Prior to the screening, Ngāti Rānana London Māori Club will be performing, and the NZ High Commissioner will be speaking.

Tickets are now very limited, but they can still be purchased online from http://www.eventelephant.com/christchurchayearon. For more information regarding the event, take a look at the official website http://www.ayearon.co.uk/

The accounting service offered by Capital City Accountancy is very similar to the existing No Worries accounting service we operate. Our excellent taxation and accounting advice remain the same across both services. Capital City Accountancy however is geared toward the longer term contractor who will remain freelancing for more than, say, 3 years, and who anticipates living and working in the UK long term. We consider tax planning for the longer term, and our fee structure is more attractive longer term.

To celebrate, for three months (until 15 April 2012) we are offering a 15% referral discount on our monthly fee for each client who is referred to our Capital City Accountancy service. The only small print we could think of is;

(1) This offer only applies for new clients you send to us. An existing client of No Worries switching across to our Capital City Accountancy service is not eligible;

(2) This offer applies for new clients you send to Capital City Accountancy. For any new clients you send to No Worries, you will enjoy our usual 10% referral discount offer;

Check the full results of the Contractor UK Reader Awards 2011 here, and here for a full commentary on the meaning of these results.

The change will affect your personal tax position when closing down your company.

A Quick Background

When you close down your company, any final dividend payments you make to yourself get taxed as dividend income in the normal way within your personal tax return. You can however apply to have these dividend payments taxed as a capital gain, by applying for the concession ESC C16 with the HMRC. This carries significant tax advantages if you are a higher rate taxpayer (earn over £42,475 in gross salary/dividend income in this current tax year), AND have traded through the company for more than one year.

What is ESC C16?

Once you have ceased trading, ESC C16 allows for any final dividend payments you make to yourself to be taxed personally on you as a capital gain, rather than as normal dividend income. This is useful if you have a substantial amount of retained earnings, and want to extract it in the most tax efficient means.

Under the current rules, there is no limit to the size of the final dividend payments you can make that get treated in this way, and so long as your company has traded for more than one year, you will pay a maximum of 10% tax on the final dividend payments (taxed as a capital gain and using Entrepreneurs Relief). Without this concession, and if you are a higher rate tax payer, any final dividend payments would get taxed at 25% – so it’s a worthwhile concession for our clients who have a significant amount of retained earnings in their company.

The New Rules

With effect from 01 March 2012, ESC C16 will disappear, and it will be replaced with legislation that will treat the first £25,000 of all final dividends payments made once striking off action has commenced, to be taxed as a capital gain. Any distributions made in excess of this threshold, will be taxed as normal dividend income.

As an approximate guide, we suggest that clients who anticipate having UP TO £50,000 in surplus funds when they close down, take this route.

The alternative is to engage the services of a Licensed Insolvency Practitioner, and take your company through a Members Voluntary Liquidation. When closing down via a liquidation, ALL final distributions are treated as a capital gain for personal tax purposes, and there is no upper limit. In terms of tax, this solution is on par with the current ESC  C16 regime. The only differences being a Members Voluntary Liquidation is a different process, and engaging a Licensed Insolvency Practitioner will cost in the region of £3,500 + VAT.

We suggest any clients who anticipate having MORE THAN £50,000 in surplus funds when they close down take the formal liquidation route. We have established a relationship with a very good Licensed Insolvency Practitioner firm experienced with small contractor companies.

What can you do right now?

Very little. This tax change will be implemented on 01 March 2012. If you have ceased trading AND are currently closing down your company AND have more than £25,000 that you intend to extract as a capital gain using ESC C16, we will do our best to ensure the concession is approved before 01 March 2012. Remember however, that it’s a CONCESSION – the HMRC do not have to agree to it, and notification of agreement from the HMRC usually takes between 4 to 12 weeks, so for most clients it is too late to commence ESC C16 proceedings. Keep in mind the HMRC will be aware of these things – the timing of their announcement is no coincidence.

If you want to close down your company right away to take advantage of ESC C16, AND resume trading through a new company, then unless you have a good commercial reason for changing the company, you will be caught by the new Transactions in Securities rules. Ignoring these rules amounts to tax evasion – we will always advise you against doing this.

However, even with this change, working through your own limited company is still by far the most beneficial form of working in the UK for contractors. And for those clients fortunate enough to have over £50,000 in surplus company funds, any additional liquidation fees paid are still minor in relation to the significant capital gains tax benefits when winding up your company

Example 1: Old Rules

Pete has finished trading on 30 Nov 2011 after three years of contracting, and has £15,000 of surplus funds in his company. He has taken on a new permanent role, and his total earnings from the new role plus the salary and dividend he drew from his company for 2011/12 will exceed £42,475. During the close down process, he decides he wants us to apply to the HMRC for ESC C16. Once the concession is approved by the HMRC, Pete pays his final dividend payment of £15,000 on 01 Feb 2012. After allowing for entrepreneurs relief, and also the annual exempt amount for capital gains, Pete will face an overall personal tax liability on the £15,000 payment of just £440. If this had been taxed as dividend income, he would have faced a personal tax liability of £3,750.

Example 2: Old Rules

Pete has finished trading on 30 Nov 2011 after three years of contracting, and has £65,000 of surplus funds in his company. He has taken on a new permanent role, and his total earnings from the new role plus the salary and dividend he drew from his company for 2011/12 will exceed £42,475. During the close down process, he decides he wants us to apply to the HMRC for ESC C16. Once the concession is approved by the HMRC, Pete pays his final dividend payment of £65,000 on 01 Feb 2012. After allowing for entrepreneurs relief, and also the annual exempt amount for capital gains, Pete will face an overall personal tax liability on the £65,000 payment of just £5,440. If this had been taxed as dividend income, he would have faced a personal tax liability of £16,250.

Example 3: New Rules (assuming 2011/12 tax rates for a fair comparison)

Pete has finished trading on 30 July 2012 after three years of contracting, and has £15,000 of surplus funds in his company. He has taken on a new permanent role, and his total earnings from the new role plus the salary and dividend he drew from his company for 2011/12 will exceed £42,475. After Pete commences striking off action for his company, he pays himself his final dividend payment of £15,000. As this is below the £25,000 threshold, the entire amount is treated as a capital gain and Pete will face an overall personal tax liability on the £15,000 payment of just £440. If this had been taxed as dividend income, he would have faced a personal tax liability of £3,750.

 Example 4: New Rules (assuming 2011/12 tax rates for a fair comparison)

Pete has finished trading on 30 July 2012 after three years of contracting, and has £65,000 of surplus funds in his company. He has taken on a new permanent role, and his total earnings from the new role plus the salary and dividend he drew from his company for 2011/12 will exceed £42,475. Pete has two options;

(a)     Liquidate his company. Although costing (say) £4,500 incl VAT, Pete’s his final dividend payment of £65,000 is taxed completely as a capital gain. After allowing for entrepreneurs relief, and also the annual exempt amount for capital gains, Pete will face an overall personal tax liability on the £65,000 payment of just £5,440. Adding the Insolvency Practitioner’s fee, the overall ‘cost’ of this transaction is £9,940;

(b)     Strike off the company. There is no Insolvency Practitioner’s fee with this option, but Pete’s final dividend payment of £65,000 will be taxed as £25,000 capital gain, and the rest as dividend income. Pete will face an overall personal tax liability on the £65,000 payment of £11,440.

Liquidating the company using an Insolvency Practitioner is the best option in this case.

Questions

(1)     I already have the ESC C16 concession from the HMRC. What happens to any dividend payments I make after 01 March 2012?

Any dividends payment made before 01 March 2012 will be treated under the old rules, and any dividend payments made after 01 March 2012 will be treated under the new rules. We suggest you make all your final dividend payments before 01 March 2012 to ensure they are treated under the ESC C16 rules.

(2)     Do I need to apply to the HMRC under the new system to treat my final dividend payments as capital distributions for tax purposes?

No. Any dividend payments made after an application to strike off the company has been sent to Companies House, will be treated as capital gains under this new regime up to £25,000. Any dividends paid over this threshold will be treated as dividend income.

(3)     Can dividends paid after striking off action has commenced be treated as dividend income for personal tax purposes?

No. Once striking off action has commenced, all dividends paid will be treated as capital gains up to the £25,000 threshold. If it suits your personal tax circumstances to have some of these final dividend payments treated as dividend income, then we suggest you make these dividend payments before you cease to trade.

(4)     I have a very large amount of surplus funds in my business. Can I close down my company now under the old rules, and start up a new one? It will save me a lot of tax.

No. HMRC may seek to counteract any tax advantage if they consider that the process if being undertaken to avoid tax in an abusive way. They can do this using the Transactions in Securities rules. In practice, HMRC will use counteraction when particularly large sums are at stake and there is evidence of “phoenixing” – that is setting up new companies to do exactly the same activities as the previous one with no apparent trade motive. We suggest this action only be taken when you have a genuine commercial reason for doing so.

(5)     I think I will have about £10,000 in surplus funds when I close down my company. Will these changes affect me?

No. This change will only affect clients who expect to have £25,000 or more in surplus funds when they close down their business. In fact, if you have less than £25,000 in surplus funds, this change will give you greater flexibility with regards to your options for optimising your personal tax position due to the ease with which final dividend payments can be treated as capital gains.

(6)     I will have about £20,000 in surplus funds when I close down my company. Can I pay myself out two dividend payments of £10,000 each over a two year period, and so avoid capital gains tax altogether? (each year all individuals get an allowance for tax free capital gains. In 2011/12 for example, capital gains tax only arises on gains exceeding £10,600).

We don’t think so – we suspect this will be viewed as too aggressive, and the HMRC may look to counteract the tax advantage using the Transactions in Securities rules mentioned in (5) above.

(7)     I intend to close down my company shortly, and take on a permanent role in the UK. What is my best option?

In nearly all cases the best option will be to have as much of your final dividend payments as possible treated as a capital gain. Ask your account manager to explain this option to you as individual circumstances means the one-size fits all approach does not usually work.

(8)     I intend to close down my company shortly, and permanently leave the UK. What is my best option?

Usually your best option is to pay all surplus funds out to yourself before you leave the UK. This will help avoid these payments being taxable in your new country of residence. Each country has differing rules however on taxation of dividends and capital gains, so please contact your account manager for advice regarding this.

(9)  When I close down my company I will only just have enough money to pay all my company taxes. I will also have a £4,000 director’s loan – what happens to that?

On closing the company, the director’s loan will be settled as a final dividend payment of £4,000. This is a bookkeeping exercise – no actual funds change hands. So long as this is done after the application to strike off your company has been filed, this £4,000 dividend payment will be treated as a capital gain.

1. Introduction
While working with your client, you may identify an opportunity to engage the services of a sub-contractor – a person whose services you will bill to your client, possibly at a rate higher than what you are paying the sub-contractor (and so make a small profit along the way). You have two options here;
(1) Sub-contractor – Simple to deal with – the subcontractor bills you, and this becomes an expense for your company;
(2) Salaried employee – So not really a sub-contractor at all! This person would be on your books as an employee, and we would run payroll for this person, calculating PAYE/NI deductions along the way;

2. Sub-Contractor
There are various ways your sub-contractor could operate. They could use a PAYE umbrella, have their own ltd company, or be self-employed. Regardless, you will receive an invoice for their services, and like any business expense, you pay your sub-contractor directly from your business bank account.

VAT Trap
Remember that if you are VAT registered on the flat rate scheme, and you engage the services of a VAT registered sub-contractor, none of the VAT you are billed can be reclaimed, so the VAT also becomes an expense for you. In cases like this, it MIGHT be better for your company to switch to the standard rate VAT scheme**. The decision will be based on how much you expect your sub-contractor will bill you, the duration of their services, and your own anticipated company turnover over the next few years. Please ask your account manager to discuss this further if you think it applies.

Example
Jim has his own company, and is VAT registered on the flat rate scheme at 14.5%. His sub-contractor has just billed him £1,000 + VAT = £1,200. Jim billed his own client £1,100 + VAT = £1,320 for the services that this sub-contractor supplied. Jim’s flat rate VAT adjusted income is £1,129. His expenses are £1,200 (no VAT can be claimed back on the VAT flat rate scheme). So overall, Jim makes a LOSS of £71 from using a sub-contractor.

If Jim’s sub-contractor was NOT VAT registered, then Jim would make a profit of £129. So if you are VAT registered on the flat rate scheme, the VAT status of your sub-contractor is VERY important to your profitability.

3. Salaried Employee
The alternative to paying a sub-contractor is to engage the person as an employee of your business. This can be an attractive option, especially if the flat rate VAT issue described above exists. However, engaging an employee also brings its fair share of administrative duties and obligations;
(1) Operate payroll for your employee;
(2) Observe statutory employee benefits such as holiday pay, sick pay, maternity pay etc;
(3) Keep adequate HR files for all employees;
(4) Provide a safe working environment for your employee;
(5) Observe UK employment law in relation to how you treat your employee;

Example
Jim has his own company, and is VAT registered on the flat rate scheme at 14.5%. He has engaged an employee and will pay them £1,000 per week in gross salary. Jim billed his own client £1,100 + VAT = £1,320 for the services that this sub-contractor supplied. Jim’s flat rate VAT adjusted income is £1,129. His expenses are £1,000 + £119 (employers NI) = £1,119. So overall, Jim makes a PROFIT of £10 from using an employee.

4. Verdict
Engaging the services of a contractor can be a great way to supplement your company income. However if you intend to charge their time to your client, just make sure you put enough of a mark-up on their rate to overcome to flat rate VAT issue described above (if using a subcontractor), and the employers NI that you must pay if the sub-contractor becomes a salaried employee.

** Remember, if you de-register from the flat rate scheme for VAT, you will not be able to re-register again until one year has passed.

If you get it wrong
For most contractors, when considering the risks of a tax investigation there are four main tax areas that could be targeted by the HMRC; (a) PAYE, (b) VAT, (c) Company tax, (d) Personal tax. A compliance check may involve one, or several of these types of taxes. If you are selected for a compliance visit, and are found to have made errors in your tax return(s) the HMRC will apply a tax-geared penalty where your actions have caused a loss of tax. The tax-geared penalty will be somewhere between 0% to 100% depending on whether the error was innocent (0%) to deliberately concealed (100%). A fixed sum penalty may also apply for various reasons. Further, if the HMRC believe the error was due to not taking ‘reasonable care’ they can go back and review your previous 6 years of returns (and if they think you have deliberately evaded tax, they can go back 20 years).

Avoiding a visit in the first place
While a minority of compliance visits are purely random, most are undertaken because the HMRC think there will be something to find. Greater analysis is now possible due to electronic filing of most tax returns, and because annual accounts are also filed in iXBRL. This format means accounts can be easily processed by the HMRC looking for unusual or irregular transactions. Here are my top tips to ensure you fly low across the HMRC radar;
1. File your returns on time. It might sound simple, but its very important. Ensure you know your VAT quarterly filing deadlines, your company tax filing deadline, the PAYE filing deadline (19th May each year), and get your personal tax return filed each year by 31 January.
2. Pay your tax on time. Just as important as item (1) above, make sure the HMRC receive their money on time. Direct debits work great with VAT, and remember tax bills can be paid by credit card. Regardless of improvements in transaction speed between banks, always allow 3 working days for your tax payment to reach the HMRC;
3. Keep impeccable records – Excellent record keeping is imperative. It shows you are professional in your approach to running your business, and will help answer any queries the HMRC may have regarding any tax or accounting transactions. This includes keeping copies (hard copies or electronic are acceptable) of all your invoices, all your receipts, all your business bank account statements, and any other relevant company documents like share certificates, directors loan agreements, and dividend vouchers.
4. Take the time to review your accounts. Avoid the temptation to simply rubber stamp what your accountant has prepared for you. If a figure looks unusual contact your accountant and ask them to explain. At the end of the day it’s your company, your tax, and your responsibility. You should explain any large variations in the notes on the return.
5. Get specialist advice from the outset. I would never suggest a contractor meet the HMRC one-to-one – always have your accountant on hand, or if the compliance visit turns into an IR35 investigation, engage the services of an IR35 specialist;
6. Don’t cover your tracks. Never conceal anything from the HMRC, and don’t think you can tell half-truths.

Summary
In most cases if your business is selected for a compliance visit it will be because the HMRC suspect you may be doing things incorrectly. If you file your returns on time, pay your tax on time, and explain any large variations to current year figures compared to previous year figures, then you will be sending a strong message that you know what you are doing, that you understand your responsibilities, and that you are running your business in a compliant fashion.

The regulations are a big shake-up for the recruitment business and for contracting work in general. Essentially the regulations allow for contractors to gain the same employment rights as the full-time employees that they sit alongside.

However, the AWR does not affect contractors working through their own limited company and who are outside IR35.

For our clients who mostly work through their own limited company’s, the implementation of the AWR will result in no real changes. However, one area that will change will be your client’s motivation to ensure you continue to operate outside of IR35. Clients engage the services to contractors to fulfil short term needs without having to comply with the onerous conditions of employment. Its great having a flexible workforce that can come in, perform specific tasks, and then leave again with no long lasting effects of sick pay, holiday pay, redundancy pay etc. Under AWR, clients will want to ensure their ltd company contractors continue to work outside of IR35, to ensure AWR will not apply. So after 01 Oct 2011, both the contractor, and the end-client will want to ensure the working relationship is compliant with IR35.

For temp contractors who fall within AWR (so either work through an Umbrella company, or work PAYE through their recruitment agency), from 01 Oct 2011 they will having the following rights;

From Day 1:

- Be informed of any relevant vacancies within a hirer’s organisation;
- Access to collective facilities and amenities provided by the hirer.

Week 12 Onwards:

- The right to be treated, in terms of pay and employment conditions, as if they had been hired directly into that role at the start of the 12 week period

More Information

For those wanting more, take a look at the full Guidance for Agency Workers Regulations published by the Department for Business Innovative and Skills.

Who Needs to Complete a Personal Tax Return
All of our clients need to complete a personal tax return for each year they are a Director of their own ltd company. This applies even if the company was non-trading, but still in existence with Companies House. For more details about who needs to file a personal tax return, please take a look here.

(1) Late Filing of your Tax Return
Your personal tax return for 2010/11 must be filed with the HMRC by 31 Jan 2012 (if filed online). If you file a paper return (which we do not recommend), the filing deadline is 31 Oct 2011. Please remember, the HMRC will not accept an excuse of ‘I didn’t know I needed to complete a tax return’ – its your responsibility to find out if you need to complete one or not.

1 day late – A fixed penalty of £100. This applies even if you have no tax to pay or have paid the tax you owe.
More than 3 months late – £10 for each following day – up to a 90 day maximum £900. This is as well as the fixed penalty above.
More than 6 months late – £300 or 5% of the tax due, whichever is the higher. This is as well as the penalties above.
More than 12 months late – £300 or 5% of the tax due, whichever is the higher. In serious cases you may be asked to pay up to 100% of the tax due instead. These are as well as the penalties above.

Example:
Dave is late filing his personal tax return. Although he has no personal tax to pay, he just forgot about it, and ended up filing his return on 29 May. He will face penalties of £100 + (29 days x £10) = £390!

(2) Paying your Tax Late
In addition to filing your personal tax return on time, you must also pay any tax that you owe by 31 Jan 2012. If you don’t pay the tax you owe for the previous tax year on time, the longer you delay, the more you’ll have to pay. So it’s important to pay HMRC as soon as you can.

The penalties are;
Unpaid as at 01 March 2012 – 5% of the tax you owe at that date
Unpaid as at 01 August 2012 – 5% of the tax you owe at that date, plus the penalty above
Unpaid as at 01 February 2013 – 5% of the tax you owe at that date, plus the penalties above

ALSO you will have to pay interest on anything you owe and haven’t paid, including any unpaid penalties, until HMRC receives your payment. The HMRC prescribed interest rates are here.

To protect yourself from these attacks please ensure you;
(1) Delete any emails you receive from the HMRC requesting any personal details, credit card details, user ID’s, and/or passwords;
(2) Delete any emails you receive from the HMRC that requires you to visit a webpage to complete any personal details, credit card details, user ID’s, and/or passwords;

The main scams are;

1. Tax rebate
HM Revenue & Customs will never send notifications of a tax rebate by email, or ask you to disclose personal or payment information by email.
Do not visit the website contained within the email or disclose any personal or payment information.

2. Requests for payment or personal information
HMRC are aware that customers have received emails requesting personal details or payment in exchange for lottery winnings, seized goods, certificates, inheritance etc. HMRC would not request payment or personal details via email.

3. National Insurance/tax rebates
HMRC are aware of companies who are issuing emails to advertise their services. These companies can apply to HMRC for a rebate of National Insurance/tax on the customer’s behalf, usually for a fee. These companies are not connected with HMRC in any way.

4. Bogus callers
HMRC have received reports of customers receiving telephone calls where the caller claimed to be from HMRC and asked them for their bank details so a tax refund can be made for a fee. HMRC will never ask you for a fee to provide any services including repayments of tax. If you cannot verify the identity of the caller HMRC recommend that you to report it to the police immediately.

5. SMS text messages
If you receive an SMS text message claiming to be from HMRC asking you to contact any number other than Tel 0845 300 3900, you should not respond. This warning only applies to any SMS text messages from HMRC. It does not apply to any messages left in person by HMRC officers asking you to ring them back at your local office.

There is more information on this at;
Reporting HMRC related phishing emails
HMRC related scam examples
What you can do to protect yourself online

A Full Enquiry – This is an extensive examination which considers all aspects of the self assessment tax return. It will involve a comprehensive review by HMRC of all books and records underlying the entries made on the return. It will also feature the issue of a notice under S9A/S12AC TMA 1970 or paragraph 24(1) Schedule 18 FA 1998.

An Aspect Enquiry – This is where HMRC enquires into one or more aspects of the self assessment tax return which may involve clarification of particular entries, to detailed consideration of whether those entries have been treated correctly for tax purposes. It may involve a check on the records upon which the particular entries were based. It will also feature the issue of a notice under S9A/S12AC TMA 1970 or paragraph 24(1) Schedule 18 FA 1998.

PAYE/VAT Compliance Visit Cover – This is where HMRC wish to carry out a routine PAYE/VAT Compliance Visit where it is agreed that professional representation is necessary and the matter cannot be dealt with by the client alone. The limit of indemnity is £1,000 per claim.

Pre-Dispute Cover – This is where it is considered necessary to involve us following a routine inspection/ compliance visit by HMRC. The limit of indemnity for Predispute cover is £1,000.

VAT Disputes – This is a challenge by HMRC to the accuracy or completeness of returns submitted. It will feature a disagreement over both the way in which VAT has been operated and over the amount of VAT due.

PAYE/NIC Disputes – This is a challenge by HMRC to the accuracy or completeness of returns submitted in accordance with Pay As You Earn Regulations. It will feature a disagreement over both the way in which PAYE has been operated and over the amount of PAYE/NIC due.

IR35 Disputes – This is where HMRC states a client should be subject to the IR35 legislation following a PAYE compliance visit or the issue of a notice under paragraph 24(1) Schedule 18 FA 1998. It will feature a disagreement over whether this legislation applies.

A Business Inspection Notice – This is where HMRC exercise their power to request entry to a person’s business premises and inspect the business premises, assets, goods and documents. It will feature the approval of an “authorised officer” of Revenue & Customs and the issue of an Inspection Notice for a short notice or unannounced visit or where the proposed inspection has been approved by the First-tier Tribunal.

Code of Practice 8 Investigations – This is where Specialist Investigations of HMRC launch an enquiry and issue Code of Practice 8 Booklet. The limit of indemnity for SI cover is £5,000.

Application for a Judicial Review – This is an application (during the course of a valid claim under the policy) to the Administrative Court to challenge a decision of an official where no other legal recourse is available to the applicant. The limit of indemnity for Judicial Review cover is £5,000.

Well the advice we have always received says stick to what you know, and let the experts advise on IR35 – and its advice that we agree with. After all, IR35 is a matter of employment law – not accounting and not tax. So if you have an accountant who offers a free IR35 review, its worth asking them how valid their opinion is, and what support they will give you if their opinion turns out to be wrong.

If you are going to get a IR35 contract review undertaken, make sure it includes;

* Completion of a questionnaire to pick up the working practices
* Discussions between the reviewer and the contractor to clarify points
* A review of all the documents provided with the contract, including schedules, codes of practice, self-billing arrangements, confidentiality requirements etc. Ideally where there is a job specification, written by the client, this too should be reviewed.
* Any changes needed should be negotiated with the backing of in-depth knowledge of case law precedent. Note, most accountants do not negotiate changes because of implications under the Managed Service Company legislation.

Kate Cottrell of Bauer and Cottrell, the employment status specialists, has seen this from the inside. Take a look at her interesting article;
Why many IR35 contract reviews just got more worthless