquired on hire purchase (HP), allowances are generally given as though there were an outright cash purchase and subsequent instalments of capital are ignored. However finance leases, often considered to be an alternative form of 'purchase' and which for accounting purposes are included as assets, are denied capital allowances. Instead the accounts depreciation is usually allowable as a tax deductible expense.
Any interest or other finance charges on an overdraft, loan, HP or finance lease agreement to fund the purchase is a revenue tax deductible business expense. It is not part of the capital cost of the asset.
If alternatively a business rents capital equipment, often referred to as an operating lease, then as with other rents this is a revenue tax deductible expense so no capital allowances are available.
Plant and machinery
This includes items such as machines, equipment, furniture, certain fixtures, computers, cars, vans and similar equipment you use in your business.
Note there are special rules for cars and certain 'environmentally friendly' equipment and these are dealt with below.
The Annual Investment Allowance (AIA) provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most businesses. Where businesses spend more than the annual limit , any additional qualifying expenditure generally attracts an annual writing down allowance of only 18% or 8% depending on the type of asset.
The maximum amount of the AIA depends on the date of the accounting period and the date of expenditure. The recent changes in the amount of the maximum AIA can be summarised as follows:
|Periods from||Annual limit|
|*1 April 2014||£500,000|
|1 January 2016||£200,000|
*From 6 April for unincorporated businesses.
Where a business has a chargeable period which spans 1 January 2016 there are transitional rules for calculating the maximum AIA for that period and there will be two important elements to the calculations:
- a calculation which sets the maximum AIA available to a business in an accounting period which straddles 1 January 2016
- a further calculation which limits the maximum AIA relief that will be available for expenditure incurred from 1 January 2016 to the end of that accounting period.
It is the second figure that can catch a business out as demonstrated by the following example:
If a company has a 31 March year end then the maximum AIA in the accounting periods to 31 March 2016 will be:
|9 months to December 2015 three quarters of £500,000||375,000|
|3 months from January 2016 one quarter of £200,000||50,000|
|Total annual AIA using first calculation||425,000|
This is still a generous figure. However if expenditure is incurred between 1 January and 31 March 2016 the maximum amount of relief will only be £50,000. This is because of the restrictive nature of the second calculation. Alternatively, the business could defer its expenditure until after 31 March 2016. In the accounting period to 31 March 2017, AIA will be £200,000. However tax relief will have been deferred for a full year.
Where purchases exceed the AIA, a writing down allowance (WDA) is due on any excess in the same period. This WDA is currently at a rate of 18%. Cars are not eligible for the AIA, so will only benefit from the WDA (see special rules for cars).
Please contact us before capital expenditure is incurred for your business in a current accounting period, so that we can help you to maximise the AIA available.
Pooling of expenditure and allowances due
- Expenditure on all items of plant and machinery are pooled rather than each item being dealt with separately with most items being allocated to a main rate pool.
- A writing down allowance (WDA) on the main rate pool of 18% is available on any expenditure incurred in the current period not covered by the AIA or not eligible for AIA as well as on any balance of expenditure remaining from earlier periods.
- Certain expenditure on buildings fixtures, known as integral features (eg lighting, air conditioning, heating, etc) is only eligible for an 8% WDA so is allocated to a separate ‘special rate pool’, though integral features do qualify for the AIA.
- Allowances are calculated for each accounting period of the business.
- When an asset is sold, the sale proceeds (or original cost if lower) are brought into the relevant pool. If the proceeds exceed the value in the pool, the difference is treated as additional taxable profit for the period and referred to as a balancing charge.
Special rules for cars
There are special rules for the treatment of certain distinctive types of expenditure. The first distinctive category is car expenditure. Other vehicles are treated as main rate pool plant and machinery but cars are not eligible for the AIA. The treatment of car expenditure depends on when it was acquired and is best summarised as follows:
Acquisitions from April 2018
The government has announced the following changes to the capital allowance rules for cars.
|Type of car purchase||Allocate||Allowance|
|New low emission car not exceeding 50g/km CO2||Main rate pool||100% allowance|
|Not exceeding 110 g/km CO2 emissions||Main rate pool||18% WDA|
|Exceeding 110 g/km CO2 emissions||Special rate pool||8% WDA|
From 1 / 6 April 2015 to 31 March / 5 April 2018
The capital allowance treatment of cars is based on the level of CO2 emissions.
|Type of car purchase||Allocate||Allowance|
|New low emission car not exceeding 75g/km CO2||Main rate pool||100% allowance|
|Not exceeding 130 g/km CO2 emissions||Main rate pool||18% WDA|
|Exceeding 130 g/km CO2 emissions||Special rate pool||8% WDA|
Acquisitions from April 2013 to 31 March / 5 April 2015
|Type of car purchase||Allocate||Allowance|
|New low emission car not exceeding 95g/km CO2||Main rate pool||100% allowance|
|Not exceeding 130 g/km CO2 emissions||Main rate pool||18% WDA|
|Exceeding 130 g/km CO2 emissions||Special rate pool||8% WDA|
Non-business use element
Cars and other business assets that are used partly for private purposes, by the proprietor of the business (ie a sole trader or partners in a partnership), are allocated to a single asset pool irrespective of costs or emissions to enable the private use adjustment to be made. Private use of assets by employees does not require any restriction of the capital allowances.
The allowances are computed in the normal way so can in theory now attract the 100% AIA or the relevant writing down allowance. However, only the business use proportion is allowed for tax purposes. This means that the purchase of a new 70g/km CO2 emission car which costs £15,000 with 80% business use will attract an allowance of £12,000 (£15,000 x 100% x 80%) when acquired.
On the disposal of a private use element car, any proceeds of sale (or cost if lower) are deducted from any unrelieved expenditure in the single asset pool. Any shortfall can be claimed as an additional one off allowance but is restricted to the business use element only. Similarly any excess is treated as a taxable profit but only the business related element.
Environmentally friendly equipment
This includes items such as energy saving boilers, refrigeration equipment, lighting, heating and water systems as well as cars with CO2 emissions up to 75 gm/km (reducing to 50gm/km from April 2018).
A 100% allowance is available to all businesses for expenditure on the purchase of new environmentally friendly equipment.
- www.gov.uk/guidance/energy-technology-list gives further details of the qualifying categories.
- Where a company (not an unincorporated business) has a loss after claiming 100% capital allowances on green technology equipment (but not cars) they may be able to reclaim a tax credit from HMRC.
Capital allowance boost for low-carbon transport
A 100% first year allowance is available for capital expenditure on new electric vans from 1 April 2010 for companies and 6 April 2010 for an unincorporated business.
Short life assets
For equipment you intend to keep for only a short time, you can choose (by election) to keep such assets outside the normal pool. The allowances on them are calculated separately and on sale if the proceeds are less than the balance of expenditure remaining, the difference is given as a further capital allowance. This election is not available for cars or integral features.
For assets acquired from 1 April 2011 (6 April for an unincorporated business) the asset is transferred into the pool if it is not disposed of by the eighth anniversary of the end of the period in which it was acquired.
Long life assets
These are assets with an expected useful life in excess of 25 years. These assets are combined with integral features in the 8% special rate pool.
There are various exclusions including cars and the rules only apply to businesses spending at least £100,000 per annum on such assets so that most smaller businesses are unaffected by these rules.
Capital expenditure on certain other assets qualifies for relief. Please contact us for specific advice on areas such as qualifying expenditure in respect of enterprise zones and research and development.
Unincorporated businesses and companies must both make claims for capital allowances through tax returns.
Claims may be restricted where it is not desirable to claim the full amount available - this may be to avoid other allowances or reliefs being wasted.
For unincorporated businesses the claim must normally be made within 12 months after the 31 January filing deadline for the relevant return.
For companies the claim must normally be made within two years of the end of the accounting period.
How we can help
The rules for capital allowances can be complex. We can help by computing the allowances available to your business, ensuring that the most advantageous claims are made and by advising on matters such as the timing of purchases and sales of capital assets. Please do contact us at Certax if you would like further advice.
Take care to avoid a penalty
At Certax we can help businesses to avoid tax penalties...
You could be charged a penalty if you don’t take reasonable care with your tax affairs.
HM Revenue & Customs (HMRC) acknowledge that most people do take care to declare and pay the right amount of tax. They use penalties to stop people who don’t take care from gaining an unfair advantage.
After consultation, HMRC has replaced a wide variety of penalties for inaccurate tax returns with one system across almost all taxes.
When does it apply?
HMRC can charge a penalty if your return or other tax document is inaccurate and as a result you don’t pay enough tax, or if you don’t tell them a tax assessment they have sent to you is too low.
This penalty system applies to :
- Capital Gains Tax
- Construction Industry Scheme
- Corporation Tax
- Income Tax
- National Insurance contributions
How does it work?
You will have to pay the additional tax and any interest that is due. If HMRC charge a penalty it will be a percentage of the additional tax. The penalty rate now depends on the type of inaccuracy. The more serious the reason for the inaccuracy the higher the penalty can be. HMRC will not charge a penalty if you took ‘reasonable care’ to get things right but still made a mistake.
If you send HMRC an incorrect document they will charge a penalty if the inaccuracy:
- is because you failed to take reasonable care – you were careless
- is deliberate – you intentionally send them an incorrect document
- is deliberate and concealed – you intentionally send them an incorrect document and try to conceal the inaccuracy
What is reasonable care?
‘Reasonable care’ varies according to the person, their circumstances and their abilities. But HMRC expect everyone to make and keep sufficient records for them to provide a complete and accurate return, and to update them regularly.
Some of the ways you can show you took reasonable care, and avoid a penalty include:
- keeping accurate records to make sure your tax returns are correct
- checking what the correct position is when you don’t understand something
- telling HMRC promptly about any error you discover in a tax return or document after you’ve sent it.
When will HMRC reduce a penalty?
HMRC can reduce a penalty if you tell them about an inaccuracy, especially if this is unprompted.
A disclosure is unprompted if when you tell them about the inaccuracy you have no reason to believe they have discovered, or are about to discover it. Everything else is a prompted disclosure.
HMRC can reduce a penalty from the maximum if you:
- tell them about any inaccuracies
- help them work out what extra tax is due
- give them access to check your figures
Can HMRC suspend penalties?
HMRC may suspend a penalty for a careless inaccuracy for up to two years. They will set conditions for you to improve your systems to stop the same mistakes happening again. If at the end of the suspension period you meet all the conditions, HMRC will cancel the penalty. They cannot suspend penalties charged because of deliberate inaccuracies.
How will I know if I have a penalty?
HMRC will discuss your tax with you to work out the correct amount. They will talk to you about any penalty that may be due before they send a penalty notice so you can understand what has happened and why they are doing this.
How can I appeal against a penalty?
You can choose to have the penalty reviewed within Revenue and Customs or can appeal against it to an independent tribunal. There is a factsheet HMRC 1 available at www.hmrc.gov.uk/factsheets/hmrc1.pdf
HMRC are now able to charge a penalty on a third party. They can only do this if a third party deliberately withholds information or deliberately supplies false information to a taxpayer who has to complete a return. HMRC have to demonstrate that the third party intended to cause the document to be inaccurate.
If you would like help with ensuring that you avoid any tax penalties, Certax can help you. Contact us today.
Cash basis for the self-employed
The optional cash basis rules allow small unincorporated businesses to calculated their profits on a cash basis rather than the normal accruals basis. At Certax, we can provide advice on whether the cash basis is right for your business in the Chesterfield area.
Accruals basis and cash basis
One example which illustrates the difference between the accruals basis and cash basis is that credit sales are included in the accruals basis accounts income despite the fact that the customer may not have paid for the goods or services by the end of the accounting period. Under the optional cash basis the business is taxed on its cash receipts less allowable cash payments made during the accounting period. So under the optional cash basis credit sales are accounted for and taxed in the year in which they are paid for by the customer.
Cash basis eligibility
The main entry criteria are that your business is unincorporated (sole trader or a partnership consisting only of individuals) and that your receipts in the accounting period are less than the VAT registration threshold in force at the end of the relevant tax year. From 1 April 2016 the current registration threshold is £83,000 (previously £82,000). For those individuals who intend to make a Universal Credit claim the threshold is set at twice the VAT registration threshold.
There are some individual exclusions from cash basis, for example, Limited Liability Partnerships, Lloyd's underwriters and those eligible individuals who wish to continue to claim averaging of profits like farmers.
Once the cash basis election is made an individual will generally have to remain in the scheme unless the business either grows too large or there is another acceptable 'change of circumstances.' These matters are not considered further here.
Key tax points
Cash receipts literally mean all cash receipts that the business receives during the accounting period. As well as trading income this will also include the proceeds from the sale of any plant and machinery. If a customer does not pay what is owed by the accounting year end then it will not be taxable until the next year when it is actually received by the business.
What deductions are allowable?
In terms of what deductions can be claimed the main rules are that the expenses must have been actually paid in the accounting period as well as being incurred wholly and exclusively for the purposes of the trade.
As is the case with calculating taxable profits generally for a business no deductions are allowed for items which are of a capital nature such as the purchase of property. However, under the cash basis the costs of most plant and machinery can be included as a deduction. One key exception is the purchase of cars.
Relief for interest payments
If you have a business loan or overdraft only interest, payments up to a maximum limit of £500 can be claimed. If, in the future, you have a larger loan and wish to claim more interest as a deduction then this could be treated as a change of circumstances and result in you then having your accounts prepared on the accruals basis.
Restrictions on the use of losses
If your business incurs a loss then under the cash basis this can only be carried forward and set against profits of the same business in future years. This is not as advantageous as the normal rules which will allow the loss to be carried back or set off 'sideways' against other income.
In order to ensure that income is taxed and expenses are relieved 'once and once only' special calculations are needed on entering or leaving the cash basis.
How we can help
The rules for the cash basis for the self-employed can be complex. We can help by looking at whether this is an appropriate option for your business. Please do contact us at Certax if you would like further advice.
Employed or self employed?
Employers sometimes ask Certax about classifying workers as employed or self employed – a surprisingly complex issue. Here is an overview of the key points.
The question as to whether someone is employed or self employed is not as straightforward as it might at first appear. Many people assume they are free to choose, but HM Revenue & Customs (HMRC) emphasises that this is not the case.
How do you decide?
Although there is no clear-cut answer to this question, HMRC has published an introductory guide - 'employment status' (see https://www.gov.uk/employment-status).
This covers areas such as:
- Who is a worker?
- Employment rights
- Casual or irregular work
- Employment shareholder jobs
- Self-employed and contractors
- Working out if someone is self-employed
- Directors and office holders.
Note, however, these are matters of general employment law, and not specific tax legislation.
What are the practical differences?
Employees are taxed under the PAYE system and are liable to Class 1 national insurance contributions (NICs). If the worker is an employee, the employer also has to pay Class 1 NICs – over a limit set each year, the employee's NICs rate reduces to 2%, but for employers NICs continue at the full rate, with no upper limit. The employer also assumes responsibility for paying Statutory Sick Pay and Statutory Maternity, Adoption or Paternity Pay.
Employees have rights under health and safety and employment laws, such as the rights to redundancy payments and not to be unfairly dismissed. Moreover, the range of social security benefits is greater for employees than for the self employed.
Self employed workers are taxed under self assessment, and are allowed more scope in claiming expenses. They also pay Class 2 and Class 4 NICs, the combined burden of which is lower than Class 1 NICs. Their 'employers' are not subject to NICs. Class 2 NICs are to be abolished in 2018.
When Class 2 NICs are abolished, Class 4 NICs will be changed to give the payer rights to pensions and benefits.
It is not surprising, therefore, that many businesses show a marked preference for self employment status for their workers!
What if you are wrong?
It is the responsibility of the person making the payment to get it right. If you treat a worker as self employed and he or she is subsequently ruled to be an employee, you could find that all the payments you have made will be treated as net payments, and you will have to pay the corresponding tax and employees' NICs, as well as the employer's NICs. You have no right in law to recover such items from your employees after the event.
You may also have to pay interest and penalties for incorrect returns.
Can you create conditions to favour self employment?
If you want to substantiate a classification of a worker as self employed, we strongly recommend that you have drawn up and enforce a suitable contract defining the services provided. You will need to give particular consideration to the following points:
- One of the main requirements is that self employed workers bear some element of risk in the arrangement, which means you will have to avoid the 'hourly rate', in favour of a 'price for the job'. The main principle is that the price, scope, and timing of the work should be agreed, and evidenced in writing, before the job commences.
- Within reason, the more freedom the worker has in the detail of the way the work is carried out the better. You must also make it clear that the worker will have to put right any faulty work at his or her own expense.
- One of the strongest tests of self employment is the right to substitute a worker who is equally capable of carrying out the work.
- All self employed workers should hold public liability insurance.
- Provision of equipment
- Where practical, the worker should supply at least some of the important equipment or tools. Of course, the extent to which equipment is required depends upon the nature of the work.
What about the construction industry?
The construction industry is subject to exactly the same rules as any other type of industry. However, there are some special considerations.
Where the work entails use of heavy equipment or expensive plant, it is sometimes recommended that contractors hire the equipment to their subcontractors, who then include the cost within their 'price for the job'. Such arrangements may seem artificial, and there is the danger that with substantial hire costs being included in the pricing, the subcontractor's turnover may breach the VAT threshold and force him or her to register for VAT. However, this is not necessarily a bad thing because VAT registration is often cited as further evidence of self employment.
With regard to pricing work, a competitive tender is best, but in practice it should not really matter who makes the first suggestion of an appropriate price.
Although there is a special scheme for taxing construction industry workers, the fact that a subcontractor is registered does not, in itself, necessarily prove self employment status.
What about personal service companies?
These guidelines apply equally to the so called 'IR35' rules to test whether a worker would be treated as an employee of the client, if it were not for the existence of an intermediate service company. There are further rules for "Managed Service Companies".
Employment Status Indicator (ESI)
HMRC has an online ESI tool which can be used in working out employment status of individuals or groups of workers. The link can be found at www.gov.uk/guidance/employment-status-indicator
If you would like more advice on classifying a worker as employed or self-employed, contact Certax.