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Nichola's SME tax news: 22 July 2009

False self-employment in the construction industry: IR35 for subbies? A new Treasury consultation may have far reaching effects for many builders and their workers…more

Reality check please! Top tips on avoiding tax investigations: this winter, compliance is going to be the new black in the world of tax! Lots of firms are giving out advice in their newsletters, but is it a case of "can't see the wood for the trees"?:...more

Avoiding the 50% income tax rate: with the onset of super tax in 2010/11, it has been reported that some of the big law firms are considering changing their year ends to avoid paying the new super tax earlier than necessary...more

Other tax news

  • Pensions changes to anti-avoidance measures
  • Go for it: PAYE dispensations and flat rate allowances
  • The new Taxpayers Charter
  • Money Laundering Regulations
  • Reporting changes in company cars


False self-employment in the construction industry: IR35 for subbies?

A new Treasury consultation will have far reaching effects for many builders and their workers…

A consultation paper was published on 20 July 2009 to consider the issue of "false self-employment" in the construction industry.

False self-employment occurs when the underlying relationship between engager and worker indicates employment, but the engagement is presented as self-employment. The result is that:

The engager avoids NICs, holiday pay, and other employment costs/benefits such as pensions.

The worker pays lower NICs (max. 8%) as a self-employed worker, compared to 11% of an employee.

The tax regime for the self-employed allows more generous tax treatment, in that that worker is often able to deduct more expenses than he would if an employee.

The construction industry is being targeted by these new government proposals because it has a higher proportion of self-employed workers than other industries. The problem has been identified by several studies over the years, but it has proved difficult for HMRC to pursue on the grounds that employment status cases are incredibly costly and time consuming.

Proposals
There will be a new "deeming provision", as follows:

Where an engager (whose main business is construction operations) uses the services of a worker to carry out such operations, the payment received for those services will be deemed to be employment income. The engager will then have to deduct and account for Pay as Your Earn (PAYE) and NICs.

There is an opt out: a worker will be treated as being genuinely self-employed if he can meet one or more of the following three criteria:

Provision of plant and equipment – that a person provides the plant and equipment
required for the job they have been engaged to carry out. This will exclude the tools
of the trade which it is normal and traditional in the industry for individuals to
provide for themselves to do their job;

Provision of all materials – that a person provides all materials required to complete a
job; or

Provision of other workers – that a person provides other workers to carry out
operations under the contract and is responsible for paying them.

The deeming provision applies to payments made via agencies and to personal service companies (taking precedence over IR35). If the Managed Service Company rules would have applied PAYE and NICs to the payment, they may be adopted.

They will not apply to domestic works, and so you do not need to apply PAYE and NICs to your gardener, handyman, or any builder who comes and works on your house.

My comments
The net result of these proposals will be that construction becomes more expensive or that workers are paid less. Not much fun given the current state of the building industry but then why should construction workers have better tax treatment than say, office or retail workers?

The problem is going to be tough to crack, but the Treasury is probably doing it in the right way. HMRC's new CIS scheme should have addressed the problem and failed, because employment status is such a complex thing. HMRC's employment indicator tool, tells, as we all appreciate only half the story, and each case turns on its facts.

Looking at the "opt out" conditions there is obviously an issue with the definition of "plant". Many labour only workers use their own vans to get too and from work. These provide transport but are also essential in many cases when you have to carry around the tools of the trade. These toolkits tend to build up over the years. The question will be whether vans will represent qualifying plant and how many tools do you need before they become "plant".

Secondly, will workers be able to piggy back into employment right as a result of deeming. This has been an issue under IR35. The problem is that tax law and employment law do not mix.

In theory, the government could apply a similar deeming provision to workers in other industries, for instance the IT sector. Now, that might be interesting. More on this topic in due course.

Examples (from the consultation document)
ABC Ltd – how ‘deeming’ would work
ABC Ltd is a business, which undertakes development of sites across the country for private
housing. It secures most of the required building services locally at the different locations,
rather than having a permanent workforce. For the current project, it is building six houses
on a small site.
The company enters into various contracts to have work carried out on the site, as follows:

Carrying out groundwork
Mr B supplies his own services and those of three other men for the groundwork. The
payments made to Mr B will not be deemed to be employment income, as he meets criterion
3. However, if he does not already employ the three people working for him, he will need to
treat them as being deemed to be in receipt of employment income if they meet none of the
criteria.

Building the walls
Four people are engaged by ABC Ltd for bricklaying. ABC Ltd sources all the bricks and the
bricklayers bring only their tools of the trade. They will be deemed to be in receipt of
employment income, because they meet none of the criteria.

Installing the glazing
Mr C supplies and fits the glazing with the assistance of his employee. Mr C will not be
deemed to be in receipt of employment income, as he meets criteria 2 and 3.

Fixing the roofing
Four people are engaged for installing the roofing sourced by ABC Ltd. They do not bring
any equipment with them. They will be deemed to be in receipt of employment income,
because they meet none of the criteria.

Installing the fixtures and fittings
Two people are engaged to fit all the doors, cupboards and other fittings, which have been
sourced by ABC Ltd, bringing with them only their own tools of the trade. They will be
deemed to be in receipt of employment income, because they meet none of the criteria.

CIS returns
Where workers engaged by ABC Ltd are not deemed to be receiving employment income
they will be included on ABC Ltd’s CIS return.

Source: Treasury Website: http://www.hm-treasury.gov.uk/consult_false_selfemployment_construction.htm

Reality check please! Top tips on avoiding tax investigations

This winter, compliance is going to be the new black in the world of tax! Lots of firms are giving out advice in their newsletters, but is it a case of "can't see the wood for the trees?

I am not naming any names, but a steady trickle of newsletters appears in my inbox offering me "Top tips in avoiding tax investigations", and they all seem to say the same thing. While this not normally a cause for concern (I have a theory that they are all secretly written by the same pool of writers) in this case it set off some alarm bells.

Top tips:

1. Submit all your returns on time. HMRC will review your compliance records over the years. A history of late filing unfortunately, according to statistics, indicates that you may be experiencing problems in other areas of tax compliance too.
2. Ensure that you have declared all your sources of income on your tax returns, with particular regard to investment income. HMRC has now given itself wide ranging powers to obtain information from third parties such as banks in the UK and abroad.
3. Review your accounts, don’t forget stock and work in progress, ensure that provisions are reasonable and that you have quantified tax add backs accurately. Investigate any fluctuations in margins and any significant changes to turnover or the level of expenses.

And finally, what you really need to do:
4. Perform a “reality check” on your declared income. Are you sure that you are actually disclosing enough income to cover your mortgage (remember we can goggle your postcode to see where you live now, and some websites even tell us how much your paid for your home), domestic bills, holidays (as evidenced by those photos on Facebook, kids as well as day to day personal spending?

Don't overlook what is outstanding in loans and credit cards though, it is quite possible the you can prove that your lifestyle has been brought on credit rather than undeclared taxable income.


Avoiding 2010’s 50% top tax rate

The lawyers are plotting to avoid paying supertax in 2010/11...

With the onset of super tax in 2010/11, it has been reported that some of the big law firms are considering changing their year ends from 30 April 2010 back to March 2010. Whilst this measure may lead to some devilishly complex tax computations for partners (Health warning: do not try this at home without software), there is no guarantee that one rule will work for all.

Cash basis and UITF 40
Although firms will have adjusted themselves out of the adjustments which were necessary when the cash basis was abolished by 2010, many may be still adjusting their results as a result of UITF40. The burning issue is will firms now take another view about work-in-progress when the 50% band is on the horizon.

Is there another solution to the super tax problem?
Firms trading via LLPs need to think fast about transferring their trade into companies. There prospect of selling goodwill to a new company is looking very rosy with a CGT rate of a mere 18% (entrepreneur's relief may also apply taking some gains to 10%). If you sell your partnership goodwill, you can loan the proceeds back to the new company too. No tax relief on goodwill acquired from connected parties though.

Supertax at a glance 2010-11 changes to income tax
From 2010-11, for individuals:
• a 50% tax rate will apply to taxable income in excess of £150,000.
• The personal allowance will also be tapered to nil for individuals whose income is in excess of £100,000.


These ensures that marginal tax rates are set to do some wacky things:

Income

Slice

Tax rate

Dividend rate

£1 to £38k*

First £38k*

20%

10%

£38,001 to £100k

Next £62,600

40%

32.5%

£100,001 to £112,950**

Next £12.950

60%

48.75%

£112,951 to £150k

Next £37,050

40%

32.5%

£150k

Next £1

50%

42.5%

* estimated as 40% band (as yet to be announced for 2010/11)
** personal allowance estimated at £6,475 in example as 2010/11 rates unknown)

Pensions changes to anti-avoidance measures

• From 2011 tax relief on pension contributions will be tapered for those who are earning more than £150,000 per year.

There are anti-avoidance measures (which are known as anti-forstalling measures) in place to ensure that you cannot try and save tax by making huge one off contributions in 2009/10 or 2010/11 ahead of the changes and therefore securing more tax relief than the Treasury would like you to obtain. These are to be less onerous than first though, due to changes in the Finance Bill. These are that you will be able to obtain full tax relief on the lower of:

Your average contributions made in the three tax years ending 2008/09.

£30,000

Your earnings in the tax year that you are making the contribution.

This only affects those who are not making regular pension contributions.

 

PAYE dispensations and flat rate allowances


Hopefully you have filed your PIIDs for 2008/09 by the 6 July deadline. Companies face the prospect of having to payroll their benefits and expenses in the near future (HMRC is in favour of the measure). It is sensible for all companies to apply for PAYE dispensations* to cover expense payments to employees. One man companies can also apply but only if their accountant agrees to check their expense claims.

The dispensation form P11DX now also allows employers to notify HMRC of their intention to uses HMRC’s flat rate allowances (known as “Scale rate payments”). These apply to subsistence and mileage allowances. If HMRC’s rates seem to low, employers can set their own rates (but they must agree them with HMRC before applying them).

*A dispensation will normally be given to cover typical business expenses, for instance to cover amounts that your employees spend on:

o Travel
o Subsistence
o Accommodation
o Entertaining

It can also cover expenses paid when an employee uses a credit card you have supplied for business expenses.

A dispensation will not cover any taxable benefits or expenses such as:
o Company cars and vans that are taxable
o Private medical insurance
o Cheap loans
o Mileage payments (employees’ cars)
o Benefits and expenses covered by an existing exemption in law

If you have a chance complete HMRC’s questionnaire on payrolling benefits and expenses: http://www.hmrc.gov.uk/employers-bulletin/payrolling.htm to top

The new Taxpayers Charter

HMRC has published its responses to input on the new Charter, these include using less aggressive language. The text of the proposed Charter is included in Annex A of the summary of responses.

Money Laundering Regulations

Just a reminder if you provide accountancy services, book-keeping, or tax advice and have not registered your business you need to do so.
Under the Money Laundering Regulations (MLRs) 2007, Accountancy Service Providers (ASPs) should have registered their business with HMRC by 1 January 2009. HMRC operates a risk-based approach to its supervision of MLRs and will use information to find any ASPs that have not registered.

Accountancy Service Providers (ASPs) include accountants, auditors, tax advisers/consultants, bookkeepers, payroll agents, and customs practitioners who are not supervised by a designated professional body (such as the Institute of Chartered Accountants in England and Wales, or the Institute of Certified Bookkeepers).

You can find out more on the money laundering pages of HMRC’s website.

Reporting changes in company cars


From 6 April 2009 you do not need to file form P46(Car) when one car is replaced by another. This is to reduce administrative burdens, but it might be a problem for your employee if the taxable benefit is significantly different, as it means that their PAYE coding will be wrong.

You may want to consider contacting the tax office if the new car has substantially different CO2 emissions, or if the employee is making a capital contribution or payment for private use that also affect the car benefit calculation.

 

 

 

 

 

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