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On 20 March 2013 the UK Chancellor, George Osborne, announced his 2013 Budget. His opening lines were “Mr Deputy Speaker, this is a budget for people who aspire to work hard and get on. It’s a budget for people who realise there are no easy answers to problems built up over many years. Just the painstaking work of putting right what went so badly wrong. And together with the British people we are, slowly but surely, fixing our country’s economic problems.”

Summary of how this Budget affects contractors
Similar to 2012, by and large, contractors should be pleased with the announcements made as part of this Budget. In the main, it is very much a case of business as usual, however with the strong focus of this Budget on rewarding businesses and workers, contractors should at least take heart that this Budget will help kick start the UK economy, and so open up more contracting opportunities in the job market.

IR35
IR35 remains largely as it is. Following on from the Ed Lester debacle (CEO of the Student Loans Company operating through his own limited company), Mr Osborne confirmed an amendment to existing IR35 provisions will be made to equalise the tax and National Insurance treatment of office holders – that is, contractors who are working through their own PSC, AND are also a director of the client they work for (that client usually being a large public company). The amendment will be made in the Finance Act 2013.

While this has resulted in a lot of commentary within the accounting/tax world, we don’t expect any of our clients to be affected by the change.

Corporation tax
The small profits rate remains at 20% (where company profits do not exceed £300,000). The main corporation tax rate for larger companies falls to 23% effective 01 April 2013, in 2014 it drops further to 21&, and by April 2015 it is expected to be 20%. These faster than previously expected drops in the company tax rate will give the UK one of the lowest corporation tax rates in the western world from 2015. Osborne said: “I want to send a message to anyone that wants to set up business here, or create jobs here, that Britain is open for business.”

Income taxes
Personal allowance will be £9,440 from 06 April 2013, and next year it will increase to £10,000.

For most contractors, these increases are more than offset by the lowering of the higher rate threshold (£32,010 in 2013/14) on earnings not exceeding the higher rate earnings threshold. For the 2012/13 tax year contractors could take home £38,996.70 in salary and dividends while keeping their personal tax liability at £0 – in 2013/14 this decreases to £38,053.80

As previously announced from 06 April 2013 the 50% additional rate of income tax will reduce to 45% , and the dividend additional rate will be reduced from 42.5 per cent to 37.5 per cent.

GARR
It stands for General Anti-Abuse Rule – and it will be introduced from July this year. It was announced as ”one of the largest ever packages of tax avoidance and evasion measures presented at a Budget” which is fairly accurate. For the contractors market, we can expect to see it even harder for offshore companies to put together a compliant structure for saving tax. We have always sounded various warnings about working in the UK via an offshore intermediary – the GAAR adds another level of complexity for them now, and puts further risk (read: liability) on the contractors shoulders.

Entrepreneurs Relief, and Closing Down your Company
There have been no changes in this area. This remains an attractive form of tax relief when looking to close down your company.

Statutory Residency Test
As planned the new Statutory Residency Test will be effective from April 2013. This is aimed to give clearer guidance, and a more robust test, to ensure the residency status of individuals can be more easily determined.

With the end of the tax year approaching, now is the perfect time to ensure you minimise the amount of personal tax you need to pay. This article explains how you can do this, to avoid an unexpected tax bill when you come to complete your personal self-assessment tax return for 2012/13, and will also explain how to make the most of the tax planning opportunities you have available.

Just as a quick refresher, the current 2012/13 tax year started on 06 April 2012, and will finish on 05 April 2013.

Most of our clients receive personal income from their business in the form of salary and dividends. Any personal tax payable on the salary is deducted by your ltd company through the usual payroll channel, but dividends are not taxed at source like this. For the most part, if our clients do face a personal tax charge for 2012/13, it will most likely be due to dividend payments received – and this is where the tax planning opportunities lie.

(1) Paying yourself too much
If you have received dividends from your company for the current tax year, you need to consider your overall personal earnings from ALL sources, to determine if you face a personal tax charge on those dividends. Other earnings sources can include salary from other employers for 2012/13, rental income, foreign income, or bank interest from your personal bank accounts. If your total gross earnings from ALL sources exceeds £42,475, then you will face a personal tax charge on any dividends you received from your limited company above the £42,475 threshold.

We have developed a simple but effective way of tracking your personal earnings position. What you need to do is;
(a) Go to your ‘My Expenses’ page within your No Worries online account, and ensure all your expenses are up to date;
(b) Go to your ‘My Earnings’ page, and complete/update Section 2 “Personal Income from other sources for 2012/13” with any personal earnings you received OTHER THAN from your own limited company;
(c) Also ensure Section 5 “Last 6 payments recorded as made to your personal account” is completely up to date with all payments you have made to yourself for the tax year (if you are a Club Gold client, and your bank statements are sent to our office, we will have this up to date for you up to your most recent statement we hold – you may still need to add in any recent payments you have made to yourself);
(d) Section 1 of your ‘My Earnings’ page will then calculate an assessment of your personal tax position, and if your total earnings from all sources exceeds £42,475, it will calculate what personal tax charge you face on the dividends you received;

If you have earned over the £42,475 threshold, and want to limit the dividend tax charge you face, you can;
– Stop paying yourself altogether from your ltd company until 06 April 2013;
- If you can’t live without some personal cashflow, then consider loaning yourself money from your ltd company, and then after 06 April 2013 repay the loan back to the company;
- If you can’t live without some personal cashflow, then you could also consider drawing some hard earned goodwill from family / friends until 06 April 2013;

(2) Paying yourself too little
Paying yourself too little can sometimes be as bad as paying yourself too much (from a tax planning perspective). So long as you have followed steps (a) to (d) above, your ‘My Earnings’ page will produce an accurate calculation of your total gross earnings from your limited company. If your total income from all sources DOES NOT exceed £42,475, then it will calculate how much more you can pay yourself before you reach the £42,475 threshold. You should aim to pay yourself up to the threshold every year if you can afford to (see Retained profits, below). If your total gross earnings from all sources does not exceed £42,475 you will face no tax charge on any dividends you have paid to yourself – so its best you maximise this tax planning opportunity each year.

(3) Retained profits
This is very important – don’t skim-read this section. The above two sections talk about taking dividends from your company. You can ONLY do this if your company has sufficient retained profits to pay out a dividend.

Your retained profits is not simply the money left in your company bank account – some of that will be needed to pay your company tax bills.
- Dividends can only be paid out of after-tax profits;
- Your company retained profit is your company bank balance less any tax liabilities it faces to date, such as Corporation Tax, VAT, and PAYE/NI.

If you follow the pay advice emails we send out each time you raise an invoice, and provided you have no company paid expenses other than our accounting fee, then your retained earnings is likely to be small, but you may still have enough to make a dividend payment worthwhile.
If however you have always paid yourself less than our payment advice emails, then you may have significant retained earnings, which you can use to make dividend payments to yourself if your total gross earnings to date does not exceed £42,475.

For our Club Gold clients if you are at all unsure about your level of retained earnings then please call/email us. For our Gold clients, the company retained earnings is only calculated once a year (at the company year end) which makes this form of tax planning very difficult. If you think this would be useful, we recommend you switch up to our Club Gold service.

(4) Actual payment of dividends
If you are wanting to plan your dividend payments to ensure you get as close as possible to the £42,475 threshold, then for simplicity we suggest you ensure the dividends are paid on or before 05 April 2013.

HMRC is cracking down on those who are late with VAT returns or payments. If you’re struggling with getting your VAT return information to us, or to pay your VAT late, read on.

On January 9 the HMRC announced their intention to get tough with businesses that miss VAT deadlines. However, they’re allowing some breathing space by giving them until the end of February to bring their returns and payments up to date.

The incentive to co-operate is that HMRC will be more lenient with penalties. We can’t say how lenient because its campaign statement is rather vague on this point. But the implication is that it will hit a business hard if it catches up with them first. For example, in extreme cases it can charge a penalty of up to 100% of the under declared VAT.

If you’ve had VAT problems, but are now up to date with both paperwork and payments then you don’t have to worry. HMRC’s campaign is not aimed at revisiting past troubles.

Our advice where you owe VAT or have an outstanding return, even if this goes back years and you’ve submitted all subsequent ones, is to bring these up to date now if you can. If you can’t, say because you don’t have the figures to put on the form or the cash to pay the VAT, contact HMRC before the end of February and negotiate for more time.

As expected from the Autumn Statement, the government has released the first draft change to the IR35 legislation since it took effect over ten years ago.

This relates to the controversy over ‘Controlling Persons’ being able to work using their own personal service company (PSC). Ed Lester led the charge with the controversy when it was discovered that as CEO of The Student Loans Company he was getting his income paid to him via a PSC. The government did not like the fact he was a Controlling Person (ie in charge of The Student Loans Company) yet was not on the company payroll, but rather was working as a contractor and taking his income tax efficiently from his PSC.

So a single clause change is proposed in Chapter 8 of Part 2 of ITEPA 2003, section 49, subsection (1), paragraph (c). The current clause reads;

(c) the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client.

The proposed new clause reads;

(c) the circumstances are such that
(i) if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client, or
(ii) the worker is an office-holder who holds that office under the client and the services relate to the office.

If you want more information on this, have a chat to London’s best contractor accountant.

The Autumn statement presented by George Osborne on 05 December 2012 is really pre-cursor to what we can expect when the Budget is announced early next year. For us, we like to pick through the headlines to assess the pro’s and con’s for our contractor clients. Here is a summary of what we have found;

(1) Drop in net earnings. For the current tax year with the optimum mix of salary and dividends, clients can pay themselves a net of £38,976 before they reach the earnings threshold at which higher rate dividend tax applies. Although the National Insurance figures for 2013/14 have not yet been published, we expect this to drop to around £38,100 in 2013/14 – a drop of £876 per year in net earnings. So our advice is if your company makes enough money, ensure you use up all of your basic rate earnings band this tax year with salary and dividends.

(2) Controlling Persons abandoned. You may, or may not , recall the furore over Ed Lester (CEO of The Student Loans Company) using his own PSC to collect his CEO paycheque. That brought a proposed change in legislation so that ‘Controlling Persons’ cannot enjoy the tax benefit of using their own PSC. The proposals were always going to be very difficult to implement, and it has now been agreed the government will strengthen the existing IR35 legislation “to put beyond doubt that it applies to office holders for tax purposes”. We will have to wait and see what those changes will look like but we don’t expect any major impacts for our clients.

(3) Public Sector workers. Our clients who work in the public sector have seen firsthand the extra assurances required by their client to maintain their independent contractor status. Those that can’t provide the assurances risk having their contract terminated. As we have seen the assurances are predominately a paper exercise with no real change in working conditions required (as you would expect for contractors working outside of IR35). The Autumn Statement mentions that the measures introduced in the public sector this year to manage the IR35 status of contractors are “sufficient” to help manage employment status.

(4) Offshore Employment Intermediaries and GAAR (General Anti-Avoidance Rule). The government has committed to undertake an internal review of offshore intermediaries being used to avoid tax and NIC’s, and guidance and draft legislation related to GAAR will be published later this month. Both of these further limit the life expectancy of offshore tax schemes and artificial tax structures. As we have said for the past few years, working through your own limited company gives you the best tax efficiency while operating within the bounds of the law. Any schemes offering 85% returns or more on income should be avoided at all costs – the risks (none of which are borne by the scheme operator) are just too high.

For more information regarding our accounting service visit our contractor accounting website, or get in touch.

A regular question we get asked by our clients is “As a contractor what insurance do I need and where can I get it?”. We have put together this useful information that will help answer some of your questions, and if you want to know more feel free to ask!

When setting up to work through their own limited company, contractors will often get certain insurances put in place to protect themselves and their company against any exposures that may exist.

Agencies and recruitment companies also often ask to see proof of insurance documents from candidates before they can be accepted for a role, and this is usually what spurs on the request to us for help regarding insurance. So what types of insurance should be considered while working as a freelancer or a contractor?

The main insurances are:

Professional Indemnity (PI)
Covers you against any errors you make or bad advice which you give leading to financial loss from those relying on your advice. It provides protection for claims made against you as a result of allegations of professional negligence. Cover includes legal defence costs and any damages awarded. Claims for negligence can be made against any company providing professional services.

Public Liability (PL)
Provides protection against claims for legal liability in respect of accidental bodily injury to third parties or damage to third party property arising in the course of your normal business activities.

Whether you are on your own premises or at a clients’ site, you have a duty to protect anyone who might be affected by your activities. If you fail in this duty and someone is injured, or property is damaged as a result of your actions then you could become legally liable to them for compensation.

Employer’s Liability (EL)
Employers’ liability provides protection against claims from employees for legal liability in respect of injury or disease which arise in the course of their work and for which you are deemed to be responsible.

It is not usually required by law to have EL this in place but it is often a contractual requirement to have this cover.

Who Can Help?
There are numerous insurance companies who specialise in providing insurance for contractors. Just ask your No Worries account manager and they’ll send you a list of the companies our clients commonly use. One company that stands out is Kingsbridge Professional Solutions. They have a contractor specific business insurance package and you can get an instant quote online at noworries.kpsol.co.uk

If you need any further information please just feel free to get in touch.

With PSC’s being in the news so much lately, and the political football of IR35 being thrown about, any contractor working in the public sector may have recently come under pressure from their client seeking assurances they are paying ‘their fair share’ of tax. This useful article helps shed some light on the situation.

From Contractor UK

Alongside new rules governing ‘off-payroll’ workers in the public sector, the Cabinet Office issued a Procurement Policy Note (PPN) to provide central government departments, state-run bodies and public sector agencies with a guide to help them seek assurance about the tax arrangements of their contractors.

As nothing was issued to assist the contractors – the very workers so much of the public sector depends on, to help them understand either the off-payroll rules or the assurance process, ContractorUK asked a leading industry expert to help fill the gap.

Here, IR35 expert Kate Cottrell, co-founder of employment status specialists Bauer & Cottrell, offers advice to contractors and other off-payroll workers providing services to the state sector who are being asked to provide assurance about their tax affairs.

Scope

This affects most contractors where public sector money is at the end of the line, including where agencies and consultancies are in the contractual chain, and it extends to other bodies such as the BBC and the NHS. It definitely affects any contractor earning at a daily rate of £220 or higher, and applies to contracts lasting more than 6 months from August 2012.

What does it mean for me?

Contracts will be changed to include clauses giving the right for engagers to seek assurances and information and evidence to show that income is being treated correctly for tax and NIC purposes and especially with regard to IR35. Those operating through umbrella companies or on agency payrolls will have to provide copies of their payslips. If you’re a contractor, you could risk having your contract terminated if you do not comply with the assurance process and failure to comply could result in the engager informing HM Revenue & Customs.

What do contractors with a Personal Service Company (PSC) have to do?

Step 3 of the guidance in the PPN is the critical part. It states:

Where the worker is engaged through their own limited company (a personal service company) and not withdrawing all their income from the department under PAYE (as set out in step two) they will need to provide evidence of one of the following:

1. The worker should be able to show that their service company is low risk for IR35 according toHMRC’s “business entity” tests described in HMRC guidance published May 2012. This means that they are a low risk of HMRC checking whether they need to operate the IR35 legislation described in step three. The worker will be able to provide this at the 6 month point. Provided the terms of the engagement remain the same, the service company will remain low risk for the duration of the contract. 
2.  If the worker is medium or high risk according to HMRC‟s “business entity” tests but feels that they are outside the scope of IR35, then they will need to provide assurance in a different way – for example, following a contract review by HMRC‟s independent IR35 helpline. The worker will be able to provide evidence of a contract review to say that they are outside the scope of the IR35 legislation at the 6 month point. If the terms of the contract remain the same, the assessment of the service company will not change for the duration of the contract
3. If the contract is within the scope of IR35, the worker can provide evidence that they are operating the IR35 legislation on the payments received from the Department. This can be evidenced by the worker providing a “deemed calculation”. This is a calculation that requires the worker to consider all the income for the year from a particular contract that is within IR35, make a “deemed payment” to HMRC for employer NICs and pay employee NICs and PAYE on the remainder of the income. The deemed payment calculation can be accessed online at http://www.hmrc.gov.uk/ir35/ir35.xlt. The legislation only requires the individual to make this payment at the end of the tax year, so it will not be possible to provide assurance until this point – the individual will need to indicate that they are intending to do this when assurance is sought and commit to meeting this requirement at an agreed later date.

If the department is not satisfied with the evidence they receive they may send details to their CRM or customer coordinator in HMRC to be considered alongside other intelligence to support HMRC‟s work to tackle non-compliance. Taxpayer confidentiality means that HMRC will not be able to share the results of any follow-up action with the department.

Actions for contractors to take (based on the requirements in the PPN):
1. Take the HMRC business entity tests.

2. If Low risk – you will be asked for a signed declaration to state that you have taken the tests, the number of points you scored and that you have gathered and retained enough relevant and reliable evidence to support your score as required by HMRC.  The engager should do nothing more other than to record the number of low risk cases for statistical purposes and to keep your signed declaration.

3. If Medium or High risk AND you believe you are outside IR35. You should provide evidence of an IR35 contract review undertaken by either HMRC or another acceptable provider and you will be asked to sign a declaration that you have taken the tests and are medium or high risk, the number of points you scored and that you consider yourself as outside the scope of IR35. The engager should do nothing more other than to record your case for statistical purposes and to keep your signed declaration.

4. If Medium or High risk AND you believe you are inside IR35.  You should sign a declaration that you are medium or high risk and that you consider that this engagement is inside IR35 and you will commit to provide evidence that they have operated IR35 after the end of the tax year. As this is not declared until May 19^th you may be asked to provide this by, say, May 31^st.  The engager should do nothing more until the agreed date.

All of our clients who have used Bauer & Cottrell IR35 contract review services will be provided with anassurance certificate for presentation to public sector engagers. We will also provide assistance and further guidance to you.

What should contractors bear in mind?

• Most PSC workers will fall into the Medium or High risk bands

• You may be given strict timescales to provide evidence and it is unrealistic to expect you to obtain an HMRC IR35 contract review in just a few weeks.  Many contractors are reluctant to use the service. Some IR35 insurances are void if the contractor uses the HMRC IR35 service. The reality is that the HMRC service is entirely confidential and independent of HMRC compliance activities. However in the event of disagreement as to the IR35 status, the request for an opinion could lead to a full blown tribunal hearing.

• Your chosen IR35 contract review provider should have taken full account of the new assurance processes and advised you accordingly.  You should also always seek their opinion on your IR35 status in writing.

•  The provision of information for the assurance process is the responsibility of the contractor/PSC/his or her advisor.

• There is already evidence of misunderstanding of this new assurance process with some departments issuing incorrect information and some going much further than apparently required to do. For example, applying it to every worker irrespective of rate or length of contract and assuming that every worker is inside IR35.

• It is not necessary for the engaging department to have an in depth knowledge of the IR35 legislation or to make a judgment on a worker’s IR35 status in order to administer the assurance process.

Final considerations

This underway exercise (- the assurance process to reflect the off-payroll rules) is currently targeting those contractors earning at a rate of £220 per day and for contracts lasting more than 6 months from August 2012, AND the engager also has to consider applying the same policy to ALL those not on the payroll. But this is a policy that any employer/engager could instigate and we could see it being widened to include any worker/contractor, irrespective of rate or length of contract. We will have to wait and see but for now, this should be seen as an IR35 wake-up call for anyone who is declaring themselves outside IR35 whether engaged by the public or the private sector.

As reported on Contractor UK:

Recent figures suggesting that self-employed workers face the toughest mortgage conditions in a generation need not apply to the UK’s contractor community, writes Tony Harris of specialist IFAs ContractorMoney.

‘Perfect storm’

Record self-employment has unfortunately coincided with strict new mortgage affordability criteria that mean many micro-business owners now face an uphill struggle to secure the borrowing they need.

While the Office for National Statistics calculates that the number of people working for themselves has jumped by almost one million since 2006, figures from the Council of Mortgage Lenders show that the number of mortgages secured by the self-employed has fallen by 72 per cent over the same period.

Self-Cert’s demise

This fall is at least in part due to the fact that before the credit crunch nearly one in four mortgages was granted on a so-called self-certification basis, where the borrower did not have to prove their earnings. The Financial Services Authority has effectively banned these schemes in an effort to foster what they consider to be more prudent lending. The regulator has applied pressure on mortgage companies to stop the practice even though many lenders actual experience shows that they are no less likely to suffer default on a self-cert mortgage than on a more mainstream loan.

The effect of a ban on self certification has been compounded by a general tightening of mainstream lending criteria as institutions have reacted to a general shortage of funds, restricting borrowing to only the very strongest of applicant.

By resorting to the traditional income measure of using the average of three years’ accounts, at the very least, this has delayed plans for many freelancers or directors of smaller enterprises who would otherwise be eager to buy their first or next home, or remortgage at the end of an initially good interest rate.

Rather than concentrate on running their business as efficiently as possible, which the economy desperately wants, micro-business owners have increasingly needed to bear in mind the demands of mortgage lenders. Start-up costs, fluctuating trading conditions and perfectly legitimate tax planning can all significantly reduce a specific years accounts figures and dramatically reduce the overall mortgage that can be granted. With an increasingly pedantic attitude taken by mortgage underwriters, any inconvenient details that don’t fit nicely into a computer-based model can spell disaster for any would-be borrower.

But contractors have a lifeline

Luckily, for those working on a short term contract, there are still a small band of freelancer-friendly lenders who will look on your earnings in a more sympathetic light.

Throughout the credit crunch we’ve been working hard to keep these mortgage institutions onside and so unlike other self-employed workers and SME directors, contractors can base mortgage affordability on a multiple of their gross contract rate alone. Typically a multiple of 3.5 to 4 times is applied to the annualised total of your current contract rate and with access to exactly same high street interest rates as a ‘permie’, contractors shouldn’t be penalised in any way for the way they work.

Freelance-friendly lenders, not staff

Sadly though, the branch staff at these freelancer-friendly lenders are not always familiar with applying the head office-agreed underwriting criteria, but the use of a specialist mortgage broker will open up these schemes for you. At what can already be a very expensive time, you also shouldn’t have to pay the £500+ that some brokers levy as their fee either. You should be able to still find an adviser that relies solely on any introducer’s commission from the lender rather than one that charges you a fee in additional to the amount they receive from the lender.

Against all the odds some lenders are even beginning to offer exclusive interest rates for contractors again and so it seems that, in a small corner of the mortgage market at least, the outlook is looking relatively bright.

From around the 20 June 2012, the HMRC started sending out letters to contractors asking them whether they have considered IR35 and, if they have concluded that the company is not subject to that legislation, to explain the basis upon which they arrived at that conclusion.

We understand the HMRC is seeking the contracts and the supporting explanations for the contractor’s last trading year. The contractor has been given a month to respond and HMRC warns that it may be necessary to arrange a meeting following receipt of the information provided.

This follows on from the new guidance issued by the HMRC on IR35 (www.hmrc.gov.uk/ir35/guidance.pdf)  which includes various business tests to “assist” you with deciding if a contract is within IR35 or not – so we thought now was a good time to remind you about IR35.

As with the employment status indicator that HMRC have used for years, the new guidance issued by the HMRC on IR35 is geared in their view and is limited in the way it works. It is always possible to answer the questions to get the result that you require but you always need to provide documentary evidence to support any claims. For instance you can simply answer one question which will put you in the low risk category whereas due to the overall position it likely that you will still be within the IR35 provisions.

The questions are not exhaustive and do not include things such as mutuality of obligation which HMRC have lost on in a number of cases.

And lets be clear on one thing – the rules relating to IR35 have not changed – what has changed is the way the HMRC select a company to determine whether or not to pursue an IR35 investigation.

So, with this in mind, we thought now was a good chance to remind you about IR35;

(1)     Ensure you have a signed contract for each engagement you undertake, that passes the IR35 test;

(2)     Keep your actual working practices to those that reflect a person in business of their own account – see www.no-worries.co.uk/IR35.asp;

(3)     Remember that we have IR35 investigation insurance in place for all clients – this is provided free of charge;

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So if you have been thinking about getting some Insurance, take a look at what’s on offer at KPSol online.