Latest Blog Posts

This week the HMRC got one step closer to collecting millions in unpaid tax from contractors who have used offshore schemes to run their contracting work through (usually through some form of loan arrangement). Commonly known as BN66, a challenge was made to the HMRC that backdating the collection of taxes on contractors who have EVER used an offshore scheme was unlawful.

Despite taking nine months to reach a decision as to whether Section 58 of the Finance Act 2008 is “incompatible” with Article 1 of the European Convention of Human Rights, the summary was a quick one. The judge concluded: “There has been no conduct on the part of the State fiscal authorities that has made the retrospective application of the amended legislation to his tax affairs an infringement of his Convention rights.”

A separate challenge by PWC is still under way.

The HMRC will only commence the collection of taxes once this case, and the PWC case, are settled, which may take some time yet.

It looks to us though that the writing is on the wall. The HMRC need to protect their tax base, and if need be this is likely to go all the way to the Supreme Court. Our advice is;
(1) Don’t ever use an offshore scheme for contracting – the risks are too great;
(2) If you have used an offshore scheme in the past, there is little you can do. If (or when) the HMRC win this, you will be liable for unpaid taxes dating back to 1987. You will just need to wait and see if the HMRC contact you;

We are now seeing evidence of the HMRC investigating individuals who have used offshore schemes last year, to collect unpaid taxes (these are our clients who switched to us from offshore providers), so this is now starting to get some momentum.

For those who have ‘On Account’ payments due for the 2010/11 personal tax year (the second instalment is due by 31 July 2011) you may not receive your payment reminder notice from the HMRC. This is because they have run out of paper. The HMRC estimate this will affect around 500,000 taxpayers. They have issued a statement claiming their “forecasting arrangements” used for previous years has not worked out so well this year, and that they “will now ensure that they understand the reasons for this and will be fully prepared for any future rises.”

So if you do need to make On Account payments for personal tax, just remember about the next payment deadline of 31 July 2011. Note you will only be asked to pay interest on the tax due on the second payment on account if you still haven’t paid it more than 30 days after you receive your statement. And if you are not sure how much to pay, you can always check it out online through the HMRC website.

You can read the HMRC news release here – HMRC Runs Out of Paper

At the moment, we are unable to file any Corporation Tax returns for companies with a year-end date after 31 March 2011, due to a problem with the HMRC online filing system. The HMRC have stated they will not be ready to accept post-31 March 2011 returns until it updates its online portal in October.

HMRC reports that because of the reduction of the Corporation Tax rate to 26% (20% for small profits rate) from 01 April 2011, it will need to update its software to account for these rate changes. However they will not commence this work until these rate changes receive Royal Assent (expected in July 2011). As a result, the HMRC estimate their online filing system will be updated around October 2011.

To further complicate matters, the introduction of mandatory efiling means we can no longer file our clients annual accounts and Corporation Tax returns early on paper. So, we are forced to use the HMRC online filing service that currently does not work for clients with a year end date after 31 March 2011.

As you can imagine, there has been outcry from the masses regarding this; people have talked of writing their MPs, taking it up with their professional bodies and broadcasting their displeasure to the media.

We are hoping that due to the unacceptable nature of the situation, the HMRC will find a better way to do it.

IR35 will always be an important issue for contractors, and the implications of it need to be understood, and an appropriate plan put in place. This is just a brief discussion on some of the issues that come up – if you want more information please get in touch.

(1) “The IR35 Investigation”
Firstly we need to dispel the myth that you may be audited for IR35 from the get go. This does not happen – first you will get a Compliance Visit. A Compliance Visit is like an overall health check of your company by the HMRC to see that you know what you are doing, and that you are meeting your tax and filing obligations. Its only after this, the inspector may decide you have a potential IR35 problem.

(2) A low salary = high chance of being audited
There are two schools of thought on this, each with opposing views. It has been our experience that paying yourself a low salary does not increase your chances of being audited. In fact, if you paid yourself a higher salary the HMRC could take the view you have something to hide. The other school of thought says the HMRC will pursue the cases where they can make the highest PAYE/NIC collections, and this will be with the contractors who pay themselves a low salary. This has not been our experience.

(3) Low risk approach
So long as you are genuinely in business of your own account, IR35 will not be an issue for you. Ensure your contracts, and your actual working practices, reflect this. You have no right to employee privileges with your client, you have no employment rights, and the success of your contracting business lies solely with you, and your ability to seek out new sources of revenue. In the event you are selected for an IR35 audit (which is be only after a Compliance Visit) you may find it useful to have IR35 insurance in place to cover the professional costs of having an expert represent your position. The insurance is usually £100-£120 per year – a small price to pay for peace of mind. Contact your account manager if you want to arrange insurance, we have a list of suppliers that our clients have used in the past.

As you know we have recently started up a new accounting service called Capital City Accountancy Limited. Since our clients are great ambassadors for our accounting service, we wanted to engage your help while giving you a chance benefit from the growth in this new accounting service. There are two ways you can do this.

1. We have doubled the referral discount!
If you refer a friend to Capital City Accountancy, you will enjoy a generous 20% discount off your monthly fee. This discount stays in place for as long as your friend stays using our Capital City Accountancy service. Be quick though, we are only running this offer for the month of July, so get as many of your friends to join Capital City as possible during the month of July and enjoy a 20% discount for as long as they contract using our accounting service.

2. ‘Like’ us on Facebook
We would also love it if you would ‘Like’ us on Facebook. This will help us gain more visibility on the social network which is an area that works well for us in spreading the word about our accounting service. To help you decide that you really want to ‘Like’ us, we are giving away 20 sets of double movie tickets. If you win and live outside the UK, no problem, we will buy you a couple of movie tickets in whatever country you like!
Its easy to ‘Like’ us;
(a) Either go to our home page, www.capitalcityaccountancy.co.uk, and click our Facebook ‘Like’ button;
(b) Or go straight to www.capitalcityaccountancy.co.uk/like and click our ‘Like’ button which you may find easier if you reading this email on your smartphone;

We always monitor with a very keen interest the latest happenings with IR35. This week the HMRC suffered another defeat as IT contractor Elaine Richardson, trading as ECR Consulting, has won her IR35 case that could have cost her £50,000.

In their ruling, the tribunal judges concluded, “It is clear to us that ECR is a genuine business and therefore not a target of the IR35 legislation.”

The tribunal applied three status tests to ECR Consulting – mutuality of obligation, substitution, and control – to get a clear picture of her working relationship with her client Vertex and concluded: “ECR operates from a dedicated business area at her home. It has a company domain and website. ECR advertises its services and is a member of the PCG. It has retained reserves and invested in development and has over the years taken on fixed price work for a variety of clients.”

Interesting, Accountax Consulting’s Matt Boddington, who represented ECR Consulting at the tribunal said “There are thousands of these cases, but somehow they never seem to make it into HMRC’s manuals. The last few IR35 cases that have been prosecuted by HMRC – there just does not seem to be the appetite that there was a few years ago. It’s almost as if HMRC is weary of the legislation themselves.”

A new accounting firm for contractors.

We are very pleased to announce the launch of a new accounting firm specialising in the contractor and freelancer market, called Capital City Accountancy.

Capital City Accountancy has been formed off the coat-tails of No Worries Company Services Ltd. No Worries is an established accounting firm specialising in the contractor and freelancer market, and has been operating since 2005. The target market had always been South Africans, Australians, and Kiwis who have come over to the UK to earn some money contracting, while also enjoying the sights of Europe. But research showed the company name did not appeal to British and European contractors – it sounded too relaxed and informal.

Capital City Accountancy took all the great things No Worries has learned from contractors since 2005, and has packaged them up into two excellent offers that present unrivalled service delivery and performance, at a price that competitors will find very challenging to meet..

We are early adopters of technology, we are a small, nimble organisation, and most importantly we know how to deliver personal service and sound advice

On 23 March 2011, George Osborne presented his second Budget. While the dust has now settled on this, we have been waiting to hear about any impending changes to income shifting (also known as S660).

In summary the Budget was not too bad for contractors. While there was the usual shifting of personal allowances, and higher rate earnings bands, the overall affect is about neutral for our clients. And the drop in Corporation Tax from 21% to 20% effective from 01 April 2011 will be gratefully welcomed by all our clients.

So here goes a summary of the changes that will impact our clients who work using their own limited company.

IR35 is staying for the time being
This issue was being closely watched, but for the time being the main message is it is still business as usual for IR35. The government has decided to retain IR35 as abolition would put substantial revenue at risk. They have announced they will however make improvements in the way IR35 is administered – which we will of course be keeping an eye on.

Corporation tax reduced
As announced in last year’s Budget, the small company rate of corporation tax paid by contractor limited companies falls by 1% to 20% from 1st April 2011.

VAT registration threshold changes
The threshold for which VAT registration is compulsory usually increases a little every year. This year the threshold is set at £73,000 with effect from 01 April 2011.

Increase in the mileage rate claimable
From 6 April 2011 the rate you can claim for mileage (when using your own car for business travel) was increased from 40p per mile to 45p per mile for the first 10,000 miles of business travel in the tax year. The rate for mileage above 10,000 miles remains at 25p per mile.

Non-domiciled taxation review
Personal taxation on individuals not domiciled (but resident for tax purposes) in the UK is complicated. The government will start a consultation process on changes to non-domiciled taxation from April 2012. So we will have to live with the existing rules for at least another year.

Disguised remuneration
Legislation will be introduced from 6 April 2011 to tackle arrangements using trusts (and other vehicles) to reward employees who seek to receive payments for services in a tax efficient way (often using some form of loan arrangement with an offshore company). We have long held the view these should be given a wide berth, and the legislation here just helps the HMRC enforce the position that contracting using an offshore company, and receiving some money in the form of a loan, is a VERY bad idea.

Income Shifting (also known as S660)
A typical example of this is where a husband contracts full-time using a limited company of which both he and his wife are shareholders (or vice versa of course!), and both parties receive dividend income. This can be beneficial if the contractor’s partner earns less than the higher rate earnings band. No special announcements have been made about this, and although we know the HMRC dislike this, it remains an opportunity worth consideration.

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 2010/11, and will also explain how to make the most of the tax planning opportunities you have available.

Just as a quick refresher, the current 2010/11 tax year started on 06 April 2010, and will finish on 05 April 2011.

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 2010/11, 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 2010/11, 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 2010/11” 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 £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 2011;
- If you can’t live without some personal cashflow, then consider loaning yourself money from your ltd company, and then after 06 April 2011 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 2011;

(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.

Your retained earnings is not simply the money left in your company bank account. Most of this will be there to cover your company tax bills.

- Dividends can only be paid out of after-tax profits;
- 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 if you are at all unsure about your level of retained earnings 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 2011. Any dividend payments that are made AFTER 05 April 2011 cannot be retrospectively applied to the 2010/11 tax year, and instead will apply to the 2011/12 tax year.

(5) Using your pension
Making contributions into your own pension fund is a good way of tax efficiently extracting funds from your company. The downside of course is the funds are tied up in a pension fund for a long time. If you are thinking about making pension contributions, ensure this is done before 05 April 2011.

(Sourced from PCG http://www.pcg.org.uk)

Tribunal cites lack of ‘mutuality of obligation’ as key to ruling in favour of taxpayer.

The first tier tax tribunal has awarded in favour of freelance engineering contractor and PCG member Mark Fitzpatrick against Her Majesty’s Revenue and Customs (HMRC) over controversial tax status law IR35.

Mr Fitzpatrick was officially cleared of using his limited company MBF Design Services to avoid tax, in reference to his time working as a freelance contractor for Airbus.

The tribunal reported a knock-out case victory across all three IR35 pillars noting a lack of ‘Mutuality of Obligation,’ (MOO) as a significant factor in their decision. Key MOO points in favour of MBF included:

· Airbus could cancel MBF’s contract without notice.

· Specifically there had been occasions where due to computer failure contractors were sent home without pay whereas employees had to remain on-site.

Mr Fitzpatrick, represented in court by Accountax, relied on support via tax investigation insurance from PCG, the leading trade association representing the freelance industry to make his defence – this funded his seven year legal battle.