The FreeAgent Blog
If you’ve never heard of IR35 then count yourself lucky. If you have, and the very mention strikes fear into your heart, then read on - we can help!
In simple-ish terms IR35 is tax legislation introduced by the UK government designed to tax "disguised employment" at a rate similar to employment.
This predominantly applies to contractors working with clients through intermediaries, such as a personal service company, where they could be seen to be acting as employees.
If you are operating under an IR35 contract the legislation requires that income tax and NI is due on the income received (less certain allowable expenses) as if that income had been paid as salary. This net income amount is called the deemed payment. Typically, if less actual salary has been paid than the deemed payment, the shortfall in tax and NI has to be paid over at the end of the year.
Who said tax doesn’t have to be taxing, huh?
To help with this we’ve created a new IR35 report in FreeAgent which calculates the accumulated deemed payment from your IR35 projects, helping you plan and set your monthly salary so there will be no additional deemed payment to account for at tax year-end.
How it works
If you’re working on a project caught under IR35, simply tick the IR35 box when you create the project in FreeAgent. This will mean that any income and expenses associated with the project are included in the calculation.
The new IR35 report will then be available in the Accounting > Reports section. This includes a month-by-month look at the accumulated income and allowable expenses across all IR35 projects and the calculated deemed payment as a result.
Learn more about the new IR35 report.
Until next time, Roan and the team at FreeAgent
Earlier today the Chancellor presented the Autumn Statement for 2015. Here, our Chief Accountant, Emily Coltman FCA, takes a look at the changes that were outlined in both the Chancellor’s speech and in the detailed report published by the Treasury, and what they could mean for small businesses.
The Annual Investment Allowance is due to fall from £500,000 to £200,000 on 1st January 2016. Today’s announcement confirmed that after this date it will remain at £200,000 until the next general election.
If you run a limited company based in Northern Ireland, then you could see your Corporation Tax bill fall from 20% to 12.5% of the company’s profits from 2018. That’s a request put forward by the Northern Irish parties, which the UK government is considering - so at this stage it’s still on the drawing board.
And if you pay small business rates, the rate relief scheme has been extended for another year.
The not-so good
If you own a second home and you plan to sell it, then instead of being able to wait until 31st January after the end of the tax year to pay your capital gains tax, from April 2019 you’ll need to pay all or part of that tax within 30 days of the disposal.
Noticeably, several issues that many commentators had been expecting to hear about in the Autumn Statement were not addressed. These included:
- Dividend tax. It appears that the dividend tax will be levied as announced in the Summer Budget.
- IR35. Nothing was said about IR35 legislation specifically, and while the Chancellor did mention "taking action on disguised remuneration" in his speech, I believe this refers to the use of payments through trusts and pension schemes, instead of salary, to reward employees.
- The rumoured introduction of restrictions to contract lengths wasn’t mentioned. This would have meant that contractors would have had to join their clients’ payroll after only one month of engagement. Thankfully it would appear that this was a red herring.
- Trivial benefits. It had been hoped that legislation would confirm that trivial benefits need not go on form P11D. This has not been included in the Autumn Statement, though it may be addressed in a future Finance Bill.
The contractor world has been holding its breath for a while about the possible restriction of tax relief on travel and subsistence costs and how that might work. While there was no final guidance on this, it was briefly referred to in paragraph 3.20 of the Autumn Statement report:
“As confirmed at Summer Budget 2015, the government will legislate to restrict tax relief for travel and subsistence expenses for workers engaged through an employment intermediary, such as an umbrella company or a personal service company. Following consultation, relief will be restricted for individuals working through personal service companies where the intermediaries legislation applies. This change will take effect from 6 April 2016.”
The emphasis in the paragraph above is mine.
One possible interpretation of this is that the proposed restriction will apply to:
- individuals working through umbrella companies
- individuals working through personal service companies, but only for projects where IR35 applies
If the second point is correct then this could be very good news, as it would eliminate the subjective and overly stringent “supervision, direction or control” tests that were initially proposed. In my view it is also much easier for all parties concerned to apply the same set of tests to determine whether a deemed payment is required and whether tax relief can be claimed on travel and subsistence, than to use two different sets of tests.
To quote from the report:
“By 2020, most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account... This will not apply to individuals in employment or pensioners, unless they have secondary incomes of more than £10,000 per year from self-employment or property. The government will consult on the details in 2016.”
This means that instead of filing an annual tax return, small business owners will need to begin to file quarterly reports online to HMRC. We’ll be closely watching how this develops and taking part in the consultations as far as possible.
Unlike the Summer Budget, the Autumn Statement contained very little that will be relevant for small businesses. It still remains to be seen what was meant by paragraph 3.20 of the report, as quoted above, but it is a great relief that the reports of contractors having to join the payroll after a month now seem to be no more than rumours.
The Autumn Statement has without doubt become a mini-Budget in recent times, and given the changes that have come over the horizon for freelancers and contractors in the past year, this Wednesday’s Autumn Statement could bring extra fireworks. So what might we have in store?
The so-called “dividend tax” - upcoming changes to the rules for how dividend income is taxed - were announced at the Summer Budget in July. HMRC has since brought out explicit guidance for how this will work.
I wouldn’t expect to see any major changes to dividend tax in the Autumn Statement, as it’s a fairly new initiative and a step towards making the route of paying a low salary and a high dividend less attractive. While the introduction of dividend tax came as a blow to some, the majority of the contractor world’s fury of late has been reserved for the consultation paper on changes to tax relief on travel and subsistence.
Travel and subsistence
Under the proposed changes to travel and subsistence, contractors who are subject to supervision, direction or control by a third party while they are working would not be able to claim tax relief on their travel and subsistence costs to that workplace.
HMRC is currently analysing the public response. The Chancellor may announce a softening of these rules in the Autumn Statement, accompanied by the message that “we have listened”. On the other hand, I would not be surprised to see the changes go through as proposed on the basis that the government wishes to create a “level playing field” between employees and contractors.
This hoary chestnut could well reappear in the Autumn Statement. In the past, HMRC has acknowledged that IR35 needs reform. Many bodies are calling for it to be abolished altogether, but I would not expect to see this happen; how to tax quasi-employment is too much of a political hot potato and too much time and money has already been invested in IR35, for example the development of the ill-fated business entity tests.
If tax relief on travel and subsistence does have to be restricted (and I am yet to be convinced that this is the right course of action) it would be a great step forward to combine IR35 reform with the rules for restriction of travel and subsistence tax relief, rather than having two separate sets of definitions. This way, tax relief would not be available on journeys to workplaces where the contract is within IR35.
The release of so-called “trivial benefits” from reporting obligations has been much discussed but not yet implemented. I would very much like to see this step taken, since it is in the direction of simplification and reducing the burden on small businesses.
My hopes for the Autumn Statement
In my perfect world, the Chancellor would be announcing a number of changes in the Autumn Statement that would radically simplify the tax system. Ideally, these would include:
- the combination of income tax and National Insurance
- a threshold to exempt small businesses from having to charge local VAT on their digital sales to EU consumers
- simplification of VAT and removal of the confusing distinction between “zero-rated”, “exempt” and “outside the scope” sales
- simplification of the tax return and income tax calculations
Of course, we’ll all have to wait until Wednesday 25th November to find out what this year’s Autumn Statement contains. We'll be live tweeting the announcement as it happens - you can follow the action on Twitter. Hope to see you there!
When you’re starting out in business, it can be tempting to run all of your finances through your personal bank account, rather than going through the hassle of setting up a separate account for your business.
While the idea of managing your business cash in the same place as your personal finances may sound like it could make life easier, the reality is that it’s actually a very risky strategy, littered with potential pitfalls. HMRC strongly recommends that small business owners keep their business and personal finances separate, but if that’s not enough to convince you, here are three other great reasons why you should take the time to set up a dedicated bank account for your business finances.
1. You’re more likely to pay the right amount of tax
If you combine your business and personal finances in a single bank account, you could find yourself paying an incorrect amount of tax by making one (or more) of the following mistakes:
- You may accidentally count non-taxable income (e.g. cash gifts from your family) or income that’s already been taxed as part of your business income. This will mean that you’ll pay too much tax.
- When you look back at your bank transactions from earlier in the year you may find it difficult to remember which payments were for business and which were personal. If you miss out some business costs when you come to add up the figures for your tax return, you’ll pay too much tax because your profit figure will be higher than it needs to be.
- If you accidentally include non-business costs in your tax return, you will reduce your business’s profit figure too far, and this, in turn, will reduce your tax bill incorrectly. HMRC takes a very dim view of this kind of mistake; if you underpay your tax, you’ll have to make up that shortfall and you may also be charged interest and face penalties for paying too little tax, which could put your business at risk.
Keep your business and personal finances separate and you’ll be far more likely to record your costs correctly on your Self Assessment tax return and pay the right amount of tax to HMRC.
2. Your business cash will be safer
Using one bank account for all of your personal and business finances means that you could easily lose track of how much money you have for each purpose. Your bank balance may seem healthy enough for you to make a significant personal purchase, for example, but you may find you need that cash in a couple of months' time to pay a business tax bill. By having separate bank accounts you’ll avoid any cash flow problems that may arise from accidentally spending business money on personal purchases.
3. You’ll give a more professional impression to customers
No matter how small your business is, your customers want to be certain that you will provide them with a top-notch service, deliver what you promised on schedule, and be there to resolve any queries. If you ask them to pay you into your personal bank account, your customers may feel that they’re not dealing with a “real” business. A bank account that’s in your business’s name, on the other hand, is likely to give a far more professional impression to customers.
Ultimately, setting up a dedicated business bank account is a very sensible move if you’re running a small business. Not only will it help ensure you pay the right amount of tax and provide extra security and protection for your finances, it will also leave customers with a professional impression of your business when they come to pay you for your work. In addition, you’ll have clearer, more understandable records of the money coming in and out of your business - and that could be invaluable when it’s time to complete your Self Assessment tax return.
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