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June 2013

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To June’s Tax Tips & MYOB News.

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June 2013
· Lack of Contract for Workers is Irrelevant
· Tax Effective Salaries for Directors
· Inheritance Tax Loan change
· Letting Business Tax Reliefs
· June Question and Answer Section
· June Key Tax Dates
Lack of Contract for Workers is Irrelevant top
If you want to hire workers (and so avoid PAYE etc.), will the lack of a contract be enough to convince the taxman of their status? What’s the latest on this?

Long Running. The case of Philip Wright v HMRC has finally finished, ending up in the Tax Tribunal where the Taxman won the day. Although it was long running, the issues were straightforward and highlighting that cutting corners can be costly.

Facts. This case involved a contractor, Philip Wright (W), who used short-term labour under very loose arrangements. He gave them no written contract, and paid them no holiday or sick pay. What was the judge’s view in these key points?

•    No contractual holiday or sick pay. Not paying these doesn’t affect the employment status of your workers greatly. On the other hand, paying for sick days and holidays is a strong indicator of employment status

Tip. If you’re intending to use a worker on a self employed basis, don’t under any circumstances agree to pay them for days when they’re absent because of illness or holiday. For preference, pay them on a job-by-job basis rather than hourly or daily rate.

•    No written contract. W provided no written contract for his employees, preferring to explain the terms and conditions of the job orally. He also gave instructions via trusted and more experienced workers on how the job ought to be done. This clearly showed the W directly or indirectly controlled the workers and that’s a vital factor in determining employment status.

This case confirms that the taxman is entitled to take account of what you say, as well as what’s in writing. W’s case was sunk by two employees who gave evidence confirming they were controlled in most aspects of their work, including when they could take time off.

Tip. Whether the contract is written or oral, avoid taking too much control. If you trust your worker, then let them get on with the job. Buts it’s not a problem to tell them what you want, you just need to avoid telling them how to do it, e.g. by imposing too much supervision.

Don’t pay your freelance workers sick or holiday pay; the Taxman will claim they’re employed. Also what you say, as this can have the same effect as a written contract.

This article is updated from an original article in Indicator,, requoted with permission. 
Tax Effective Salaries for Directors top
Inheritance Tax Loan Change top
The 2013/14 tax year started on 6 April with changes to tax and NI rate bands and limits.  Directors who aim to extract profit from their company in the most tax-efficient way might need to tweak their salary to make the most of these new rates.

Tactics recap
The general idea is to set your salary at a level where no tax and NI is payable.  However, because the NI-free limits, known as thresholds, are lower than the tax-free allowances, concentrate on pitching your salary below these.

NI limits on the up
The NI thresholds for 2013/14 will mean you won’t pay NI where your salary and bonuses for the year don’t exceed £7,747.  But your company’s NI starts at £7,695, so from April 6 it’s this lower salary figure that’s optimum.

Note.  At the salary level suggested neither you nor your company will pay NI, but the good news is you’ll still receive a full year’s NI credit to your state pension record.

More income needed
A salary of £7,695 per year isn’t going to pay the bills, so you’ll want to top this up with income which doesn’t count for NI purposes.  Usually this means dividends, although some benefits-in-kind (BiK) also work.  The trouble with tax and NI-free BiKs is that they are few and far between and not terribly user friendly.  For example, you can’t pay your grocery bill using the cycle-to-work-scheme!  What you should do therefore is pay regular dividends, say monthly, at the most tax-efficient level; this will depend on the tax-free allowances and rate bands available to you.

Up and down tax limits
For the tax year 2013/14, basic tax-free allowances are set at £9,440, up from £8,105 for the current year.  However, the bad news is the point at which higher rate tax will apply drops from £34,370 to £32,010.

Just give us a ring pn 01422 847500 if you’d like to find out more about tax effective salaries and dividends.

A change in the way loans are treated for inheritance tax (IHT) purposes could increase the taxable value of your estate on death, and the amount of IHT payable. This change will affect IHT calculated on deaths occurring after the Finance Act 2013 is passed, (expected mid-July 2013) but applies to loans which are already in place.

At present any debts owed by the estate are deducted from the net estate after reliefs, such as business property relief (BPR), have been given. Broadly BPR provides 100% or 50% relief from IHT on the value of your business assets and unquoted shares. After the Finance Act 2013 is passed, the value of a loan must be deducted from the asset it was used to acquire. Read More

Letting Business Tax Reliefs top
June Question and Answer Section top
The tax treatment of businesses which involve the letting of property is not consistent across all taxes and tax reliefs. It’s not logical, but just because the letting business qualifies for one tax relief it will not necessarily qualify for an apparently similar tax relief.

For example if you have a property letting enterprise which you wish to transfer into a company in return for shares in the company, a capital gain will arise in your hands when you transfer the properties to the company. This gain can be rolled into the value of shares of the company if the property enterprise is deemed to be a ‘business’. This relief is known as incorporation relief, but it will only apply if the business owner is more than just a passive property investor. The courts have decided that the business must have some substance in terms of turnover, be conducted on sound business principles with a view to a profit, and be activity pursued with reasonable continuity. Read More
Q. I have decided to become VAT registered. Can I claim the VAT back on the van I bought two years ago, which I still use for my business?Answer

Q. Is it true that my company can purchase a top-end touring bike plus safety gear, for me to use without any restrictions? Answer

Q. I am a self-employed personal trainer. I pay rent to various local gyms where I train my clients, supply my own uniform and make my own appointments. I have to look the part to get work, so I take body-building supplements. Can I claim the cost of those supplements as a business expense?Answer
June Key Tax Dates top
19/22 – PAYE/NIC and CIS deductions due for month to 5/6/2013

Need Help? top
New Clients Welcome top
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