understands your needs?
helps you keep more of your income?
delivers custom solutions?
If you are starting your own business, running it as a sole trader is the quickest and easiest way to do it. However, you will have unlimited liability which means you are personally responsible for business debts.
Another important aspect is that you are taxed on all the profits with little opportunity for tax planning. This is why most businesses will incorporate as profits increase.
We can assist in all aspects of self-employment, from choosing the best time to start the business, the best time for your year-end, support you through the initial business registration and provide advice on all aspects of tax.
We provide a range of compliance services for sole traders:
Partnerships are similar to sole trades, except that they are used when more than one person owns the business.
Each profit share is determined by the partners and best practice is to record this in a partnership agreement.
With partnerships each partner has joint and several liability for the debts of the partnership, so that if one partner cannot pay their share of any business debts, the debt will fall on the other partners.
Setting up a partnership agreement from the outset is essential.
Our compliance services include:
We are a member firm of the Association of Chartered Certified Accountants and our rigorous internal procedures mean that clients can be confident that their accounts have been prepared in line with the Association’s standards of and the Companies Act 2006.
Corporate tax planning can result in significant improvements in your bottom line. Our services will help to minimise your corporate tax exposure.
Self assessment tax returns are becoming increasingly complex and failing to submit your return on time, or correctly, can result in substantial penalties.
We use our expertise and the latest tax software to ensure that tax returns are completed efficiently, accurately and on-time. We have considerable experience in dealing with HMRC and are also experienced in representing our clients should they be subject to a tax enquiry or investigation.
We provide a comprehensive personal tax compliance service for individuals that includes:
Invoicing your contracting work through a limited company is highly tax efficient.
We are IR35 experts and will advise you on how to structure your next contract to minimise IR35 risk. We will ensure you claim all the tax deductible expenses that you are entitled to and work out if you can save money by joining the VAT Flat Rate Scheme. We will complete your accounts and tax returns ahead of deadlines and provide you with clarity over your future tax payments.
Free company incorporation and set up with HMRC if you are a new Contractor and sign up with us.
Included in this service:
VAT • Value added tax is one of the most complex and onerous tax regimes imposed on business. We provide an efficient cost effective VAT service which includes assistance with VAT registration and help with completing your VAT return.
Payroll • Administering your payroll can be time consuming and the task is made all the more difficult by the growing complexity of taxation and employment legislation. We provide a comprehensive payroll service.
Construction Industry Scheme • CIS returns & payments
Book-keeping • Maintenance of accounting records
Management Accounting • Provision of management accounts
If you wish to know more about these services please contact us on 01332 202660.
If your business does not require a statutory audit then our Assurance Service will provide reassurance that your accounts stand up to close scrutiny from your bank or other finance providers.
Work is tailored to your specific requirements and the level of confidence that you are looking to achieve and will provide credibility to your accounts by the issuing of an assurance review report.
Adrian Mooy & Co is a registered auditor with the Association of Chartered Certified Accountants.
We strive to provide an auditing service that adds more value than merely the statutory compliance requirement of an audit.
We tailor the audit to meet your circumstances and needs. Using the latest techniques and software we deliver a cost-effective audit that provides real value.
Before starting out you may need help with business planning, cash flow and profit & loss forecasts.
You may also want help identifying the best structure for your business. From sole trades and partnerships to limited companies and limited liability partnerships, we have the experience to advise on the best solution for you both operationally and from a tax point of view.
We also advise on accounting software selection, profit improvement, profit extraction & tax saving.
If you wish to know more about our Business Start-up service please contact us on 01332 202660.
We can work with you to:
Accountancy and taxation of property is a specialist area. We have the expertise and experience to work effectively with private landlords and property investors. We deal with self-assessment tax returns, accounts preparation and tax advice for all aspects of property portfolios.
Whether you are a first time buy to let landlord or a long established developer we will discuss and understand your situation in order to advise and recommend the most appropriate medium through which to carry out your property investments. We will guide you through the accounting and tax issues and help you to plan effectively to minimise your tax liabilities.
Services we offer include:
We take the time to explain your accounts to you so that you understand what is going on in your business.
Up to date, relevant and quickly produced management information for better control.
As part of our accounts service we prepare your annual accounts and complete yearly personal and business tax returns.
As your year-end approaches we will agree a timetable with you for completion of the accounts that minimises disruption to your business and leaves no late surprises when it comes to your tax liabilities.
We can also prepare management accounts to help you run your business and make effective business decisions. Management accounts are also very useful when approaching lending institutions when no year end accounts are available. We offer:
For a meeting to discuss your requirements please call us on 01332 202660.
We understand the issues facing owner-managed businesses.
We provide advice on personal tax & planning opportunities.
Running a small business places many demands on your time. We can help lift the load with our complete payroll service.
Designed to ease your administrative burden, our service removes what is often a time consuming task, leaving you free to concentrate on managing your business.
We can also prepare your benefits and expenses forms and advise you of any filing requirements and national insurance due. Benefits and expenses can be a complicated area and knowing what to report can be tricky.
We can file all your in-year and year end returns with HMRC and provide you with P60s to distribute to your employees at the year end.
We also offer a solution to meet your auto-enrolment obligations.
Businesses dealing with the requirements of VAT legislation will agree that this is often a complex area.
Our compliance services offer support for all stages of completing your VAT returns, whether you need advice on the treatment of specific transactions or have produced your records and would like verification that they are correct.
We can also advise on the pros and cons of voluntary registration, extracting maximum benefit from the rules on de-registration and the Flat rate VAT scheme.
Our consultancy service guides you through the intricacies of the legislation, pinpointing areas where you may be able to relieve or partly relieve the cost of VAT for your business, for example when purchasing new equipment or undertaking new projects such as property development.
For a free meeting to discuss VAT and obtain further advice please call us on 01332 202660.
We can conduct a full tax review of your business and determine the most efficient tax structure for you.
We give personal tax advice to a wide variety of individuals, including higher rate tax payers, company directors & sole traders.
We can assist with:
For a meeting to discuss your requirements please call us on 01332 202660.
Confirm your expectations
Our aim is to help you maximise your business potential and we tailor our service to meet your requirements and agree a timetable for delivering them.
Understand your needs
Firstly we listen and gain an understanding of your business and what you are aiming to achieve.
Communication is important to the success of any commercial venture. It is therefore a vital part of our work with you, sharing the knowledge and ideas that help you to realise your ambitions.
Build a relationship
Success in business is based around relationships and trust. Our objective is to develop and build strong relationships with our clients, based on two way trust and respect.
We seek your opinions on the service we provide and respond to feedback in order to upgrade and improve what we do.
Straightforward and easy to deal with Adrian Mooy & Co provide an efficient, friendly and professional service - payroll, tax returns, annual accounts and VAT returns are always done on time. Eddie Morris
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Allowable / Non Allowable Expenses (Table 1)
||Non allowable expenses
|Accountancy, legal & other professional fees.
||Accountants, solicitors, surveyors, architects.
||Legal costs of buying property. Costs of settling tax disputes and fines.|
|Advertising & business entertainment costs.
||Advertising in newspapers, directories & website costs.
||Entertaining clients, suppliers & customers; hospitality at events.|
|Bank, credit card & other financial charges.
||Bank, overdraft, credit card charges, HP interest & leasing.
||Repayment of the loans or overdrafts or finance arrangments.
|Car, van & travel expenses.
||Car & van insurance, repairs, servicing, fuel, parking, RFL, business travel & subsistence.
||Non business motoring costs (private use proportions). Costs of buying vehicles. Travel costs between home and business.
|Communications, stationery & other office costs.
||Phone, mobile, internet, postage, stationery, printing, office equipment, software.
||Non business or private use proportion of expenses.
|Construction industry payments to subcontractors.
||Construction industry payments to subcontractors. (before taking off any tax)
||Payments for non business work.
|Cost of goods that you are going to sell.
||Cost of goods bought for resale.
||Cost of goods or materials bought for private use.|
|Depreciation & loss/profit on sale of assets.
||Depreciation & loss/profit on sale of assets are not allowable expenses
||Depreciation of equipment, cars etc. Losses on sales of assets|
Allowable / Non Allowable Expenses (Table 2)
||Non allowable expenses
|Insurance policy.||Costs of any business
|Interest on bank and other business loans.||Interest on bank and other
|Repayment of the loans or
overdrafts, or finance
|Irrecoverable debts written off.||Amounts included in turnover but unpaid and written off because they will not be recovered.||Debts not included in
turnover; general bad debts.
|Other business expenses.||Trade journals and subscriptions; other sundry business
running expenses not
|Payments to clubs, charities,
political parties etc.; non
business part of any
expenses; cost of ordinary
|Rent, rates, power and insurance costs.||Rent for business premises, business and water rates, light, heat, power, property insurance, security; use of home as office (business proportion).||Costs of any non business part of premises; costs of
buying business premises.
|Repairs and renewals for property and equipment.||Repairs and maintenance of business premises and
equipment; renewals of small tools and items of
|Repairs of non business
parts of premises or
equipment; costs of
improving or altering
premises and equipment.
|Wages, salaries and other staff costs.||Salaries, wages, bonuses, pensions, benefits for staff or
employees; agency fees,
subcontract labour costs;
employers’ NICs etc.
|Own wages and drawings,
pension payments or NICs;
payments for non business
Guide to Self Employed Expenses
Any expenses must be applicable to the running of your business. The general rule is that a self employed person cannot deduct expenses unless they are ‘wholly and exclusively’ laid out for the purposes of the trade, profession or vocation. Keeping up-to-date and accurate records from the start is important for your business.
What records to keep - Anything to do with your business such as cashbooks, invoices, mileage records, bank statements, receipts for purchases, CIS vouchers.
How to keep your records - Either on paper or on computer. For electronic records you must save information in a readable format. As a general rule keep records for six years.
Allowable expenses - In most cases it will be clear if something has been incurred wholly and exclusively for the purposes of business - provided a receipt has been kept as proof of purchase, a deduction should be allowed. Two tables of the most common allowable (and disallowable expenditure) are shown above (Tables 1 & 2)
However, a newly established business is often run from home, perhaps using an existing car for any business travelling that is required and an existing mobile phone for business calls. This can cause problems, because of the ‘duality’ of purpose, inherent in many such costs. It is therefore necessary that you can clearly identify and separate the expenditure between business and private purposes. Below we look at these particular elements in detail.
Motoring expenses - If you use a car both for business and privately, you can claim a proportion of the running costs n the ratio of your business mileage to your total mileage. You must keep a log of business mileage as well as copies of all bills/receipts to calculate the appropriate deduction.
You can alternatively use a fixed rate per business mile to compute vehicle expenses instead of keeping detailed records of actual expenditure. It is available if the annual turnover of a business is less than the VAT registration threshold.
Use of home as office - Where a room at home is used wholly and exclusively for business purposes, a deduction may be claimed for a portion of: insurance, council tax, mortgage interest, rent, repairs and maintenance, cleaning, heat, light and power, broadband and telephone.
Administrative costs, including mobile phone - You can deduct the administrative costs of running your business, including advertising, stationery, postage, telephone and fax. You may also be able to deduct the cost of trade or professional journals or subscriptions.
Disallowed expenses - Some expenses are never allowable for tax purposes, for example, entertaining clients, even if such entertainment directly led to new business.
Private expenditure is also non-allowable expenditure - some examples: ordinary ‘civilian’ clothing, food for sustenance, having somewhere to live.
Selling Future Business Profits: Income Or Capital?
A look at anti-avoidance rules concerning the sale of an individual's occupation income.
Turning income receipts into capital has been potentially attractive to individual taxpayers for many years. This is mainly due to the difference between the rates of income tax (i.e. higher and additional rates 40% and 45%) and capital gains tax (i.e. higher rate generally 20% for 2016/17, based on changes in Finance Bill 2016).
Creative minds have long been trying to devise ways of achieving this objective. Generally speaking, tax 'loopholes' these days tend to be blocked with anti-avoidance legislation very soon after HM Revenue and Customs (HMRC) become aware of them. However, one set of anti-avoidance provisions, aimed at blocking particular attempts to turn income into capital, has been with us in various forms for decades. Unfortunately, the rules are not very well known, and can therefore present an unexpected trap.
Selling occupation income
The anti-avoidance rules in question affect sales of occupation income.
For example, Robert, a VAT consultant (who pays income tax at 40%), sold a licence in respect of his consultancy fees for the next three years to another VAT practitioner on 1 February 2016, for a capital sum of £200,000. He declares the transaction as a capital receipt on his tax return for 2015/16. Is he correct to do so?
An income tax charge under the above anti-avoidance rules can apply where the transaction has been effected to exploit Robert’s earnings capacity and a main object is the avoidance or reduction of an income tax liability, if three conditions are satisfied. These conditions (A to C in the legislation) are broadly as follows:
Payments for licences (or copyrights, or franchises) are specifically caught if the value of the right is derived from the individual’s activities. In the above example, Frank is trying to turn his income into a capital receipt, and each of the conditions A to C is satisfied. The capital sum would therefore fall to be charged to income tax on an 'arising' basis (i.e. in the tax year 2015/16, when the capital sum is receivable.
Sales of going concerns
There is an important exemption from the income tax charge for sales of going concerns. This exemption applies to capital receipts for the disposal of assets (including any goodwill) or a partnership interest, if the value is attributable to a profession or vocation as a going concern. A similar exemption applies to the disposal of shares in a company.
However, this is subject to a further anti-avoidance rule. A potential restriction in the exemption applies broadly if the going concern value is derived to a material extent from future earnings attributable to the individual’s activities in the occupation. The exemption only operates in those circumstances if the individual will receive full consideration for the future earnings (e.g. a partnership profit share, or employment income as a company employee.
Practical Tip: A further possible let-out from the income tax charge is that it applies to an 'occupation'. This means that activities of a kind undertaken in a profession or vocation are caught, whether as a self-employed individual, an employee or office holder. The anti-avoidance rules were probably intended to affect individuals such as actors and sportsmen (e.g. see Black Nominees Ltd v Nicol (and cross-appeal), but professionals such as accountants and solicitors are also potentially within the scope of the provisions. However, trading activities fall outside them.
Employee Business Travel Expenses Claim
Where employees use their own cars for business mileage they can claim reimbursement from their employers through the approved mileage allowance payments rates (AMAPs). These are not regarded as a taxable benefit. There is currently a higher rate of 45p per mile for the first 10,000 miles of business use and 25p per mile thereafter.
Where individuals are paid less than those amounts by their employer, they can claim mileage allowance relief (MAR) for the residual amount.
If employees receive greater amounts than are allowed tax-free, they will pay tax on the excess.
You cannot make a claim for travel to and from your permanent place of work.
Only two types of journey count as business travel:
- journeys that form part of your employment duties (such as journeys between clients' premises by a salesperson)
- journeys that relate to your attendance at a temporary workplace
If your mileage claim is below £2,500, Form P87 is used to make the claim. If your mileage claim is more than £2,500 then you must register you under Self Assessment and file a Tax Return annually.
You can claim up to 4 years back, i.e. after 6/4/16 the following claims can be made: 2015/16; 2014/15; 2013/14 & 2002/13.
Entrepreneurs’ Relief: Timing matters
A valuable capital gains tax relief can easily be lost through unfortunate timing.
Entrepreneurs’ relief (ER) is among the most popular and well-known of tax reliefs. ER offers a capital gains tax (CGT) rate of 10% on net chargeable gains of up to £10 million. A claim for ER is available on a material disposal of business assets, such as an individual’s company shares, where certain conditions are satisfied.
A disposal of shares will typically involve a sale (or possibly a gift). However, for ER purposes the disposal of an interest in shares can also include a company purchase of its own shares from the individual shareholder. Such payments are normally treated as income distributions. However, if certain requirements are met, the shareholder is normally treated as receiving a capital payment instead.
Share disposals require certain alternative conditions to be met for ER purposes, depending on the circumstances. The most common of those conditions requires that the following criteria are met throughout the period of one year ending with the date of disposal: firstly, the company is the individual’s personal company and is either a trading company or the holding company of a trading group; and secondly, the individual is an officer or employee of the company (or, if the company is a trading group member, of one or more companies which are members of the trading group).
Thus ER can be inadvertently lost if the individual resigns as an officer and employee before the date of disposal of the shares.
ln Moore v Revenue v Customs  UKFTT 115 (TC), the taxpayer was a director shareholder of a trading company, and was also employed with the company under a contract of employment. Following a dispute between the taxpayer and the other director shareholders, it was agreed that the taxpayer would leave the business.
There were unsigned and undated Heads of Terms prepared in February 2009, in which it was agreed that the company would purchase 2,700 of the taxpayer's 3,000 shares. It was also agreed that the taxpayer's employment would be terminated, and that he would resign as a director.
Subsequently, at a general meeting of the company on 29 May 2009, it was resolved that the company would purchase the 2,700 shares from the taxpayer. On the same day, the taxpayer signed a compromise agreement for the termination of his employment, and also Companies House papers concerning his resignation as a director. However, that documentation stated the effective date of the taxpayer's resignation as 28 February 2009.
HMRC refused an ER claim on the share disposal, because the taxpayer was not an officer or employee of the company throughout the period of one year ending with the disposal of his shares on 29 May 2009. The taxpayer appealed.
A company purchase of own shares must comply with company law requirements to be valid. The First-tier Tribunal noted that a contract for the purchase must be approved in advance by resolution. That resolution was not passed until 29 May 2009. The taxpayer ceased to be a director or employee on 28 February 2009. Therefore, the 'officer or employee' condition for ER purposes was not satisfied for the one-year period up to the date of disposal on 29 May 2009. The taxpayer’s appeal was dismissed.
(The taxpayer in Moore continued to provide services to the company after his employment had ended. Even though he ceased to be a director and employee of the company in February 2009, it might have been possible to argue that he effectively continued to be an employee, based on ER case law. Unfortunately, in Moore the taxpayer’s services were provided through a personal service company, and not directly.)
UK Resident Landlords
This overview relates to a schedule A business, which is applicable to most individual landlords. Special rules apply to the rent a room scheme and to holiday lets. Hotels and guest houses are also excluded from these general rules.
Rents & allowable expenses
Rents less allowable expenses are taxable as part of the taxpayers total UK income. The main rule for allowable expenses is that they must be wholly and exclusively incurred in the course of the letting business. It is important to differentiate initial and capital costs from running costs. Capital costs and set-up costs, which are capitalised, are usually relieved for tax purposes against the calculation of the gain on sale of the investment property. The cost of improvements is normally treated as increasing the base cost of the investment.
The two biggest items allowable as a deduction in calculating taxable net rental income will often be mortgage interest and travel where the cost is attributable to the rental income. The lettings agent will incur other costs and as long as these represent routine maintenance these too will be allowable. From 6 April 2017 individuals receiving rental income on residential property in the UK will receive relief on mortgage interest at the basic rate of income tax (to be introduced progressively over four years from 6 April 2017)
Basis of determining ‘rent’
The rental income for small lettings (under £15k p.a.) is normally calculated as the cash received. Taxable rent from all other lettings are taxable on an earned or receivable basis though relief is normally given for unrecovered rental.
Special rules apply to the treatment of losses. While profits are added to a taxpayer’s income and taxed at the taxpayers highest rates, losses generally may not be set off income from other sources other than some types of other property income. Losses may be carried forward to offset future profits, with some restrictions on the type of profits they may offset.
All UK residents with un-taxed income or profits are obliged to notify HMRC by 5th October following the end of the tax year when such income or profit first arose. Landlords must also notify HMRC when gross rental income exceeds £10,000. Unless the taxable amount is under £2,500 and HMRC can collect the tax due through the PAYE scheme, HMRC will require submission of a Tax Return. The landlord’s Tax Return must include the additional property pages. All Income Tax Returns must be filed by 31st January following the end of the Tax Year (the previous 5th April) if filed online, otherwise the deadline is the previous 31st October. The calculation of the tax liability takes into account all the landlord’s other income and allowances, and for this reason is necessarily complicated.
Sale of property
On disposal of the property any increase in value is potentially subject to capital gains tax. The gain is calculated by comparing the sales proceeds with all the acquisition costs. Some reliefs are available and there is a personal annual exempt amount. Substantial reliefs are available if the landlord has lived in the property at any time as his only and principal private residence.
You are resident in the UK if you normally live in the UK and only go abroad for holidays and short business trips. If you believe you may be non-resident then you must pass several precise tests.
This note is provided as a general overview. It should not be relied upon for taxation purposes, as it cannot provide a complete analysis of the law in any particular circumstance. We will be pleased to advise on any individual situation.
Tax Return Errors
Errors are sometimes made in tax returns. This can result in HM Revenue and Customs (HMRC) seeking to impose penalties in respect of the errors. If the tax return error has resulted (for example) in a tax liability being understated, HMRC will generally consider whether the error was careless or deliberate. An error is 'careless' if it arises due to a failure to take reasonable care. Thus no penalty can be charged if the error arose despite reasonable care having been taken.
Is it 'reasonable' or not?
Unfortunately, there is no statutory definition of 'reasonable care’ for these purposes. This has resulted in case law over the years on the distinction between reasonable care and careless (or negligent) behaviour.
For example, in Collis v Revenue & Customs the First-tier Tribunal commented: 'We consider that the standard by which [reasonable care] falls to be judged is that of a prudent and reasonable taxpayer in the position of the taxpayer in question.'
HMRC considers that reasonable care depends on the particular taxpayer's abilities and circumstances. However, HMRC generally expects higher standards of taxpayers with professional advisers.
However, has a taxpayer taken reasonable care in relying on professional tax advice, if that advice results in a tax return error? The answer seems to be 'it depends'. For example, in Gedir v Revenue & Customs , the First-tier Tribunal held that the taxpayer took reasonable care despite a tax return error. In reaching that conclusion, the tribunal noted the following 'essential elements':
- the taxpayer consulted an adviser he reasonably believed to be competent;
- he provided the adviser with the relevant information and documents;
- he checked the adviser’s work to the extent that he was able to do so; and
- he implemented the advice.
The tribunal noted the earlier case Hanson v Revenue and Customs , and considered that the decision in that case sets out the correct basis for establishing whether a taxpayer who uses an agent to complete his tax return has taken reasonable care to avoid an inaccuracy in the return. In Hanson, the First-tier Tribunal considered that there was carelessness on the part of the taxpayer’s advisers. However, the taxpayer had taken reasonable care to avoid the error. In the circumstances, the taxpayer was entitled to rely on his accountants' advice without the taxpayer consulting the legislation or any HMRC guidance.
On the other hand, a taxpayer's reliance on professional advice does not represent a 'get out of jail' card in all circumstances. For example, in Shakoor v Revenue and Customs , the tribunal found that an accountant's incorrect advice was obviously wrong, and that the taxpayer realised, or ought to have realised, that it was obviously wrong, or so potentially wrong that it called for further explanation or justification. The taxpayer therefore incurred a penalty.
Tip: Taking a different view from HMRC on a technical point is not necessarily careless behaviour, if the taxpayer’s adviser's view turns out to be incorrect. Provided that the view is reasonable, the adviser is entitled to advise the taxpayer on that basis. The First-tier Tribunal decisions in Gedir and Hanson on reasonable care do not create a binding precedent, but may be persuasive in cases where the taxpayer has made a tax return error concerning a point on which professional advice has reasonably been taken, and HMRC is contending that the error it was careless.
Don't Become A Contractor By Accident
Business Property Owners: Don't Become A Contractor By Accident!
Owners of businesses with properties that become too involved in construction or improvement work on their properties could become a contractor by accident!
Many owners of businesses not engaged in construction work will probably know little or nothing about the construction industry scheme (CIS). This is perhaps understandable, as the definition of 'contractor' for CIS purposes means that non-construction businesses are generally excluded, unless average annual expenditure on construction operation (normally measured over a three-year period) exceeds £1 million (FA 2004, s 59(1)).
Don't make it personal!
However, non-construction business owners who become personally involved in construction work undertaken on properties (e.g. arranging for the work to be done on their business properties, contracting with the builders, etc.) could inadvertently become subject to obligations under the CIS regime, including the requirement to deduct tax from
subcontractors who are not registered for gross payment, and to account for that tax to HM Revenue and Customs (HMRC).
In Donnithorne v Revenue and Customs  UKFTT 241 (TC) the appellant, the director of companies owning nursing homes, wanted to ensure that various additions or improvements were made to one of the nursing homes. He therefore decided to take on the role of arranging for the construction work to be done. To his surprise, HMRC assessed the appellant for having failed to make deductions under the CIS in respect of payments made to three subcontractors. HMRC also sought penalties from the appellant for having made no CIS returns.
Before the First-tier Tribunal, the appellant conceded that he had been acting as a contractor, even though he appeared not to be undertaking any of the work himself. He had entered into the contracts with the construction workers; if the workers had not been paid it was the appellant who they would have sued for payment. This made the appellant an 'intermediary', and he therefore had a potential liability to operate the CIS regime.
However, there are certain exemptions from a contractor’s liability to deduct and account to HMRC for CIS deductions, where the contractor has failed to do so.
One such exemption applies if the contractor satisfies HMRC that he took reasonable care to comply with the requirement to deduct the correct tax from relevant payments to subcontractors (within FA 2004, s 61), and that either the failure to deduct that tax was due to an error made in good faith, or he held a genuine belief that this requirement did not apply
to the payment (Sl 2005/2045, reg 9(3)).
If HMRC refuses to direct that the contractor is not liable to pay the tax, the contractor may appeal (reg 9(7)). Fortunately for the appellant in Donnithorne, the tribunal decided that reg 9(3) was satisfied on the 'unusual' facts of the case. The appellant's liability to account now
for CIS payments was therefore discharged in relation to payments made to the first subcontractor. In addition, the appellant's CIS liability was eliminated in respect of payments made to the second subcontractor. The tribunal made no finding or decision in relation to the small payment (ie. £229) made to the third subcontractor.
Furthermore, the tribunal decided that in view of the special circumstances in the case the appellant's liability for penalties should be entirely eliminated under the 'special reduction’ provisions for late filing penalties (in FA 2009, Sch 55, para 16).
Interestingly, the tribunal in Donnithorne pointed out: 'with a minor difference in form, the conclusion could well have been that there was no question of liability under the CIS scheme on anybody's part. For had the nursing home companies themselves engaged the builders, there would have been no liability on the part of those companies (not being construction companies in any sense) to make deductions on paying for building works in just the manner that there are no such liabilities when an ordinary home owner pays for some building work on his house...’
An Introduction to the Tax System for the Self Employed
You must register with HMRC within the first three months of self employment. There are three ways that you can register:
In calculating taxable profits you are entitled to claim deductions from your business income in respect of any expenses incurred for the purposes of trade (with a few minor exceptions). When you buy equipment for your business, you will be entitled to deduct the full cost (up to a maximum of £200,000 per year from 1 January 2016)
Tax is payable on the whole of the profits of a trade and the aim of the system is that over the lifetime of your business the profits will be taxed once, and once only.
How is the tax collected? - Tax returns covering income for the year ending 5 April 2016 have to be submitted to HMRC by the ‘filing date’ which is 31 January 2017 for on-line returns. There are automatic penalties for late filing of tax returns.
Payment of tax - Payments on account of income tax and Class 4 NIC will be due on 31 January 2016 and 31 July 2016. These interim payments will be based on one half of the total liability for 2014-15. The balance of income tax for 2015-16 is due on 31 January 2017 (along with the first interim payment for 2016-17 and any capital gains tax for 2015-16). Interest and surcharges will be levied for late payment.
The self-employed are subject to a two-tier system of national insurance contributions. Class 2 NICs are aligned with self assessment liabilities. Profits between certain limits are subject to Class 4 NICs and payable at the same time as the installments of tax.
Employed or Self Employed?
The question as to whether someone is employed or self employed is not as straightforward as it might at first appear. Many people assume they are free to choose, but HM Revenue & Customs emphasises that this is not the case.
How do you decide? - Although there is no clear-cut answer to this question, HM Revenue & Customs considers areas such as: • Ultimate control of the work • Profit element, and risk of loss • Provision of materials and equipment • Integration with the employer’s business • The intention between the parties • Usual conditions in the industry.
The employer has responsibility for determining employment status.
What are the practical differences? - Employees are taxed under the PAYE system and are liable to Class 1 national insurance (NI) contributions. If the worker is an employee, the employer also has to pay Class 1 NI.
Employees have rights under health and safety and employment laws, such as the rights to redundancy payments and not to be unfairly dismissed. Moreover, the range of social security benefits is greater for employees than for the self employed.
Self employed workers are taxed under self assessment and are allowed more scope in claiming expenses. They also pay Class 2 and Class 4 NI contributions, the combined burden of which is lower than Class 1 NI. Their ‘employers’ are not subject to NI.
What if you are wrong? - It is the responsibility of the person making the payment to get it right. If you treat a worker as self employed and he or she is subsequently ruled to be an employee, you could find that all the payments you have made will be treated as net payments, and you will have to pay the corresponding tax and employees’ NI, as well as the employer’s NI. You have no right in law to recover such items from your employees after the event.
Can you create conditions to favour self employment? - If you want to substantiate a classification of a worker as self employed, we strongly recommend that you have drawn up and enforce a suitable contract defining the services provided. In line with the tests referred to above, you will need to give particular consideration to the following points:
Pricing - One of the main requirements is that self employed workers bear some element of risk in the arrangement, which means you will have to avoid the ‘hourly rate’, in favour of a ‘price for the job’.
Workmanship - Within reason, the more freedom the worker has in the detail of the way the work is carried out the better. You must also make it clear that the worker will have to put right any faulty work at his or her own expense.
Substitution - One of the strongest tests of self employment is the right to substitute a worker who is equally capable of carrying out the work.
Insurance - ll self employed workers should hold public liability insurance.
Provision of equipment - Where practical, the worker should supply at least some of the important equipment or tools.
Travel Expenses - Intermediaries: The New Rules
The Finance Bill 2016 introduces new rules which restrict the ability of workers providing their services through an intermediary to claim a deduction for the cost of travelling between home and work.
Employees are not allowed a deduction for home to work travel costs (ordinary commuting) and the new rules deny relief in certain situations to workers working through an intermediary for travel. However it should be noted that the rules do not affect all workers providing their services through an intermediary - a deduction for home-to-work travel is only denied if certain conditions are met.
Who is affected? - The new rules apply where a worker:
Employment intermediary - The rules apply where the worker does not provide his or her services direct to the client, but those services are provided through an intermediary. Thus, the intermediary provides an additional layer between the worker and the client. The intermediary may be a psc, an umbrella company, an employment agency or similar.
Supervision, direction and control - The 'supervision direction and control' test is critical in determining whether a worker who provides services through an intermediary is able to claim a deduction for the cost of travel between home and work. The new rules only bite where the worker is subject to, or is subject to the right of 'supervision, direction and control' of any person as to the manner in which the worker provides his or her services.
The 'supervision, direction and control' test is met if there is a right to supervise, direct or control, even if there is no actual supervision, direction or control. The supervision, direction or control can be provided by 'any person'. It does not have to be provided by the client - the test is met if it is provided by an agency, a project manager, a consultant, a manager, etc.
The worker only needs to meet one part of the test for it to apply.
Supervision - The 'supervision' element of the test is met if someone watches or oversees how the worker provides his or her services or checks the work that the worker is doing to make sure that it is done correctly or to the right standard.
Direction - Direction over the manner in which a worker provides his or her services means providing a worker with instructions, guidance or advice so that they do their work in a particular way.
Control - A person is subject to control as to how they do their work if another person tells or instructs them how to do the work. It is the right of a person to say to the worker 'don’t do it like that' or 'do it like this'.
A worker who provides personal services through an intermediary is still able to claim a deduction for home to work travel if they are not subject to supervision, direction & control.
Should You Form a Limited Company?
Recent tax changes have made it even more important to consider carefully, when running a business, whether it is best to trade as:
• Sole trader – an individual
• Partnership – two or more individuals or companies
• Limited company • Limited liability partnership
We are often asked, ‘Should I form a Limited Company?’ The reality is that there is no easy answer. Each situation has to be judged individually. As well as the obvious issues of tax and national insurance contributions (NICs), there are other potentially relevant factors, such as: • The nature of the business and its expected rate of growth • The degree of commercial risk • Administrative obligations • Personal preferences • Pensions
In the early years of a business, the privacy of operating as a sole trader or partnership may be attractive. Business funds can be used at will with fewer restrictions than in an incorporated environment. However, we are considering here the features of a limited company. A company is a completely separate legal entity subject to two main areas of regulation – tax and company law. This planning guide looks at some of the advantages and disadvantages of trading as a limited company. If you need assistance to register as a company please contact us on Derby 202660.
Advantages / Disadvantages of incorporation
Possible advantages of incorporation - Incorporation normally provides limited liability. If a shareholder has paid fully for his or her shares, he or she cannot normally be required to invest any more in the company. Although companies with bank borrowings often have to provide directors’ personal guarantees, the protection of limited liability will generally apply in respect of liabilities.
• A company enjoys legal continuity, it can own property, sue and be sued.
• Effective ownership or part ownership of the business may be readily transferred, subject to the provisions of the Articles of Association.
• Shareholders can be paid in dividends (currently free of NICs)
• Growing businesses can re-invest profits after an overall tax charge of 20%.
• Accumulated funds could be withdrawn on a sale of shares with the benefit of capital gains tax (CGT) Entrepreneurs’ relief which reduces the effective CGT rate.
• Corporate status is sometimes thought to add to the commercial respectability of the business.
• Employees may be offered an opportunity to buy their own stake in the business.
• The National Minimum Wage does not apply to directors (as they are office holders)
Possible disadvantages of incorporation
• Formation of a company incurs administrative costs.
• Customers and suppliers must be informed of a change to limited company status.
• The tax position arising on the incorporation of an existing business needs careful analysis. It may be possible to defer capitals gains tax on the transfer of goodwill etc.
• A company's accounts must be filed on public view with the Registrar of Companies.
• Funds withdrawn from a company normally give rise to tax liabilities.
• Remuneration for directors is subject to both employee's and employer's National Insurance liabilities. Both the company and its directors are liable to NIC on many benefits in kind, and a form P11D must be prepared for each director.
• Tax on directors' remuneration paid monthly is payable on the 19th of the following month through the PAYE system, and corporation tax is payable nine months and one day after the end of a company's accounting period. For a sole trader or partnership, tax is generally paid by instalments on 31 January and 31 July on the current year basis.
• Companies pay tax on capital gains at their corporation tax rate. In a company, a capital gain is reflected in the value of its shares and if these are sold a "double charge" to capital gains tax can arise.
• An individual has greater flexibility in dealing with trading losses.
Your Charter & HMRC Enquiries
Dealing with HM Revenue and Customs (HMRC) is rarely a pleasant task. For example an enquiry by HMRC into a self-employed individual’s tax return and accounts can be a time-consuming, stressful experience for the taxpayer not to mention the financial cost implications (e.g. additional professional fees).
Answering questions from, and generally interacting with, HMRC officers can be an intimidating experience, particularly during an enquiry. Fortunately, HMRC has a Charter for taxpayers ('Your Charter'). There is a legal requirement for the Charter to '...include standards of behaviour and values to which [HMRC] will aspire when dealing with people in the exercise of their functions’ (CRCA 2005, s 16A(2)).
'Your Charter' applies to the conduct of HMRC officers during an enquiry, although it is important to appreciate that it applies to HMRC's interactions with taxpayers generally. The Charter was amended in January 2016. The amended version broadly comprises seven taxpayer 'rights':
1. 'respect you and treat you as honest; 2. provide a helpful, efficient and effective service; 3. be professional and act with integrity; 4. protect your information and respect your privacy; 5. accept that someone else can represent you; 6. deal with complaints quickly and fairly; and 7. tackle those who bend or break the rules.'
How can it help? - In the context of a tax return enquiry, the rights that taxpayers and agents should monitor in particular are the first and third above; the first in respect of the HMRC officer’s conduct from the outset of the enquiry; and the third in terms of HMRC's approach to the enquiry in general (e.g. helping to keep the practitioner’s professional fees to the client as low as possible).
HMRC states: 'We'll presume that you’re telling us the truth, unless we have good reason to think otherwise.' However, taxpayers and agents might be forgiven for thinking that HMRC sometimes seem to take the opposite approach.
For example, in the course of a tax return enquiry, a self-employed individual with a cash-based business (e.g. a café proprietor) might find that HMRC attempt to discredit the accuracy and/or completeness of his accounting records (a practice commonly known as 'breaking the records'), with a possible view to increasing turnover and taxable profits for the year of enquiry (and possibly for other tax years, as well). A respectful reminder by the taxpayer or agent of the Charter standards required of HMRC may sometimes be appropriate.
Two-way traffic - interestingly, the latest Charter also contains seven 'obligations' (i.e. what HMRC expects from taxpayers), namely: 'be honest and respect our staff; work with us to get things right; find out what you need to do and keep us informed; keep accurate records and protect your information; know what your representative does on your behalf; respond in good time; and take reasonable care to avoid mistakes'.
Student Loan Repayments
Changes to student loan collection from April 2016.
Repayment of student loans is a shared responsibility between the Student Loans Company (SLC) and HM Revenue and Customs (HMRC). Employers have an obligation to deduct student loan repayments in certain circumstances, and to account for such payments 'in like manner as income tax payable under the Taxes Acts'.
With effect from 6 April 2016, there are two plan types for student loan repayments:
Plan 1 loans are pre-September 2012 income contingent student loans, and repayments will start when the £17,495 threshold is reached. Loans taken out post-September 2012 in England and Wales become eligible for repayment when the higher threshold of £21,000 is reached. Previously, these have been repaid outside of the payroll directly to the SLC. From April 2016, they are to be calculated and repaid via deduction from an employer's payroll. So, employers and payrolls must now be capable of coping with both types of plans.
Broadly, an employer must start making student loan deductions from the next available payday using the correct plan type if any of the following apply:
Deductions are rounded down to the nearest pound. Deductions are non-cumulative, and so employers can ignore the question of amounts already deducted by a former employer. HMRC provide tables to assist employers in calculating the deduction each pay day, which (because of rounding) may not be exactly 1/52 of the annual amount.
Employers are required to collect student loan repayments through the PAYE system by making deductions of 9% from an employee's pay to the extent that earnings exceed the relevant threshold for each plan type, each year (see above).
Each pay day is looked at separately, and so repayments may vary according to how much the employee has been paid in that week or month. If income falls below the starting limit for that week/month, the employer should not make a deduction.
Service Companies - Can They Help?
Use of service companies by unincorporated businesses - Individuals who operate their businesses as sole traders or partnerships may sometimes wish that they operated through a company instead.
For example, changes to dividend taxation from April 2016 include an income tax rate of 0% on the first £5,000 of dividend income. If some of the company's shares are held by spouses and possibly other family members, the benefit can be multiplied.
However, there may be commercial and/or other reasons why the unincorporated business owner may not wish to incorporate and operate through a company. The same applies to introducing a company into a partnership of individuals (i.e. a 'mixed partnership’). The tax implications of both operations can also be complex and difficult.
Why use a service company? As a possible alternative to incorporating the business a service company might be considered, to operate alongside the existing unincorporated business. For example, some professional partnerships have traditionally used service companies. The trade of the service company might include providing accommodation, office and/or other ancillary services to the main partnership. The service company may possibly also deal with the partnership’s suppliers, engage staff, etc., and sell its services to the partnership with a suitable mark-up on its costs.
For tax purposes, the service company's charges in the above example could effectively move some partnership profits away from immediate (and often higher) rates of income tax (and NICs) otherwise chargeable on the individual partners, and into the service company (on which corporation tax is charged at 20% (for financial year 2016)). This could also potentially allow the partners to take dividends (in their capacity as the company's shareholders), and possibly to transfer shares to their spouses to enable them to do so.
Plenty to consider - This may sound fairly straightforward. However, there are numerous tax implications to consider, and some possible traps.
For example, the service company's charges must be commercially established. If the service company's charges are excessive, this could result in a 'double whammy’; corporation tax for the company on its profits, but with no tax deduction for the partnership for the service charges incurred.
The trading transactions between the service company and partnership should also be on arm's length terms including any credit afforded by the company to the partnership. Otherwise, a tax charge could arise for the company under the 'loan to participator' provisions. There may also be beneficial loan implications to consider for the partners in their capacity as directors or employees of the service company, in respect of monies owed to the company by the partnership.
There are various other potential tax issues of service company structures to consider (e.g. VAT, the 'settlements' anti-avoidance provisions if service company shares are transferred to family members, etc.). The decision to use a service company should be a commercial one; it should not be tax motivated.
Overdrawn Directors' Loan Accounts
Overdrawn Directors' Loan Accounts – Traps to Avoid
The loans to participators provisions are relatively well-known among affected taxpayers. The legislation imposes a 25% tax charge in respect of loans or advances to participators.
The tax charge can be prevented on an overdrawn directors loan account to the extent that the 'Ioan' is repaid up to nine months after the end of the company's accounting period in which it is made. There is also relief if the loan is repaid or written off after that period.
'Bed and breakfasting’
There are anti-avoidance rules to rules to block 'bed and breakfasting’.
This practice involves the shareholder repaying the overdrawn loan account balance either just before the end of the accounting period or within the following nine months, so that the 25% tax charge is not due. The shareholder might then withdraw a similar (or greater) amount from the company shortly thereafter.
lf the anti-avoidance provisions apply, relief from the above tax charge is broadly denied (or withdrawn, if already given). The provisions can apply in the following circumstances:
If 'caught' by either of the above rules, the effect is broadly that the repayment is treated as repaying the 'new' loan(s), rather than the earlier ('old') one(s). Relief from the 25% charge is therefore wholly or partly denied (or withdrawn) in respect of the 'old' loan(s) (i.e. relief will only be potentially available to the extent that the repayment exceeds the 'new' loan(s)).
Repayments not 'caught'
However, the above anti-avoidance rules do not apply if the directors' loan account repayment gives rise to an income tax charge on the director shareholder (see below).
HMRC accepts that repayments can be made via 'book entries' in the company's accounting records, at the date when the book entries are made.
...Or are they?
The most common ways to repay an overdrawn directors' loan account balance in a 'taxable' form is by crediting the loan account with their salary or a bonus from the company. Similarly, a dividend from the company may be credited to the loan account.
Trivial Benefits And How To Deal With Them
The income tax exemption for trivial benefits and its implications for employers.
Finance Bill 2016 contains a proposed exemption from income tax for trivial benefits, effective from 6 April 2016.
Fewer form P11Ds?
Several changes have been made to the rules on employee benefits and expenses from April 2016. The changes mean that for 2016/17 some employers will no longer have to complete returns of benefits and expenses (forms P11D).
The three main changes, potentially leading to fewer forms P11D for 2016/17, are:
Trivial benefits exemption
Prior to 2016/17, employers were required to agree with HMRC whether benefits could be treated as trivial. Legislation included in Finance Bill 2016 will provide for an exemption for trivial benefits and apply from 6 April 2016.
The proposals provide for an income tax and NICs exemption from 2016/17 for trivial benefits where the following conditions are met:
The cost of the benefit is defined in the legislation as:
Directors and officeholders
Trivial benefits provided to directors or other office holders of close companies (broadly, those with five or fewer participators), or to members of their families or households, will be capped at £300 per tax year.
Where an employee receives a benefit exceeding £50, the whole amount becomes taxable, not just the excess, and it must be accounted for accordingly.
The exemption applies equally to benefits provided to an employee, or to a member of his or her family or household, subject to the £50 limit.
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