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Welcome…
To July’s Tax Tips & MYOB News.
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Off-Payroll Rules (IR35) to be extended to Private Sector Workers?
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As mentioned in the Autumn Budget, the Government has opened a consultation into a possible extension of the rules that currently apply to “off-payroll” workers in the public sector to the private sector. This consultation is being undertaken at the same time as the consultation into employment status.
The IR35 rules introduced in 2000 are intended to ensure that people working through a Personal Service Company (PSC) who would have been employees if they had been engaged directly, pay broadly the same Income Tax and National Insurance Contributions (NICs) as if they were employed. However, it is estimated by HMRC that only 10% of individuals working in this way apply the rules properly, costing the Exchequer hundreds of millions of pounds in lost tax revenues every year.
Is it working in the Public Sector?
In April 2017, the Government reformed the rules for engagements in the public sector, and early indications are that this has resulted in an increase in public sector compliance. The April 2017 change requires the public sector body or agency, not the worker, to decide whether or not the IR35 rules apply and then deduct income tax and national insurance from payments to the worker.
There are however concerns that many of such workers are being treated as quasi-employees incorrectly. The consultation document states that there is evidence that some public authorities did have difficulties implementing the reform, both understanding the new rules and resolving disputes with contractors. HMRC have introduced the Check Employment Status for Tax service (CEST) software on their website to assist employers in reviewing workers’ contracts.
Options being Considered for the Private Sector
As well as the possible extension of the rules that currently apply to the public sector, the consultation is requesting views on other options. One alternative would be to require engagers to carry out due diligence into labour providers in their supply chain to ensure that they are compliant with employment and tax laws. This is already a requirement for gangmasters and other labour providers.
One suggestion apparently rejected was to create a new corporate structure referred to as a “freelance limited company” that would offer a simplified tax treatment, limited liability, a restriction on the frequency of dividend payments, and a requirement for the worker to be paid a minimum salary.
Another proposal rejected was to introduce a flat-rate withholding tax, similar to the Construction Industry Scheme for off-payroll engagements.
The consultation period ends in August and it is anticipated that the Chancellor will make an announcement about future proposals in the Autumn Budget.
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VAT Reverse Charge for Construction Businesses
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| CGT to be paid Earlier |
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Under new rules due to come in on 1 October 2019 builders, sub- contractors and other trades associated with the construction industry will have to start using a new method of accounting for VAT.
The measure is designed to combat VAT fraud in the construction sector labour supply chain which HMRC argue presents a significant tax loss. HMRC has now published draft legislation to introduce the Reverse Charge for Construction Services. Under the proposed new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the reverse charge a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT. The customer (main contractor) would then account for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position. This is intended to ensure that VAT is correctly accounted for on supplies by sub-contractors.
Construction Work Affected
The reverse charge will apply to a wide range of services in the building trade, including construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, and foundation works. The definitions have been lifted directly from the CIS legislation.
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Owners of second homes and buy-to-let landlords may face a much shorter period in which to pay any capital gains tax (CGT) due on property sales from April 2020.
HMRC are consulting on the mechanism for collecting CGT on residential property disposals from April 2020, when the tax will be due within 30 days of completion.
This will be instead of the normal payment date of 31 January following the end of the tax year and is yet another attack on buy to let landlords!
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NI and Multiple Employments
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You split your time between two companies and each pays you a modest salary below the NI threshold. During a PAYE inspection you were told that in future one of the companies must pay NI on the combined salary. Is HMRC correct?
Vive la difference!
One of the government’s big plans is to merge income tax and NI. However, for 2017/18 and the foreseeable future there are significant differences. For example, income tax is worked out by reference to your total income whereas NI is usually calculated on a job-by-job basis. But where businesses are associated, different rules apply.
Is there an association?
Even though being associated for tax purposes these days doesn’t carry the same significance as it used to, tax legislation rules define what associated means. However, there’s no equivalent definition for NI purposes; instead HMRC relies on the everyday meaning. This allows it to cast a very wide net in which employers can be caught. The consequence is that earnings paid by those employers must be lumped together for NI purposes.
Example. Jenny is a director of Acom Ltd and Bcom Ltd. Both operate from the same premises and share employees. In 2017/18 she draws salary of £8,000 per year from each. The rest of her income is paid as dividends (which are, of course, not subject to NI). Because her earnings are below the NI lower earnings threshold (£8,164 for 2017/18), neither employers’ nor employees’ NI is payable. If HMRC rules that Acom and Bcom are associated, NI must be worked out on the aggregate of Jenny’s salaries. This would result in employers’ and employees’ contributions of £1,081 and £940 respectively.
Note. Associated employers are permitted to decide which of them accounts for the NI, or they could share the liability in proportion to the salary they pay. Either way this will require making adjustments to the payroll of one or all employers. You’ll need to consult your software guide on how to achieve this.
Tip. It’s up to HMRC to make its case for aggregation of earnings. You aren’t required to do its job, but you cannot deliberately split earnings between employers for the purpose of avoiding NI.
Tackling HMRC over aggregation
If HMRC says that because you’re a director shareholder of two or more companies they are associated, refer it to the guidance in its NI manual ( NIM10010 ). This says “just because two companies associate together for mutual aid, or that one or more directors are common to each, does not, of itself, cause those companies to be carrying on business in association with each other.”
Association for NI purposes depends on the companies’ financial dependance on each other. This doesn’t mean simply who pays the bills, but rather that each company’s success or failure is largely reliant on the other’s. The more independent their prospects are, the less likely they are to be associated.
Tip. If you’re a director of two or more companies which aren’t associated, consider dividing your salary between them to maximise NI efficiency. For example, for 2017/18 you could take salaries of up to £8,164 from each of three companies without triggering any employers’ or employees’ NI liability.
Where businesses share resources, HMRC might argue that they are associated. This means salaries paid from each to the same person must be aggregated when working out NI. However, it’s up to HMRC to prove association. Where it doesn’t apply it’s okay to divide salaries between businesses to reduce NI bills.
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| July questions and answers |
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Q. I am a company director and usually work from an office in London. However, I will shortly be relocating to France for a couple of months and will be working from there. Will I be able to claim travel expenses whilst I’m abroad?
Answer
Q. I am a sole trader providing IT consultancy services to customers. I am registered for VAT. Can I use the cash accounting system for paying VAT and do I need to apply to HMRC to use it?
Answer
Q. What are the conditions for claiming Marriage Allowance and what is the maximum that can be claimed in 2018/19?
Answer
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5 – Deadline for PAYE settlement agreement for 2017/18
6 – Deadline for 2017/18 forms P11D and P11D(b) to be submitted and copies of P11D to be issued to relevant employees
Deadline for employers to report share incentives for 2017/18
14 – Return and Payment of CT61 tax due for quarter to 30 June 2018
19/22 – PAYE/NIC, student loan and CIS deductions due for month to 5/7/2018 or quarter 1 of 2018/19 for small employers
Class 1A NIC due in respect of the tax year 2017/18
31 – Second self assessment payment on account due for 2017/18
Second 5% penalty surcharge on any 2016/17 outstanding tax due on 31 January 2018 still unpaid
Penalty of 5% of tax due or £300, whichever is greater for 2016/17 personal tax returns still not filed
Deadline for Tax Credits to finalise claims for 2017/18 and renew claims for 2018/19
Half yearly Class 2 NIC payment due
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