Are your contractors disguised employees

What is a disguised employee? Very definitely, it is not an individual holding a clock card in fancy dress. It is contractor, usually in the guise of a limited company, that is undertaking work as if an employee, but more importantly, is being paid as a business contractor: this saves the “employer” paying National Insurance and gives the employee/contractor opportunities to apply some useful tax planning.

What do HMRC make of this?

Unsurprisingly, HMRC were not enamoured of this tactic and way back in 2000 they introduced the notorious IR35 legislation. In effect, IR35 dictates that where certain criteria are met the contractor has to treat his income from contracts where he or she is basically an employee, as if they were a salary, thus precluding any tax or NIC advantages for the contractor.

The problem with IR35 is the definition of the “certain criteria” that contractors need to follow in order to decide if a contract falls under IR35 or not.

A shift in emphasis

HMRC have lost numerous tax cases since 2000 on this issue, and clearly the revenue they were gaining hardly matched the costs of chasing contractors to comply.

Their solution seems to be to shift the responsibility for deciding if a contractor should be treated as a de facto employee, from the contractor to the “employer”.

Public Sector Bodies (PSBs) were the guinea pigs for this change in emphasis.

Following the apparent success of shifting the responsibility for a decision – if a contractor was, or was not, a disguised employee, to PSBs – HMRC have now resolved that this system will be rolled out to the private sector.

Who will be affected and when?

Draft legislation is expected by September 2019, and HMRC have intimated that the legislation will only be applied to medium and large companies – the 1.5m small companies will be exempt.

There is no doubt that shifting the responsibility for deciding if an engager/contractor is an arms-length commercial arrangement or disguised employment will likely be as problematic as the existing IR35 regulations.

We will be keeping a keen eye on these changes and will report back as they unwind later this year.

Unbelievable excuses and dubious expenses

HMRC seem to be working on their people skills, either that or they have decided to soften their hard sales approach to tax compliance by injecting a little humour. Last week they published the following responses they had received for late payment of tax and claims for expenses that failed.

This what they said:

Excuses for not paying tax on time

As the deadline approaches for submitting returns and paying tax for 2017-18, HMRC reveals some of the most bizarre excuses it has received for not paying on time.

Most of our customers complete their tax returns honestly and on time but every year HM Revenue and Customs (HMRC) receives some outlandish excuses and expense claims.

Some of the most bizarre excuses HMRC received from customers who missed the Self-Assessment deadline include being too short to reach the post box and having fingers too cold to type. Here are some of the strangest from the past year:

  • my mother-in-law is a witch and put a curse on me
  • I’m too short to reach the post box
  • I was just too busy – my first maid left, my second maid stole from me, and my third maid was very slow to learn
  • our junior member of staff registered our client in Self-Assessment by mistake because they were not wearing their glasses
  • my boiler had broken, and my fingers were too cold to type

Claims for dubious expenses

As well as unbelievable excuses, every year we also receive some dubious expenses claims for unconvincing items like woolly underwear and pet insurance for a dog. Some of the most questionable include:

  • a carpenter claiming £900 for a 55-inch TV and sound bar to help him price his jobs
  • £40 on extra woolly underwear, for 5 years
  • £756 for my pet dog insurance
  • a music subscription, so I can listen to music while I work
  • a family holiday to Nigeria

All these excuses and expenses were unsuccessful.

How do we prepare for Brexit when so much is undecided?

It is hardly surprising that Brexit is fast becoming as big a turnoff as tax. How on earth are we supposed to react or adapt to such far-reaching changes when the exact details of our exit are still undecided just a few weeks before the March 2019 deadline?

Businesses that buy or sell goods to the EU must be pulling their corporate hair out – just how will their supply lines be affected?

A new government website covering possible Brexit consequences

The government has already published a bunch of documentation setting out the consequences of a no-deal outcome and they have now doubled up this resource by creating an EU exit website aimed at advising UK businesses.

The HM Government site’s URL is https://euexitbusiness.campaign.gov.uk/

The main points of focus are:

  • Employing EU citizens
  • Importing, exporting and transporting
  • Operating in the EU
  • Regulations and standards for products and goods
  • Using personal data
  • European and domestic funding
  • Intellectual property
  • Energy and climate, and
  • Public sector procurement.

If you have neither time or inclination to for this level of detail what can be done to safeguard your situation and have ongoing benefits for your business?

Action to take now to avoid downside risks of Brexit

It would seem to make sense to take a hard look at supply line issues by undertaking a formal impact assessment and we are aware that many importers and exporters already have this process underway.

The other action you could consider is to work on your business fitness. If, as has been suggested by the pundits, Brexit does create a slowdown in economic activity, then being in good financial shape will not be wasted effort.

If you think this is an idea with traction please call so we can discuss your options.

Why does the UK tax year end 5th April?

A bit of history this week but with a practical outcome for 2019.

Up to 1582, Europe used the Julian calendar introduced by the Romans in 45BC. Unfortunately, the Julian calendar differed from the solar calendar by 11 ½ minutes; after 500 years this small difference meant that the Julian calendar was 10 days off the solar calendar.

To remedy this error, Pope Gregory introduced the Gregorian calendar in most of Europe under his influence, 1582. There was a notable exception, you guessed right, the British Empire. Sound familiar?

The Brits stoically maintained their use of the Julian calendar until 1752 by which time the Empire was 11 days off the dates in Europe, they then adopted the Gregorian version.

Up to the change, the 25th March was the start of the new tax year. Therefore, following the change the new beginning of the tax year was advanced 11 days (so the Treasury didn’t lose 11 days of revenue). The beginning of tax year was therefore advanced to 5 April.

But just a minute, the current tax year ends 5th April and begins 6th April?

The final twist occurred in the year 1800. This year was a leap year in the old Julian system but not in the new Gregorian calendar. Accordingly, the Treasury moved the tax year back one further day and thus, from 1800, the tax year has ended on the 5th April and begins on 6th April.

Have you received your tax statement?

HMRC normally send out a tax statement this time of the year to all self-assessment taxpayers that have submitted a tax return for 2017-18.

As we reported last week, this will list any balance of tax due for 2017-18 and the amount of any payment on account required for 2018-19 (if any is due). Both amounts will need to be settled on or before 31 January 2019 to avoid interest and possible late payment penalties.

If you don’t receive a statement, but you know how much you need to pay, simply organise an online bank payment to:

HMRC Cumbernauld – sort code 08 32 10 – account number 12001039, or

HMRC Shipley – sort code 08 32 10 – account number 12001020

If you don’t know which account to use send your payment to Cumbernauld.

In either case be sure to quote your ten digit Unique Tax Refence number followed by the letter “K”. For example: 1234567899K. DO NOT make a payment without this number as HMRC will not know who to allocate the payment to.

If you don’t know how much to pay, contact your tax advisor or login to your online tax account.

Will your income be lower 2018-19 compared to 2017-18?

If you believe that your taxable income will be less than the previous tax year, you may be able to elect to reduce any payments on account for 2018-19 that have been calculated as if your tax due for 2018-19 is going to be the same as 2017-18.

Your tax adviser can do this for you or you could contact HMRC’s helpline for advice on how to proceed.

And as we have advised in previous posts on this topic, if you cannot fund your 31 January 2019 tax payment, call HMRC Business Payment Support Service: 0300 200 3835 to organise an agreed repayment schedule. Generally, you will need to clear any arrears before any further tax liabilities fall due for payment.

Travelling to the EU after Brexit

The following guidance was published on the GOV.UK website 20 December 2018. Much of the guidance has been updated on the basis of a no-deal Brexit.

UK citizens planning a trip to the EU and EEA before 29 March 2019 are not affected by Brexit changes.

The following comments assume a no-deal Brexit and would apply from 29 March 2019

Flying to the EU from the UK

Flights should continue as today. Both the UK and EU want flights to continue without any disruption. There will be no impact to direct flights to non-EU countries.

Before you leave for the airport, check online for the latest travel

Aviation security for passengers

Most passengers will not experience any difference in aviation security screening. The UK will continue to apply robust aviation security measures and prioritise passenger safety and security.

The European Commission has proposed measures to avoid extra security screening of passengers from the UK when transferring to onward flights at EU airports.

Air passenger rights

For air passengers on a flight departing the UK, the same passenger rights as apply today will continue to apply after the UK leaves the EU. For EU registered airlines, EU law will continue to apply in respect of flights to and from the EU.

  • passengers subject to denied boarding, delay or cancellation, will be entitled to assistance and compensation on the same basis as today
  • passengers with reduced mobility will still be entitled to the same assistance from airports and airlines
  • UK consumer protection in the event of insolvency of a travel provider will continue to apply

Travelling by Eurostar to the EU from the UK

Your rights as a rail passenger using either domestic or cross-border rail services will remain unchanged. Passengers on cross-border rail services will continue to be protected by the EU regulation on rail passengers’ rights, which will be brought into UK law.

Travelling by Eurotunnel to the EU from the UK

Your rights as a passenger using Eurotunnel’s cross-border shuttle services will remain unchanged. Passengers can continue to use Eurotunnel’s existing complaints procedure.

Travelling by bus or coach to the EU from the UK

Passengers on cross-border bus and coach services will continue to be protected by the EU regulation on bus and coach passengers’ rights, which will be brought into UK law.

Travelling by sea to the EU from the UK

Most passengers travelling to the EU by sea should not experience any difference to their journey.

Ferry passengers

Passengers on ferry services will continue to be protected by the EU regulation on passengers’ rights, which will be brought into UK law.

Cruising

Cruise operations will continue on the same basis as today. Passengers who embark on a cruise at a UK port will continue to be protected by the EU regulation on maritime passengers’ rights, which will be brought into UK law.

So, there we have it. Based on these comments there would seem to be a smooth transition for travellers in the event of a no-deal Brexit. However, add the following to-dos to your holiday check list if you are travelling to the EU after 29 March 2019:

 

  • Make sure you don’t need a visa for your visit.
  • Check out driving restrictions, can you use your UK driving license?
  • If using your car, is your insurance still valid for travel to the EU?
  • Advise your bank and make sure you will be able to use your cards in your EU destination.
  • Make sure your travel insurance cover is still valid.
  • Check with the airport or your agents to make sure there are no delays…

 

Bon voyage.

Tax Diary January/February 2019

1 January 2019 – Due date for Corporation Tax due for the year ended 31 March 2018.

19 January 2019 – PAYE and NIC deductions due for month ended 5 January 2019. (If you pay your tax electronically the due date is 22 January 2019)

19 January 2019 – Filing deadline for the CIS300 monthly return for the month ended 5 January 2019.

19 January 2019 – CIS tax deducted for the month ended 5 January 2019 is payable by today.

31 January 2019 – Last day to file 2017-18 self-assessment tax returns online.

31 January 2019 – Balance of self-assessment tax owing for 2017-18 due to be settled on or before today. Also due is any first payment on account for 2018-19.

1 February 2019 – Due date for Corporation Tax payable for the year ended 30 April 2018.

19 February 2019 – PAYE and NIC deductions due for month ended 5 February 2019. (If you pay your tax electronically the due date is 22 February 2019)

19 February 2019 – Filing deadline for the CIS300 monthly return for the month ended 5 February 2019.

19 February 2019 – CIS tax deducted for the month ended 5 February 2019 is payable by today.

CGT planning for married couples

This article is also relevant to couples who have entered into a civil partnership.

For the tax year 2018-19, taxpayers can make tax-free capital gains of up to £11,700.

This allowance is available on a per person basis and so married couples (and those in a civil partnership) have a combined CGT allowance of £23,400.

Consider married couple John and Joy. Joy wants to dispose of a block of shares before 6 April 2019, but this will create a taxable gain of £22,000. After her CGT allowance is deducted this will create a CGT bill of £2,060 – Joy is a higher rate taxpayer and so she would pay CGT at 20%.

John is retired and has relatively little income for 2018-19 and no capital gains. It is quite legitimate for Joy to gift 50% of her shares to John before they are sold – gifts between spouses and civil partners are free of CGT. Each party would then sell their half-shares and chargeable gains of £11,000 each would be covered by their £11,700 allowance. Hey presto, no CGT to pay.

John and Joy decide to use the tax saved to fund a well earned winter break abroad. Not a bad outcome and an entirely acceptable tax planning ploy.

The top rate of Income Tax is 45%?

Named the additional rate, the highest rate of Income Tax is 45%, and some might say 45% is high enough.

However, if the rate of tax is measured as the relationship between income and tax plus tax related penalties paid, there are times when this 45% can rise, to as much as 90%.

For example, if HMRC discovers that a taxpayer has been negligent in declaring all their income for tax purposes, they can charge a penalty. This can be as much as 100% of the tax due – effectively this doubles the rate of tax charged. And so, if you are paying tax on under-declared income at 45%, and if a 100% penalty is levied, the effective rate of tax charged is 90% of the income declared.

Whilst this may be an extreme example, consider taxpayers whose income exceeds £100,000. For the tax year 2018-19, for every £2 your income exceeds £100,000 you lose £1 of your tax personal allowance. This means that taxable income between £100,000 and £123,700 is taxed at an effective rate of 60%.

All is not what it seems.

Set your New Year resolutions

This is not the place to discuss your personal options, but this is an ideal time to consider your business and personal financial planning options for 2019.

What are your options?

If Brexit, as it seems likely, has a depressive effect on the UK economy, we may be pushed back into a mild recession. If so, the enthusiasm for investment will decline and businesses will hoard cash.

Accordingly, you might like to consider your present cash position, plan for a levelling off or decline in your sales and pressure on your margins as competitors seek to maintain their competitive advantage; and, you will need to invest some time in considering the effects of any disruption to your supply lines especially if we are faced with a no-deal Brexit.

There has never been a more appropriate time to prepare a formal business plan.

Ideally, the numbers should be entered into your accounts software so that you can closely monitor what is happening to you financially compared to your expectations. In this way you can take remedial action as events unwind rather than considering the mess left behind if you take your eyes off the road ahead.

We can help. Please call so we can make a start on finding the best-fit solution for your business. 2019 will likely be a challenging year. Be prepared.