Archive for May, 2014

Individual Savings Accounts

Friday, May 30th, 2014

 

Successive governments, concerned at the relatively low level of savings in the UK economy have over the years introduced various means by which individuals can save through a tax-free environment.

Individual Savings Accounts (ISAs) were introduced in April 1999 and the government has confirmed that ISAs are a permanent feature of the savings landscape.

 

What is an ISA?

ISAs are tax-exempt savings accounts available to individuals aged 18 or over who are resident and ordinarily resident in the UK. ISAs are only available to individual investors and cannot be held jointly.

ISAs are guaranteed to run for ten years although there is no minimum period for which the accounts must be held.

Investment limits

The 2013/14 annual ISA subscription limit is £11,520 of which not more than £5,760 can be invested in cash. There is no minimum subscription level.

 

Investment choices

ISAs are allowed to invest in cash (including bank and building society accounts and designated National Savings), stocks and shares (including unit and investment trusts and government securities with at least five years to run) and life assurance.

 

Types of ISA

Investors are able to invest in two separate ISAs in each tax year; a cash ISA and a stocks and shares ISA.

 

Tax advantages

The income from ISA investments is exempt from income tax. However the tax credits on any dividends are not reclaimable.

Any capital gains made on investments held in an ISA are exempt from capital gains tax.

 

Uses of an ISA

Many people use an ISA in the first instance, to save for a rainy day. Since they were first introduced people have used them to save for retirement, to complement their pension plans or to save for future repayment of their mortgage to give just a few examples. We have known young people, wary of commitment to long-term saving start an ISA and when more certain of the future use it as a lump sum to start another financial plan.

 

Junior Individual Savings Account (Junior ISA)

The government has introduced a Junior ISA which is available for UK resident children under the age of 18 who do not have a Child Trust Fund account. Junior ISAs are tax advantaged and have many features in common with ISAs. They can be cash or stocks and shares based products. The annual subscription limit is £3,720 for 2013/14.

How we can help

Please contact us if you would like any further information on ISAs.

Tax free gains

Thursday, May 29th, 2014

 There are a number of assets that you can sell at a profit without paying capital gains tax (CGT) on the sale. They include:

  • Any car that is owned personally, and not by a business.

  • Personal possessions worth up to £6,000 each. For example jewellery, paintings or antiques.

  • Stocks and shares you hold in tax-free investment savings accounts, such as ISAs and PEPs.

  • UK Government or 'gilt-edged' securities, for example, National Savings Certificates, Premium Bonds and loan stock issued by the Treasury.

  • Betting, lottery or pools winnings.

  • Personal injury compensation, and

  • Foreign currency you bought for your own or your family's personal use outside the UK.

 

Of course, if you make a loss selling any of the above, the losses would not be available to set off against other gains for CGT purposes.

There are also certain reliefs that you can claim to mitigate or defer CGT. These include:

  • Business Asset Roll-Over Relief – This applies when you dispose of some types of business asset, which you intend to replace. You may be able to 'roll-over' or postpone the payment of any CGT that would normally be due.

  • Incorporation Relief – If you incorporate your business, that is, you transfer your business to a company CGT may not be due at that time.

  • Gifts Hold-Over Relief – You may be able to get this relief if you give away a business asset. You can postpone all or part of your gain until the asset is sold or disposed of by the person you gave it to.

  • Disincorporation Relief – When a business is transferred from a limited company to the shareholders, it is known as disincorporation. The shareholders continue the business in an unincorporated form – as a partnership or sole trader.

If you are thinking of selling assets that you are concerned may result in a tax charge please contact us for an opinion. Often there are planning opportunities that can be legitimately employed. The key is to plan the transaction carefully to maximise use of reliefs available.

Homeworking and Tax Relief for Employees

Wednesday, May 28th, 2014

Over the last ten years technology has advanced massively. It was not so long ago that mobile phones were the size of a brick. Now emails and the internet can be accessed on the move. However, whilst technology has moved on, travelling has become more and more difficult. Homeworking has become the answer for many but how have the tax rules kept up with these changes?

 

Your status is important

The tax rules differ considerably depending on whether you are self-employed, as a sole trader or partner, or whether you are an employee, even if that is as an employee of your own company. One way or the other though, if you want to maximise the tax position, it is essential to keep good records. If not, HMRC may seek to rectify the tax position several years down the line. This can lead to unexpected bills including several years worth of tax, interest and penalties.

This factsheet considers the position for employees.

 

General rules

Generally, any costs paid on behalf of, or reimbursed to, an employee by their employer will be taxable. The employee will then have to claim the personal tax relief themselves and prove that they incurred those costs ‘wholly, exclusively and necessarily’ in carrying out their job. The word ‘necessarily’ creates a much tighter test than that for the self-employed.

In addition, the way in which the services are provided can sometimes make a substantial difference to that tax cost. For example, if the employer provides something for the employee, the rules are often much more generous than if the employee bought it themselves and attempted to claim the tax relief. A bit of advice and forward planning can often prove to be fruitful.

An exemption

The rules for employees in relation to ‘use of home as office’, contains a specific exemption from a tax charge. They allow payments made by employers to employees for additional household expenses to be tax free, where the employee incurs those costs in carrying out the duties of the employment under homeworking arrangements. ‘Homeworking arrangements’ means arrangements between the employee and the employer under which the employee regularly performs some or all of the duties of the employment at home.

The arrangements do not need to be in writing but it is advisable to do this, as the exemption does not apply where an employee works at home informally.

Where these rules are met, the additional costs of heating and lighting the work area and the metered cost of increased water usage can be met. There might also be increased charges for internet access, home contents insurance or business telephone calls and where working at home leads to a liability for business rates, HMRC accept that the additional cost incurred can also be included.

However, unlike the self-employed, HMRC do not accept that a proportion of household fixed costs such as mortgage interest, rent, council tax or water rates are allowable.

HMRC accept that a £4 per week payment from the employer is acceptable without too much formality if the above tests are met. However, to justify a higher payment, the message is prove it!

 

Tax relief

The above rules only allow tax free payments to be made in specific circumstances. However, if payments are made outside of these rules or, in fact, no payments are made at all, the employee can claim personal tax relief themselves if they can prove that they incurred those costs or received those payments ‘wholly, exclusively and necessarily’ for the purposes of their job. In reality this is extremely difficult – some would say impossible – as HMRC require the following tests to be met:

▪       the employee performs the substantive duties of their job from home (ie the central duties of the job)

▪       those duties cannot be performed without the use of appropriate facilities

▪       no such facilities are available to the employee on the employer’s premises or are too far away

▪       and at no time either before or after the employment contract is drawn up is the employee able to choose between working at the employer’s premises or elsewhere.

So the moral for employees is to go for tax free payments, not tax relief!

 

Equipment costs

Capital allowances will be available to the company for the costs of providing equipment to employees who work at home. Provided that the private use of those assets by the employee is insignificant, then there will be no taxable benefit on the employee. Again, this could apply to things such as a laptop, desk and chair, provided that the employer has a written policy making it clear that the provision of the equipment is for work related purposes.

 

Travel costs

The rules are so ‘simple’ that HMRC explain them in a convenient 100-page booklet, IR490! However, the main point to note is that although an employee’s home may be treated as a workplace for tax purposes this is not enough, on its own, to allow the employee to get tax relief for the expenses of travelling to another permanent workplace.

Employees are able to claim tax relief on the full travelling cost incurred in the performance of their duties. However, no relief is available for the costs of ordinary commuting or private travel.

The rules are complex but ordinary commuting is defined as travel between the employee’s home and a place which is a ‘permanent workplace’. A ‘permanent workplace’ includes places where there is a period of continuous work lasting more than 24 months or the period of attendance is all or most of the period of employment.

HMRC state that, for most people, the place where they live is a matter of personal choice, so the expense of travelling from home to any permanent workplace is a consequence of that personal choice. As a result such travelling expenses will not qualify unless the location of the employee’s home is itself dictated by the requirements of the job.

Even if that condition is met, the cost of travel between the employee’s home and another permanent workplace is only deductible during those times when the home is a place of work.

Of course, employees who work at home are entitled to a deduction for the expenses of travelling to a temporary workplace, that is anything which is not a permanent workplace. It is as clear as that!

Example

Jane’s duties often involve her working late into the evenings and she has no access to her employer’s premises (her permanent workplace) at night, so she takes work home with her. As it is a matter of personal choice where the work is done (there is no objective requirement that it is done at her home) any travel to or from her home cannot be said to be in the performance of her duties and no relief is available for any costs.

However, Jane’s husband is an area sales manager who lives in Leicester. He manages his company’s sales team in the Midlands and the company’s nearest office is in Newcastle. He is therefore obliged to carry out all his administrative work at home, where he has set aside a room as an office. He is entitled to relief for the expenses of travelling to the company’s office in Newcastle, as well as for journeys within the Midlands as these should all qualify as temporary workplaces.

 

Be reasonable

As you can see, all things are possible but the key is to be clear about the rules, keep good records and be sensible about how much to claim.

 

How we can help

If you would like any help about obtaining tax relief on the costs of homeworking, please do contact us.

Charity based tax schemes quashed

Tuesday, May 27th, 2014

HMRC have had recent successes in the courts that have neutralised tax schemes utilising charity tax reliefs. Here’s what they have to say on the GOV.uk website:

HM Revenue and Customs (HMRC) successfully challenged the tax avoidance scheme used by Nicholas Green and designed by Afortis Limited as part of an ongoing crackdown on charitable tax relief abuse. The First-tier Tribunal ruling and its impact on similar schemes could make sure over £35 million of tax is paid.

Under the scheme, shares were listed on the Channel Islands Stock Exchange at a value significantly more than their real worth. The shares were then gifted to charity at the inflated value. The scheme was designed to allow Mr Green to claim tax relief on the amount that the shares had been listed for, rather than on the much lower amount that the shares were worth.

The tribunal ruled that the relief claimed should be reduced significantly from that claimed by those using the scheme.

This latest decision follows HMRC’s defeat of another scheme using charitable reliefs, promoted by NT Advisors, at a tax tribunal last week.

Nicky Morgan, Financial Secretary to the Treasury, said:

“The government wants to encourage more people to give to charity and has provided tax relief to incentivise this, but we will not tolerate abuse of the system. This case is further evidence of HMRC’s tough action to tackle tax avoidance schemes that seek to abuse charitable giving tax reliefs.

“Taxpayers entering into these arrangements are not only damaging their own reputations, they are harming the reputations of charities that may not be aware they are being used to avoid tax. Anyone thinking of getting involved in a tax avoidance scheme does so at their risk and should know that HMRC will pursue them in collecting the tax that is due.”

VAT – Cash Accounting

Monday, May 26th, 2014

Cash accounting enables a business to account for and pay VAT on the basis of cash received and paid rather than on the basis of invoices issued and received.

 

Advantages and Disadvantages of the Scheme

The advantages of the scheme are as follows.

  • Output tax is not due until the business receives payment of its sales invoices. If customers pay promptly, the advantage will be limited. Even so, the gain may be material.
  • There is automatic bad debt relief because, if no payment is received, no output tax is due.
  • Most businesses find it easier to think in terms of cash flows in and out of their business than invoiced amounts.

The potential disadvantages are as follows.

  • There is no input tax recovery until payment of suppliers’ invoices.
  • The scheme will not be beneficial for net repayment businesses – for example, a business just starting up, which has substantial initial expenditure on equipment, stocks etc so that input tax exceeds the output tax, should delay starting to use the scheme. That way, it recovers the initial input tax on the basis of input invoices as opposed to payments.

 

Key Rules

From 1 April 2007 a business can join the scheme if it has reasonable grounds for believing that taxable turnover in the next 12 months will not exceed £1,350,000 provided that it:

  • is up to date with VAT returns
  • has paid over all VAT due or agreed a basis for settling any outstanding amount in instalments
  • has not in the previous year been convicted of any VAT offences.

All standard and zero-rated supplies count towards the £1,350,000 except anticipated sales of capital assets previously used within the business. Exempt supplies are excluded.

When a business joins the scheme, it must be careful not to account again for VAT on any amounts already dealt with previously on the basis of invoices issued and received.

A business can start using the scheme without informing HMRC. It does not cover:

  • goods bought or sold under lease or hire-purchase agreements
  • goods bought or sold under credit sale or conditional sale agreements
  • supplies invoiced where full payment is not due within six months
  • supplies invoiced in advance of delivering the goods or performing the services.

Once annual turnover reaches £1,600,000 the business must leave the scheme immediately.

On leaving the scheme, VAT is due on all supplies on which it has not already been accounted for. However outstanding VAT can be accounted for on a cash basis for a further six months after leaving the scheme.

 

Accounting for VAT

Output tax must be accounted for when payment is received.

Cheque. Treated as received on the date the cheque is received or if later the date on the cheque. If the cheque is not honoured an adjustment can be made.

Credit/debit card. Treated as received/paid on the date of the sales voucher.

Standing order/direct debits. Treated as received/paid on the day the bank account is credited.

Part payments. VAT must be accounted for on all receipts/payments even where they are part payments. Part payments are allocated to invoices in date order (earliest first) and any part payment of an invoice allocated to VAT by making a fair and reasonable apportionment.

 

Records

Under the cash accounting scheme the prime record will be a cash book summarising all payments made and received with a separate column for VAT. The payments need to be clearly cross-referenced to the appropriate purchase/sales invoice.

In addition the normal requirements regarding copies of VAT invoices and evidence of input tax apply.

 

How We Can Help

We can advise on whether the cash accounting scheme would be suitable for your business.

Internet and Email Access

Friday, May 23rd, 2014

In order to protect the firm, its employees, customers and suppliers, all members of staff should be given a copy of the firm’s policy regarding acceptable use of IT resources – particularly internet, email access, and data protection policies. It may also be necessary to have a separate Bring Your Own Device (BYOD) policy covering the use of personal devices and to what extent (if any) these can be connected to corporate information systems.

Any such policies should form part of the contract of employment – to the extent that any breaches of the policy could result in disciplinary action, and in some cases even dismissal.

Having an acceptable use policy not only helps protect the organisations exposure to rogue software, legal action, and loss of corporate/personal data but can also help in disputes with employees.

Email

Employees need to be wary of the content of all emails they may send. One email sent without thought as to the potential repercussions can have unintended consequences for both the employee and organisation.

Illegal material

Due to the uncensored nature of the material on the internet, there are a large number of web sites which contain offensive, obscene and illegal (in the UK) material. Employees should not access such sites.

Viruses and phishing

Innocent looking web sites and emails have been used to tempt users to download material which has been found to contain a virus, or to disclose company, or personal confidential data they would not normally impart.

Personal phones, personal headsets and use of social networks

Firms may wish to include references to the use of personal phones, personal headsets and social networking. The use of these or restrictions on the use of these will very much depend on the working environment.

A Model Policy Statement

To minimise these kinds of potential problems, all employers should consider setting out a policy statement for all employees embracing internet and email access.

A suggested policy statement is shown below which you may find useful as a starting point.

Policy and scope

The company/ firm (delete as appropriate) sees the internet and the use of email as an important business tool.

Staff are encouraged to enhance their productivity by using such tools – but only according to guidelines on their use as set out in this document.

The internet is largely unregulated and uncensored and we have a duty of care to protect the security of the company’s/firms internal information, our customers, our suppliers and our employees from malevolent, obscene and illegal material.

[Monitoring – Optional paragraphs 1

With this in mind, the company (firm) reserves the right to monitor emails and internet sites visited, on an employee basis. However, this will only be performed where there is a suspicion of behaviour which breaches the company’s ‘email and internet access’ policy.

Staff under surveillance will be informed, by management, that they are being monitored.

Covert monitoring will only be performed in exceptional circumstances and only when sanctioned by a senior officer(s) of the company/firm.]

[Monitoring – Optional paragraphs 2

With this in mind, the company/firm reserves the right to monitor email and internet traffic. However, individual users will not be identified in the monitoring process.]

It will be assumed that all staff understand and agree to the policies unless a director (partner) is notified otherwise. Any exceptions are to be appended to the employee’s contract of employment and signed by a director (partner) and the employee.

All the company’s/firm’s resources, including computers, access to the internet and email are provided solely for business purposes.

The purpose of this policy is to ensure that you understand to what extent you may use the computer(s) owned by the company/firm for private use and the way in which access to the internet should be used within the company/firm, to comply with legal and business requirements.

This policy applies to all employees of the company/firm and failure to comply may lead to disciplinary action in line with the Disciplinary Procedure. In addition, if your conduct is unlawful or illegal you may be personally liable.

General principles

A computer and internet access is provided to you to support the company’s/firm’s activities.

Private use of computers and the internet is permitted, subject to the restrictions contained in this policy. Any private use is expected to be in the employee’s own time and is not to interfere with the person’s job responsibilities. Private use must not disrupt our IT systems or harm the company/firm’s reputation.

You should exercise caution in any use of the internet and should never rely on information received or downloaded without appropriate confirmation of the source.

Access to the internet and email

All/The following users have access to the internet and email from all/the following PCs…

Personal use

The internet may not be accessed for personal use during normal hours of employment. Occasional use for personal reasons is allowed outside working hours, however the restrictions set out in ‘Browsing/Downloading material’ (below) must be adhered to.

Personal emails may not be sent/received unless in an emergency or with prior authority.

[Optional paragraph on Personal use of mobile phones, personal headsets and social networking]

Emails and email attachments

Emails must conform to the same rules as issuing correspondence on the company’s/firm’s headed paper.

[Optional sentence – Emails must be authorised by either a director/ partner (or manager)].

Emails must not contain controversial statements/opinions about organisations or individuals. In particular, racial or sexual references, disparaging or potentially libellous/defamatory remarks or anything that might be construed as harassment should be avoided.

Emails must not contain offensive material.

Emails containing a virus must not knowingly be sent.

Emails coming from an unknown source must not be opened but disclosed to management (see Disclosure).

Emails sent externally, must contain the company’s/ firm’s disclaimer (see sample below)

Emails (sent and received) must be stored in the appropriate client files and use the same naming conventions which are used to store letters and other correspondence.

Browsing/Downloading material

Only material from bona fide business, commercial or governmental web sites should be browsed/downloaded.

No other material should be browsed/downloaded. This specifically includes games, screensavers, music/video and illegal, obscene or offensive material.

Laptops/portables and portable media devices

a        Travelling with laptops/portables

Laptops are liable to be inspected by authorities particularly if travelling by air/sea/rail, both within and outside the UK. Where an employee has a company’s/firm’s laptop they must ensure that it does not knowingly contain illegal material.

Laptops containing corporate data should be encrypted.

b       Using laptops/portables on remote connections

Company’s/firm’s laptops may be used for email/internet use without being connected to the corporate server. Appropriate security software to allow such access and to control viruses, should be installed.

c        Using portable media devices

          Portable media devices include USB memory sticks, USB pens, CDs, DVDs etc.

          Where these contain confidential corporate or personal data, the data contained on these devices should be encrypted.

Disclosure

Employees have a duty to report the following to management:

  • suspect emails/email attachments/web sites
  • obscene/illegal material found on a PC
  • persistent use of the internet for personal reasons
  • persistent downloading of illegal/obscene/offensive material
  • loss of corporate data or loss of machines and devices containing corporate data

Disciplinary

A breach of any of the policies is a disciplinary matter.

Illegal activities will also be reported to the relevant authorities.

Inappropriate use

Computers are a valuable resource to our business but if used inappropriately may result in severe consequences to both you and the company/firm. The company/firm is particularly at risk when you have access to the internet. The nature of the internet makes it impossible to define all inappropriate use. However you are expected to ensure that your use of computers and the internet meets the general requirements of professionalism.

Specifically, during any use of the computer or internet you must not:

  • copy, upload, download or otherwise transmit commercial software or any copyrighted materials belonging to the company/firm or other third parties
  • use any software that has not been explicitly approved for use by the company/firm
  • copy or download any software or electronic files without using virus protection measures approved by the company/firm
  • visit internet sites or download any files that contain indecent, obscene, pornographic, hateful or other objectionable materials
  • make or post indecent, obscene, pornographic, hateful or otherwise objectionable remarks, proposals or materials on the internet
  • reveal or publicise confidential or proprietary information (including personal data) about the company/firm, our employees, clients and business contacts.

 

The following activities are expressly forbidden:

  • the deliberate introduction of any form of computer virus
  • seeking to gain access via the internet to restricted areas of the company’s/firm’s computer system or another organisation’s or person’s computer systems or data without authorisation or other hacking activities.
  • Downloading corporate information onto portable media devices (such as USB pen or CD) unless management has expressly approved this activity.
  • Uploading personal/private information (for example music, films or photographs) from portable media devices (such as USB pen or CD) onto a local or network drive, unless management has expressly approved this activity.

Monitoring

At any time and without notice, we maintain the right and ability to examine any systems and inspect and review any and all data recorded in those systems. Any information stored on a computer, whether the information is contained on a hard drive, computer disk or in any other manner may be subject to scrutiny by the company/firm. This examination helps ensure compliance with internal policies and the law. It supports the performance of internal investigations and assists the management of information systems.

In order to ensure compliance with this policy, the company/firm may employ monitoring software to check on the use of the internet and block access to specific websites to ensure that there are no serious breaches of the policy.  We specifically reserve the right for authorised personnel to access, retrieve, read and delete any information that is created by, received or sent as a result of using the internet, to assure compliance with all our policies. Such monitoring will be used for legitimate purposes only.

 

Sample Disclaimer

This email and all attachments it may contain are confidential and intended solely for the use of the individual to whom it is addressed. Any views or opinions presented are solely those of the author and do not necessarily represent those of [the company/firm]. If you are not the intended recipient, be advised that you have received this email in error and that any use, dissemination, printing, forwarding or copying of this email is strictly prohibited.

Please contact the sender if you have received this email in error.

 

Companies Act 2006 emails and web sites

Changes to Company law mean that, every company must now include their company registration number, place of registration and registered office address on corporate forms and documentation (this includes emails and websites).

In particular, all external emails must include this information – whether as part of the corporate signature or as part of the corporate header/footer.

 

How we can help

We will be more than happy to provide you with assistance in formulating an acceptable use policy, or if any additional information is required.

Tax anomalies

Thursday, May 22nd, 2014

Institute for Fiscal Studies director, Paul Johnson, recently spoke at the annual Chartered Tax Advisor Address. He pointed out a number of the unnecessary complications and policies that have left the UK tax system more complex and less efficient.

 “For example:

  • There is a basic rate of income tax of 20%, a higher rate of 40% and a top rate now of 45%. What is less well known is that the last government introduced a rate of 60% on a band of income starting at £100,000. This government has maintained it and effectively increased its range considerably. There is now a 60% rate of income tax on income between £100,000 and £121,000 (where it drops back to 40%). It’s hard to make much sense of that.
  • Several elements of the income tax system no longer adjust with inflation. The point at which the 45p rate becomes payable, and indeed the point at which the 60p rate becomes payable, is fixed in cash terms and has already fallen by more than 12% relative to the Consumer Prices Index since its introduction. More people will gradually be pulled into these higher rates. There is apparently no plan to stop this.
  • This government has accelerated a trend overseen by recent governments which has fundamentally altered the nature of our system of income tax, namely a continued increase in the number of higher rate taxpayers. Numbers have risen from less than 2 million in 1990 to nearly 4 million in 2007 and well over 5 million by 2015. The problem is not necessarily so much the fact of the change – there is a case for, and a case against, such a system – but the fact that this fundamental change to our tax system, which appears to have the support of the three main political parties, has never been announced or properly debated.
  • Governments of all stripes have continually cut income tax whilst increasing National Insurance Contributions (NICs) – a tax on earned income. The only reason for this is that income tax seems to be more salient and therefore increases to NIC rates are politically easier.
  • The last government and this one raised rates of Stamp Duty Land Tax time and time again. This is one of the worst designed and most damaging of all taxes, yet revenues from it are due to hit £15 billion within just a few years. At the extreme a £1 increase in sale price can now trigger an additional £40,000 tax bill. The tax helps to gum up the entire property market.”

Will any of these comments affect future tax policy? We shall have to wait and see.

Construction Industry Scheme

Wednesday, May 21st, 2014

The Construction Industry Scheme (CIS) sets out special rules for tax and national insurance (NI) for those working in the construction industry. Businesses in the construction industry are known as ‘contractors’ and ‘subcontractors’. They may be companies, partnerships or self employed individuals.

The CIS applies to construction work and also jobs such as alterations, repairs, decorating and demolition.

Contractors and subcontractors

Contractors include construction companies and building firms and also government departments and local authorities. Any other business spending more than £1 million a year on construction is classed as a contractor for the purposes of the CIS.

Subcontractors are those businesses that carry out work for contractors.

Many businesses act as both contractors and subcontractors.

Monthly return

Contractors have to make a monthly return to HMRC:

  • confirming that the employment status of subcontractors has been considered
  • confirming that the verification process has been correctly dealt with
  • detailing payments made to all subcontractors and
  • detailing any deductions of tax made from those payments.

The monthly return relates to each tax month (ie running from the 6th of one month to the 5th of the next). The deadline for submission is 14 days after the end of the tax month. Even if no subcontractors have been paid during a month, contractors still have to make a nil return. All contractors are obliged to file monthly even if they are entitled to pay their PAYE quarterly.

Identification

Subcontractors must give contractors their name, unique taxpayer reference and national insurance number (or company registration number) when they enter into a contract. So long as the contractor is satisfied that the subcontractor is genuinely self-employed the ‘verification’ procedure (explained below) must be followed.

Employed or self-employed?

A key part of the CIS is that the contractor has to make a monthly declaration that they have considered the status of the subcontractors and are satisfied that none of those listed on the return are employees. HMRC can impose a penalty of up to £3,000 if contractors negligently or deliberately provide incorrect information.

Remember that employment status is not a matter of choice. The circumstances of the engagement determine how it is treated.

The issue of the status of workers within the construction industry is not a new matter and over the last few years HMRC have been making substantial efforts to re-classify as many subcontractors as possible as employees. The courts have considered many cases over the years and take into account a variety of different factors in deciding whether or not a worker is employed or self-employed. The tests which are applied include:

  • the right of control over how, what, where and when the work is done; the more control that a contractor can exercise, the more likely it is that the worker is an employee
  • whether the worker provides a personal service or whether a substitute could be provided to do that work
  • whether any equipment is necessary to do the job, and if so, who provides it
  • the basis of payment – whether an hourly/weekly rate is paid, whether there is any overtime, sick or holiday pay and whether or not invoices are raised for the work done
  • whether the worker is part and parcel of the organisation or whether they are conducting a task which is self-contained in its own right
  • what the intention of the parties is – whether there is any written statement that there is no intention of an employment relationship
  • whether there is a mutuality of obligation; that is, an ongoing understanding that the contractor will offer work and the worker accept it
  • whether the workers have any financial risk.

As can be seen from the above, there are a number of factors which must be considered and the decision as to whether somebody should be classified as employed or self-employed is not a simple one.

Clearly, HMRC would like subcontractors to be classed as employees, as this generally means that more tax and national insurance is due. However, just because the HMRC think that somebody should be re-classified does not necessarily mean that they are correct.

HMRC have developed software known as the employment status indicator tool, which is available on their website, to address this matter but the software appears to be heavily weighted towards re-classifying subcontractors as employees. It should not be relied on and professional advice should be taken if this is a major issue for your business. Please talk to us if you have any particular concerns in this area.

Verification

The contractor has to contact HMRC to check whether to pay a subcontractor gross or net. Not every subcontractor will need verifying (see below). Usually it will only be new ones.

The verification procedure will establish which of the following payment options apply:

  • gross payment
  • a standard rate deduction of 20%
  • a deduction made at the higher rate of 30% if the subcontractor has not registered with HMRC or cannot provide accurate details to the contractor and HMRC cannot verify them.

HMRC will give the contractor a verification number for the subcontractors which will be matched with HMRC’s own computer. The number will be the same for each subcontractor verified at any particular time. There will be special suffixes for the numbers issued in respect of subcontractors who cannot be verified. The numbers are also shown on contractors’ monthly returns and the payslips issued to the subcontractors.

Clearly, these numbers are a fundamental part of the system and contractors have to ensure that they have a fool-proof system in place for obtaining and retaining them. It will also be very important to give precise details to HMRC because, if their computer does not recognise the subcontractor, the higher rate deduction will have to be made.

Who needs verifying with HMRC?

If a contractor is paying a subcontractor they will not have to verify them if:

  • they have already included them on any monthly return in that tax year; or
  • the two previous tax years.

A payslip?

Contractors have to provide a monthly ‘payslip’ to all subcontractors paid, showing the total amount of the payments and how much tax, if any, has been deducted from those payments. The contractor has to provide this for each tax month as a minimum. Contractors are allowed to choose the style of the ‘payslips’ themselves but certain specific information has to be provided including the:

  • contractor’s name
  • contractor’s employers’ tax reference
  • tax month to which the payment relates
  • subcontractor’s name, unique tax reference or specific subcontractor reference
  • the gross amount of the payment
  • cost of any materials which have reduced the gross payment
  • amount of any tax deductions made and
  • verification number where deduction has been made at the higher rate of 30%.

If contractors include such payments as part of their normal payroll system, it needs to be clear that although payslips are being generated for those individuals, they are not employees and have clearly been classed as self-employed.

Are tax deduction made from the whole payment?

Not necessarily. The following items should be excluded when entering the gross amount of payment on the monthly return:

  • VAT charged by the subcontractor if the subcontractor is registered for VAT
  • any Construction Industry Training Board levy.

The following items should be deducted from the gross amount of payment when working out the amount of payment from which the deduction should be made:

  • what the subcontractor actually paid for materials including VAT paid if the subcontractor is not registered for VAT, consumable stores, fuel (except fuel for travelling) and plant hire used in the construction operations
  • the cost of manufacture or prefabrication of materials used in the construction operations.

Any travelling expenses (including fuel costs) and subsistence paid to the subcontractor should be included in the gross amount of payment and the amount from which the deduction is made.

Penalties

The whole system is backed up by a series of penalties. These cover situations in which an incorrect monthly return is sent in negligently or fraudulently, failure to provide CIS records for HMRC to inspect and incorrect declarations about employment status. However, from October 2011 late returns under the CIS scheme will trigger penalties as follows:

  • a basic penalty of  £100 for failure to meet due date of the 19th of the month
  • where the failure continues after two months after the due date, a penalty of £200
  • after six months the penalty rises to the greater of 5% of the tax or £300
  • after 12 months the penalty will again be the greater of £300 or 5% of the tax but, where the withholding of information is deliberate and concealed, it will be 100% of the tax (or £3,000 if greater) and where information is withheld deliberately, 70% of tax (or £1,500 if greater)
  • where the return is 12 months late but the information only relates to persons registered for gross payment, the penalty will be £3,000 for deliberate and concealed withholding of information and £1,500 for deliberate withholding without concealment
  • where a person has just entered the CIS scheme penalties will be restricted to a maximum of £3,000 in certain circumstances.

Paying over the deductions

Contractors have to pay over all deductions made from subcontractors in any given tax month by the 19th following the end of the tax month to which the deductions relate. If payment is being made electronically, the date will be the 22nd, or the next earlier banking day when the 22nd is a weekend or holiday. If the contractor is a company which itself has deductions made from its payments as a subcontractor, then the deductions made may be set against the company’s liabilities for PAYE, NI and any CIS deductions it is due to pay over.

What about subcontractors?

If a subcontractor first starts working in the construction industry on a self-employed basis they will need to register for the CIS.

To register, a subcontractor needs to contact HMRC by phone or over the internet and they will conduct identity checks. The rules for subcontractors to be paid gross include a business test, a turnover test and a compliance test.

Subcontractors not registered with the HMRC will suffer the higher rate deduction from any payments made to them by contractors.

 

How we can help

Please do get in touch if you would like further information about the CIS. We can advise on the CIS whether you are a contractor or a subcontractor.

Why it\’s important to plan

Tuesday, May 20th, 2014

Consider this case study:

Bill Smith, a self-employed electrician, purchased a brand new van 15 March 2014 for £18,000. Due to a downturn in the local economy his trading profits for the year to 31 March 2014 were just £9,400. Fortunately, he had secured a number of regular contracts for the following year that should net at least £30,000 in the trading year to 31 March 2015, however, he would be required to travel and hence the purchase of the new van.

Towards the end of June 2014 Bill took his books to his accountant to work out his tax position for 2013-14. In July 2014 Bill was called in for a meeting.

His accountant informed him that his adjusted taxable profits for 2013-14 were £10,400. His accountant also informed him that he could claim a reduced Annual Investment Allowance for the purchase of the van of £1,000 that would clear any tax liability for the year.

Bill was feeling good, no tax to pay. Then, the bad news…

As the initial claim for the van had been made in 2013-14 (due to purchase during March 2014) the balance not written off for tax purposes (£18,000 – £1,000) £17,000 would only be available in later tax years for an 18% writing down allowance. So for the tax year 2014-15 Bill could claim (£17,000 x 18%) £3,060 as a reduction of his profits for that year. Based on estimated profits of £30,000 this would produce a tax bill of approximately £3,400.

Then more bad news, Bill was advised that if he’d delayed the purchase of the van for three weeks, until after 5 April 2014, he could have written off the entire purchase price of the new van against his profits for 2014-15 and reduced his tax bill for that year to £400 instead of £3,400. With no claim for the van in the earlier tax year, his tax bill for 2013-14 would have been £200 and £400 for 2014-15. In total a cash flow saving of £2,800 (£3,400-£200-£400).

The moral of the story is – planning is important.

If you are considering any significant change in your business activities talk it over with us BEFORE you under take the change. The old cliché is supremely relevant: there really is no point in closing the stable door after the horse has bolted.

Franchising

Monday, May 19th, 2014

Franchising is becoming increasingly popular in Britain with an annual turnover of around £13.4 billion. The business community now takes franchising very seriously and it is accepted across a range of sectors. The advantages of owning your own business are obvious but so too are the risks. The franchisee is taking less of a risk than starting his or her own business. Fewer than one in ten franchises fail. This is because they are operating under an established and proven business model and supplying or producing a tested brand name.

Franchising is essentially the permission given by one person, the franchisor, to another person, the franchisee, to use the franchisor’s name, trade marks and business system in return for an initial payment and further regular payments.

Each business outlet is owned and managed by the franchisee. However, the franchisor retains control over the way in which products and services are marketed and sold, and controls the quality and standards of the business.

 

The advantages and disadvantages

Advantages

These include:

  • it is your own business
  • someone else has already had the bright idea and tested it too
  • there will often be a familiar brand name which should have existing customer loyalty
  • there may be a national advertising campaign
  • some franchisors offer training in selling and other business skills
  • some franchisors may be able to help secure funding for your investment as well as discounted bulk buy supplies.

Disadvantages

The potential disadvantages include the following:

  • it is not always easy to evaluate the quality of a franchise especially if it is relatively new
  • extensive enquiries may be required to ensure a franchise is strong
  • part of your annual profits will have to be paid to the franchisor by way of fee
  • the rights of the franchisor, for example to inspect your premises and records and dictate certain methods of operation, may seem restrictive
  • should the franchisor fail to maintain the brand name or meet other commitments there may be very little you can do about it.

 

The costs

The franchisor receives an initial fee from the franchisee together with on-going management service fees. These will be based on a percentage of annual turnover or mark-ups on supplies and can vary enormously from business to business. In return, the franchisor has an obligation to support the franchise network with training, product development, advertising, promotional activities and a specialist range of management services.

Financing costs

Raising money to finance the purchase of a franchise is just like raising money to start any business. All of the major banks have specialist franchise departments. You may need to watch out for hidden costs of financing. These could arise if the franchisor obtains a commission on introducing you to a business providing finance or a leasing company for example. Of course these only represent true costs if you could have obtained the finance cheaper elsewhere.

 

Choosing a franchise

Factors to consider

There are many factors you may need to take into account when choosing a franchise. Consider the following:

  • your own strengths and weaknesses – make sure they are compatible with the franchise
  • thoroughly investigate the business you are planning to buy
  • research the local competition and make sure there is room for your business
  • give legal contracts careful consideration
  • last but not least, talk to us about the financial projections for the business – cash flow, working capital needs and profit projections will form the core of your business plan.

Finding a franchise

The British Franchise Association is likely to be a sensible starting point. They are at Centurion Court, 85f Milton Park, Abingdon, OX14 4RY (01235 820470) www.thebfa.org.

A directory of all franchises available in the UK is available at www.franchiseadvice.com

Having narrowed down your choice, you will then need to think about writing to a shortlist of probably five or six franchise companies asking them for further details. This should include projections of the likely level of business as well as a draft contract.

If the franchise is a good one there are likely to be a number of applicants. You will need to sell yourself as the ideal applicant to the franchisor which will include providing references as well as putting forward a strong case as to your suitability as a franchisee.

 

The contract

The contract will form the basis of all franchise agreements. It should ensure that you run your business along the lines set out by the franchisor. The following areas should be covered:

  • the name and nature of the business
  • the geographical territory where the franchisee can use the name
  • how long the franchise will run
  • the fees (both initial and on-going) that will be charged
  • what happens if the franchisee wants to sell or either the franchisee or franchisor want to end the agreement
  • the terms of the relationship, specifically that the franchisor will provide training, advertising etc and that the franchisee will abide by the rules laid down by the franchisor.

 

How we can help

The franchising industry claims to be able to help you start a new business with a much greater than average chance of survival. Statistics seem to back this up and suggest that a franchised business has a much better chance of surviving the first three ‘danger’ years than other new businesses.

However you don’t get something for nothing and we can help you to look critically at the costs of entering into a franchise. We can also help with the all important business plan, including cash flow, working capital needs and profit projections. We can also provide independent advice on the forecasts given by the franchisor and help you determine how realistic they are. Contact us to find out more.