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The Construction Industry Scheme (CIS) sets out the rules for how payments to subcontractors for construction work must be handled by contractors in the construction industry.

CIS covers construction operations carried out in the UK. The rules of the scheme define the types of work that are classed construction operations. But as a general rule, the scheme includes almost any work that’s done to a permanent building, temporary structure, or civil engineering work or installation (such as roading / bridge building etc).

Some examples of the types of construction work that are covered by the scheme include jobs like:
• site preparation
• general construction – bricklaying, roofing, plastering and so on
• alterations and extensions
• repairs and refurbishment
• decorating
• dismantling work
• demolition

There are two forms of the CIS Scheme, CIS for Contractors, and CIS for Sub Contractors.

CIS for Contractors

Very few of our clients fall into this category. It applies if you run a business that engages subcontractors for construction operations – a ‘mainstream’ contractor.

Under CIS the contractor is required to do the following;
• Register with the HMRC as a contractor
• verifying your subcontractors with HMRC
• paying your subcontractors in the right way – making deductions if necessary
• paying over deductions to HMRC
• giving subcontractors deduction statements
• sending monthly returns to HMRC
• keeping proper records

CIS for Sub-Contractors

Most of our clients who are impacted by CIS will fall under this category. You are a subcontractor if they agree to do construction work for a contractor, and don’t have any sub-contractors working for you.

Under CIS the sub-contractor is required to do the following;
• Register with the HMRC as a sub-contractor;
• Collect a deduction statement from their contractor each month;

How a CIS registered Sub-Contractor gets tax deducted

When a CIS registered sub-contractor is paid, they will receive 80% of their invoiced amount. The main contractor holds onto 20%, and pays it over to the HMRC on behalf of the sub-contractor every month.

Ensure the contractor has deducted the correct amount when paying the sub-contractor. A contractor will deduct 20% from the total gross invoice less;
• any VAT they’ve charged
• materials
• consumable stores
• fuel used – except for travelling
• plant hire
• manufacturing or prefabricating materials

Dealing with Taxation

When a sub-contractor is paid, the contractor deducts 20% and then pays 80% to the sub-contractor. The contractor then pays this tax deduction across to the HMRC every month. The system essentially means the contractor is acting as a tax collector on behalf of the HMRC.

When the sub-contractor works through their own limited company, the total deductions suffered by the sub-contractor are reported in the end of year PAYE return.

You can offset during the tax year all CIS deductions taken from payments made to the company against any PAYE and Class 1 NICs due or CIS deductions the company has made from its own subcontractors.

HMRC will repay any deductions that the company is not able to set off against its PAYE liabilities during the tax year when the company sends in its Employer Annual Return (form P35) at the end of the tax year.

More Information

HMRC guidance titled Construction Industry Scheme – Guide for contractors and subcontractors – CIS340

Early in April 2010 the Home Office announced significant changes to the Tier 1 visa requirements.

The changes mean that individuals with a Bachelor degree are once again eligible and those who have earned £150,000 or more will automatically qualify even if they hold no formal qualifications.

Note that the minimum threshold for points awarded for previous earnings has increased from £20,000 to £25,000.

Also, the threshold for the age category has been extended to allow points to be claimed for those up to the age of 39.

The initial grant of the Tier 1 visa is now reduced from three to two years, with a three year extension subject to meeting the requirements.

Note that the above does not apply to those currently in the UK under -

• Tier 1 (General) with leave granted before 06 April 2010
• The Highly Skilled Migrant Programme (HSMP)
• Writers, Composers and Artists
• Self-employed Lawyers

For further information, or if you would like to speak to an experienced UK visa advisor for free initial advice, please call Richard on 0207 731 1117 or email richard@no-worries.co.uk

Contractors working in the UK who want to save tax by working through an offshore tax scheme now face enormous uncertainty on their UK tax obligations.

These offshore schemes work by diverting income earned in the UK through a foreign company/bank account, which is then routed back to the UK thus avoiding most UK taxes. Typically the contractor earns around £12,000 in salary (which is taxed in the UK), and the remaining funds paid to the contractor are in the form of non-repayable loans (which are not taxed).

While the effects of such an arrangement reduce the contractors tax liability, other unintended effects are the contractor has difficulty proving their earnings for credit applications (such as a mortgage), and importantly for our clients, the loan component of payments received are not recognised by the Home Office if earnings needs to be proved for a Visa application.

Her Majesty’s Revenue and Customs (HMRC) strongly dislike offshore tax schemes and as they have spelt out in Budget Note 66 (released on 12 March 2008 – see www.hmrc.gov.uk/budget2008/bn66.pdf ) they intend to apply retrospective legislation to get their fair share of taxes off contractors who have used (or are using) such schemes. The legality of applying retrospective legislation has been challenged in the courts, but on Thursday 28 January 2010 the Royal Court of Justice ruled the retrospective effect of BN66 is not unlawful.

This is very bad news for contractors who have EVER used an offshore scheme – no matter if they used the scheme for one day or two years, the HMRC are able to catch contractors going all the way back to 1987 to collect both fines and backdated taxes.

But this all goes back to the saying “if it sounds too good to be true, then it usually is”. If you live in the UK, work in the UK, and get paid for the work that you do in the UK then there has never been a legal way of avoiding paying UK taxes. While the offshore scheme providers have slipped through in the past, we think with the current economic climate the HMRC will concentrate on collecting all the tax they can, and contractors who have worked (or are working) through offshore scheme providers now face the enormous risk that they will be targeted.

Our advice to UK contractors who use an offshore scheme provider is that they contact the offshore company to determine what their likely UK tax liability will be in light of this legislation. They should also be getting regular updates from their offshore scheme provider on the risks they face, and updates on new developments as they come to light.

For UK contractors who want to work legally and tax efficiently in the UK, using their own UK limited company is still their best option, and any accountant will be able to explain the benefits of doing this. If you would like any information regarding our accounting service please take a look at www.no-worries.co.uk/company-management-howitworks.asp, or else feel free to call.

The budget was announced by the Chancellor, Alistair Darling, on Wednesday 24 March 2010. For small businesses, the Budget had very little real effect and there were only minor changes from what had previously been announced. Here is a summary of the changes we think apply to our customers.

Corporation tax rate for small companies

The corporation tax rate for small companies (companies with annual profits lower than £300,000) remains at 21%. There is still a proposal in place to change this to 22% next year, but this will depend on the outcome of this year’s general election (and the Conservative party has promised to reduce this rate to 20% as soon as possible, if elected).

Annual Investment Allowance

The Annual Investment Allowance (AIA) has been doubled to an annual spend of £100,000. In practice this measure will not impact our clients. The Annual Investment Allowance is currently £50,000, and enables businesses to claim full tax relief on capital expenditure in the year the capital items were purchased. Very very few of our clients have ever spent more than £50,000 on capital items in a single year.

Personal tax rates and allowances

There are no changes to the personal allowance or rates of tax. The only addition is the new tax band of 50% that applies to income over £150,000. The personal allowance remains at £6,475, and any income above this is taxed at;
£0 to £37,400 – 20%
Then up to £150,000: – 40%
Then over £150,000 – 50%

Entrepreneurs’ relief

This is relief from capital gains tax resulting from the disposal of a business – and is very useful of a number of our clients when they decide to wind up their business. The relief currently applies to permit a maximum 10% capital gains tax charge on gains of up to £1 million (the lifetime allowance). This life time allowance has now been increased to £2 million.

VAT Changes

While no changes to the standard VAT rate of 17.5% were made (and none were expected), there have however been small adjustments to the VAT registration thresholds. From 1 April 2010 the taxable turnover threshold increases to £70,000 from its current threshold of £68,000 – this is the threshold above which you MUST register for VAT, calculated on a rolling 12 month basis. The threshold which determines whether you may apply for VAT deregistration increases to £68,000 (from £66,000).

If you have a UK student loan, there are some important points you need to keep in mind as there will be implications on your personal tax liability.

Student loan repayments will start on the 6th of April after you leave your course. You are required to pay 9% of your income towards your student loan, once your total gross income for the tax year exceeds £15,000. As most of our clients are a Director of their limited company and required to complete a personal self assessment tax return, the student loan repayments will be calculated when you complete your personal tax return for the year. You will be required to make the payment to the HMRC and they will forward this to the Student Loans company. An example of how this could impact on you is as follows:

If you gross earnings for the year are £40,000 (from dividends and salary through your limited company)
- £40,000 – £15,000 = £25,000 (earnings over the repayment threshold)
- £25,000 x 9% = £2,250 (approximate student loan repayment required based on earnings of £40,000)

So, in this situation you would be required to pay £2,250 towards your student loan. As this a personal repayment, the money must be paid from your personal bank account, not your company bank account.

Criminals like to use the HMRC in an attempt to steal identities, and access details. The methods fraudsters use to obtain the information they want is constantly changing, so HMRC provides regular updates on the type of scams it is aware of. The main risk involves the stealing of identity or access details.

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;

Often the email scams will attempt to convince you that you are due a tax refund. Others will say that due to new security measures, you need to supply your HMRC user ID and password. Please delete these emails as soon as you receive them.

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

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 2009/10, and will also explain how to make the most of the tax planning opportunities you have available.

Just as a quick refresher, the current 2009/10 tax year started on 06 April 2009, and will finish on 05 April 2010.

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 2009/10, 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 2009/10, and bank interest from your personal bank accounts. If your total gross earnings from ALL sources exceeds £43,875, then you will face a personal tax charge on any dividends you received from your limited company above the £43,875 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 2009/10” 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 to within a month – 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 £43,875, it will calculate what personal tax charge you face on the dividends you received;

If you have earned over the £43,875 threshold, and want to limit the dividend tax charge you face, you can;
- Stop paying yourself altogether from your ltd company until 06 April 2010;
- If you can’t live without some personal cashflow, then consider loaning yourself money from your ltd company, and then after 06 April 2010 repay the loan back to the company;
- If you can’t live without some personal cashflow, then you could also consider drawing some hard currency goodwill from family / friends until 06 April 2010;

(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 £43,875, then it will calculate how much more you can pay yourself before you reach the £43,875 threshold. You should aim to pay yourself up to the threshold every year if you can afford to (see Retained earnings, below). If your total gross earnings from all sources does not exceed £43,875 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 earnings

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 earnings to pay out a dividend.

- Dividends can only be paid out of company retained earnings;
- Your company retained earnings 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 £43,875.

For our Club Gold clients, we issue a P&L statement every quarter showing your company retained earnings. However, if you are at all unsure about this, then please just 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 £43,875 threshold, you need to ensure the dividend payments LEAVE your business bank account on or before 05 April 2010. Any dividend payments that are made AFTER 05 April 2010 cannot be retrospectively applied to the 2009/10 tax year, and instead will apply to the 2010/11 tax year.

Often our clients find themselves doing a small amount of administration from home – not really substantive duties – just a bit of paperwork in the evenings, and checking emails.

With the world turning digital the tax office recognises that you can in fact do some effective work from home, and there is a small but useful tax-free claim you can utilise.

The HMRC will allow you to claim £3 per week (or £39 a quarter, or £156 per year) with no receipts needed. It doesn’t sound like much, but for the sake of putting four quarterly entries into your ‘my expenses’ page, you will save yourself £33 in company tax. And if you are a higher rate tax payer, you will also reduce your personal tax liability by £39. All for less than five minutes work in updating your expenses within your No Worries online account.

What we suggest you do is claim this expense every quarter (£39) and call it “Homeworking £3 per week allowance” within your expenses page. Easy.

Where your limited company, rather than you personally, meet the cost of your training, the training exemption is very wide-ranging. Your limited company may pay for a wide variety of training costs without triggering any tax liability for the you. In fact the concept of ‘work-related training’ is drawn so widely that it can encompass almost any activity that is not purely recreational.

To ensure you qualify

- For any training courses or material that you require, ensure the contract/purchase order/purchase invoice contains your company name;
- Get your company to pay for the training directly from the business bank account

How not to qualify

More than likely, any claim you make for training will be disallowed in the following circumstances;
- You arrange for the training yourself, personally;
- You pay for the training from your personal bank account;

If these two conditions exist, in reality there is little point in making a claim for the training as a tax deductible expense, because in all likelihood it won’t be.

If you have a need for some short term funding, taking a loan from your company is straightforward, and can help plug any short term cash flow problems you may have. And if you are a higher rate tax payer in the current tax year and don’t want to attract the top end tax that your dividends do, taking a loan can often be the best way to go.

There are some rules though, and this brief guide gives you a quick outline of what they are. If you have any more questions about this, feel free to get in touch with us.

1: Loan less than £5,000

This is the simplest scenario. There is no personal tax benefit charge on taking a loan of less that £5,000 from your company, and this is a good way to get access to company funds in the short term.

2: Loan greater than £5,000

The tax office regard a loan of over £5,000 as a personal taxable benefit. Note the entire loan is assessed as a personal benefit, not just the amount exceeding £5,000. To eliminate the personal taxable benefit, you need to pay your company interest from your personal bank account on the loan balance at a rate of 4.75% (as at today – check http://www.hmrc.gov.uk/rates/interest-beneficial.htm to get the latest rate). This loan rate is set by the HMRC.

We suggest the loan interest is calculated and paid annually for every personal tax year the loan is outstanding (ie for each year to 05 April). The interest is calculated on the average loan balance for the year, and we can help you with this calculation. Please just ask us.
You will also need to draw up a loan agreement between yourself and your company to record the loan details, and interest payments that will be made. We can help you prepare this too.

IMPORTANT 1

The loan needs to be repaid back into your business bank account within nine months of your company yearend. So if your example you took a loan on the 01 July 2008, and your company year-end is 30 November 2008, then the loan needs to be repaid by 30 August 2009. You can find your company year-end date under the heading ‘Company year end’ on your No Worries online ‘My Company Operations’ page.

IMPORTANT 2

If the loan is not repaid within nine months of the company year end, the company will incur a tax charge of 25% of the loan balance outstanding at year end. This tax is ‘temporary’, and is repaid back to the company once the loan balance is settled.