Leonherman Blog

HMRC lose IR35 case

Self-employed

In the March we reported that the House of Commons Work and Pensions Committee published a report calling on the Government to close the loopholes that allow “bogus” self-employment practice, following the Tax Tribunal decision involving Christa Ackroyd Media Ltd, a company set up by a TV presenter to supply her services to the BBC, where it was held that the IR35 personal service company rules applied to the arrangements.

In a recent case involving a night manager on a building site, another tribunal decided that the IR35 rules did not apply. The facts of the recent case involve a Mr Daniels supplying his services via his company MDCM Ltd. These are entirely different from those in the Christa Adcock case but it indicates that the current rules are very unclear and open to interpretation by the courts.

For the IR35 rules to apply it must be inferred that under the hypothetical contract between “worker” and client that worker would be regarded as an employee if directly engaged. There are numerous factors taken into account, but the most important factor considered by the courts is the extent to which the “worker” is under the control of the client.

Please get in touch if you wish to discuss whether these recent cases impact on your particular circumstances.

Posted in News

Salary v Dividend – What is the best profit extraction strategy?

Balance

How much salary should you pay?

From 6 April 2018 (and not before) you can pay a salary of £702 per month without paying any tax or national insurance contributions (“NIC”).

If you choose this option you:

  • Do get National Insurance Credits towards some benefits for example state pension.
  • Must be registered as an employer.
  • Have to file an RTI (real time information) return each pay period – RTI fines will apply for late filing.

No income tax or national insurance is due on a salary at this level.

This is a perfectly legal and an acceptable way of paying yourself from your company; in fact HM Revenue & Customs (“HMRC”) have been known to state that they do not have a problem with this approach.

 

Dividends – from April 2018

Any dividends paid over £2,000 will attract dividend tax.

The rates of tax will be:

  • First £2,000 of dividends – tax free
  • 5 % for dividends falling within basic rate tax (caution on how this is calculated)
  • 5% for dividends falling within higher rate tax (i.e. where total income exceeds £46,350)
  • 1% for dividends falling within the additional rate of tax with income over £150,000.

How to work out your dividend tax

The calculations assume that you have no other income.

You would pay a salary of £702 x 12 from the company = £8,424

You can then pay £2,000 plus the remainder of your personal allowance as dividends without any tax = £2,000 + (£11,850 personal allowance less the salary of £8,424) = £5,426.

So a total of £13,850 will be tax free (dividend allowance + personal allowance). 

Note – this is per person.

You will pay tax after £13,850! 

Tax at 7.5%

For the next £32,500 of income you will pay tax at 7.5%.

So you can take:

  • a salary of £8,424
  • dividends of £5,426 + £32,500 = £37,926 

Total income of £46,350 

Dividend tax due on this will be (£32,500 x 7.5%) £2,437.50 

Tax at 32.5%

Dividend income over £37,926 will attract tax at 32.5%.

If your income exceeds £100,000 your personal allowance is restricted by £1 for every £2 of income over £100,000 and so will reduced to nil at an income level of £123,700.  

 

Dividend tax rule of thumb

The dividend tax rule of thumb to use is:

  • take a salary of £8,424
  • tax free dividends of £5,426 to use up the remainder of your personal allowance
  • £75 of tax per £1,000 of dividends from £5,427 up to total dividends of £37,926
  • £325 of tax per £1,000 of dividends over £27,927

If your income exceeds £100,000 obtain a personalised quotation as it gets really complicated!

Payments on Account and the new Dividend Tax

The dividend tax puts most people into payments on accounts.

Notes/disclaimer
Dividends are paid out of post tax profits.

Failure to process your payroll and submit the correct RTI (Real Time Information) returns could result in fine or penalties.

Disguised employment issues aside, operating as a limited company is perfectly legitimate and is purely a business choice.

Salary is an allowable business cost and will reduce the profit subject to corporation tax.

Everyone has different tax affairs; this fact sheet is for illustration purposes only and should not be relied upon for your tax planning or tax affairs.

We recommend that you seek the advice from a qualified accountant before making any tax planning decisions to ensure you have a tax plan that suits you.

Posted in News

Pension funds can be an effective way of estate planning

pension-changes

We have covered the tax efficiency of pension funds in a number of previous blog posts. As well as the increased flexibility in terms of drawdown arrangements that were introduced in April 2015. There were some important changes to what happens to the undrawn funds on death. These changes mean that your pension fund can be passed to your beneficiary’s tax efficiently.

In the case where the pension scheme member dies under age 75, certain lump sum death benefits are now tax-free. In particular a drawdown or flexi-drawdown pension fund lump sum death benefit or an uncrystallised funds lump sum death benefit.

If however the pension scheme member at the time of their death was age 75 or older, the special lump sum death benefit charge on the fund will be 45%. But if a nominated beneficiary wants to draw down income each year rather than take the lump sum the amounts drawn would be taxed at their marginal income tax rate. It has recently been reported that there are currently £2 billion of pension assets in drawdown where the beneficiary is aged under 55, suggesting that a significant number of individuals have taken advantage of these new rules.

Note that cash and quoted shares, including those held within an ISA, are subject to inheritance tax on death whereas pension fund assets are generally free from inheritance tax. It may therefore be more tax efficient to spend or give away cash and shares rather than draw on the pension fund.

Please get in touch if you would like to discuss estate and inheritance tax planning in more detail.

Posted in Ask the Expert, News

The UK’s Requirement to Correct (RTC)

Deadline

What is the Requirement to Correct?

As a result of tax transparency HMRC is more likely than ever to ‘spot’ non-compliance – be it as a result of genuine mistakes, carelessness or deliberate action.

The Requirement to Correct (‘RTC’) is a statutory obligation for taxpayers with overseas assets to correct any issues with their historic UK tax position.  Those who fail to do so face punitive financial penalties and other severe sanctions.

The RTC applies to any person with a potential undeclared UK income tax, capital gains tax and/or inheritance tax liability, i.e. individuals, partnerships, trustees or non-resident landlord companies.

What is the deadline?

The RTC period started on 6 April 2017.  Taxpayers must correct their UK tax position by 30 September 2018.

What does HMRC want taxpayers to do now?

HMRC wants all taxpayers who have or who had any offshore financial connections (including those who consider themselves to be non-UK domiciled and/or non-UK resident) to review their UK tax affairs to ensure that all tax returns are correct. Additionally, taxpayers should ensure they submitted tax returns for all years for which they owed tax on income or gains.

This includes checking implementation of planning and technical opinions (e.g. that someone is non-UK domiciled are correct) and whether advice taken in the past was refreshed when the law or the client’s circumstances changed. Offshore structures, anti-avoidance legislation and remittances should also be reviewed.

Those who identify errors or failures to submit/notify in the past must rectify the situation before 30 September 2018.  Some may decide to submit disclosures where there is doubt over a technical position in order to protect their position against failure to correct sanctions in case HMRC later decides that additional tax is due.

What happens if an error is not corrected by 30 September 2018?

After this date, the ‘Failure to Correct’ (‘FTC’) regime will start, with punitive penalties, including:

  • A tax geared penalty of between 100% and 200% of the tax not corrected
  • A potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year
  • Potential “naming and shaming” where over £25,000 of tax per investigation is involved
  • A potential additional penalty of 50% of the amount of the standard penalty, if HMRC could show that assets or funds had been moved to attempt to avoid the RTC

Anyone who fails to correct their position despite knowing that they should do so may also face:

  • A potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year
  • Potential “naming and shaming” where over £25,000 of tax per investigation is involved

No penalty will be chargeable where the taxpayer has a reasonable excuse for failing to correct the position.  A ‘health check’ of a taxpayer’s position during the RTC period is likely to provide a strong, defence.

How can Leonherman help?

We can assist clients with Tax Health Checks, reviewing both their historic position and, where appropriate, approaching HMRC with a disclosure call 0161 249 5040

Posted in Ask the Expert, News

Bag a boost from your business’s research – and stay in control

R&D

Big benefits are being shared by many SMEs which have switched on to the financial advantages of claiming R&D tax credits – but we believe many more could be due a slice of the cake.

In the last 12 months alone, Leonherman has helped clients identify R&D expenditure of in the region of £1.44million – resulting in corporation tax savings for those clients of in excess of £365,000.

Example successful claims include:

  • Company A – A supply chain and warehouse management specialist, benefited to the tune of £69,355, for work leading to the implementation and customisation of new bespoke warehouse management systems for a number of clients, which integrated with other systems already in use.
  • Company B – A digital marketing agency, received £76,879 for work which integrated psychological behaviour and data analytics to its conversion rate optimisation services, and so improved the way a major customer’s website works. This has enabled greater efficiency for the customer and led to a more customised user experience increasing revenues.

The Oxford Dictionary defines ‘research’ as ‘the systematic investigation into and study of materials and sources in order to establish facts and reach new conclusions.’

So provided the conclusion your research reaches hasn’t already been publicly revealed elsewhere, and can be shown to have contributed to achieving a specific benefit to your working practices and productivity, then your project is likely to qualify for some direct funding.

And the best part of it is, those savings can be channeled into any part of your business, so in theory, you can use them, for example, to employ extra staff to capitalise on your research efforts, or to publicise your work.

Such funding can even be the catalyst for your business to diversify, without the need to resort to venture capital, ‘angel’ funding or mainstream sources, so enabling you to control the scope of your research, its outcome, and of the future destiny of your business.

You’re also likely to see other benefits from this approach, such as:

  • Enabling you to carry out your research, and evaluate it, at your own pace:
  • Remaining sharply focused on the issues you want to address, and being better able to do this without outside influence, and last but not least:
  • Being able to share the benefits among the staff directly responsible for your pioneering work (and who wouldn’t appreciate some of that?).

With a little help, you can quite easily claim back about one-third of the amount spent on direct research and development and all the supporting efforts and time you put into it.

In our experience we have often found that companies are not necessarily aiming for major breakthroughs, but more to make tweaks and small improvements, often building upon already-available technology, to achieve tangible results which can be applied in a specialised and individual setting.

We will apply tried and tested measurement criteria to determine whether your business has a valid R&D tax credits claim, and will then support you in gathering all the evidence needed to ensure that it is lodged successfully – an approach which has so far yielded a 100% success rate.

So get the due credit for what makes your business unique – by contacting us on 0161 249 5040, or emailing partners@leonherman.co.uk

Posted in Ask the Expert, News

Demand for digital Tax advice

MTD

Research by HMRC has shown that the demand for digital tax advice has increased following a survey of 2,900 small businesses and landlords.

With the majority of small businesses and landlords expecting to consult an accountant in order to comply with Making Tax Digital.

Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs – meaning the end of the annual tax return for millions.

Of those 2,900 surveyed, 72% will ask an accountant for advice, 15% will use the HMRC website, 13% will use the HMRC helpline with others saying they will ask family and friends first.

If you’re considering changing your accounting software or currently use a manual system you will need to check your chosen method will meet MTD requirements.

We work with a number of different accounting software from Xero, to Quick Books and Sage.  If you want to know more about Making Tax Digital and how it will affect you, get in touch with our Tax team on 0161 249 5040.

 

Posted in Ask the Expert, News

Highly Commended at this years Damar’s Apprenticeships awards

damar logo

We are pleased to announce that we received a highly commended award at this years Damar’s apprenticeships awards.

The Managing Director Jonathan Bourne said; “The judges were extremely impressed by the standard of your nomination, that even though you missed out on the award itself, we wanted to recognise your nomination by awarding a Highly Commended award.”

Leonherman has worked in partnership with Damar Training for the past six years for the recruitment and provision of accredited training programmes. The partnership has brought much success with apprentices and trainees progressing to semi-senior accounts roles, continuing to study towards further professional study qualifications through ACCA and becoming Senior Accountants.

In addition to this we are now an ACCA Approved Employer for Trainee Development and have been awarded Platinum level reflecting the level of support provided to Trainee Accountants studying for their ACCA qualifications.

Leonherman is very much committed to operating as a Training Practice, recruiting Apprentices at an early stage to develop an individual and provide a well-rounded training programme in order to produce the highest calibre accountants who can then go on to become supervisors and managers within the firm.

Please get in touch or call 0161 249 5040 to discuss how you can apply for our Apprenticeship Programme

Posted in Office News

Are your workers really self-employed?

Self-employment on the rise

Previously we have reported that the House of Commons Work and Pensions Committee published a report calling on the Government to close the loopholes that allow “bogus” self-employment practice.

Most of the people working for organisations such as such as Uber, Amazon, Hermes and Deliveroo are not on the payroll, have limited workers’ rights and are paid for each delivery or “gig”. The Committee recommended a default assumption of “worker” status, rather than “self-employed”. The economist Mathew Taylor was also asked to produce a report on the status of such workers and suggested that a new category of “dependent contractor” should be established.

HMRC and the Treasury have now published a consultation into a thorough review of employment status.

Consultation on employment status
HMRC published a consultation on employment status on 7 February as a follow up to the Taylor Review of Modern Working Practices.

Individuals and their employers have to know which employment status applies to ensure the right protections are applied – from the National Minimum Wage and holiday pay, to unfair dismissal protection and statutory redundancy pay.

Employment status also affects the taxes that an individual and their employer pay. It is therefore essential in maintaining a clear and effective tax base, with individuals and employers knowing what rates of tax and National Insurance Contributions (NICs) are applicable to everyone in their organisation.

The existing legislation defining an employee for both tax and employment rights ultimately relies on whether a contract of service exists. No further definition or clarity is provided in the legislation.

As a result, over time the courts have interpreted the legislation and developed tests to determine an individual’s employment status. These tests are contained in a number of key precedent cases, including a mixture of employment rights and tax judgments.

A possible solution suggested is to legislate a more detailed definition of employment incorporating the irreducible minimum core tests established by case law:

  • Mutuality of obligation
  • Control over the individual
  • Personal service

If you are unsure of your employee status or those of your employees and contractors get in touch with our Tax Team on 0161 249 5040

Posted in News

Personal tax changes to be aware of pre April 2018

Spring Budget

This is the first year we won’t be seeing a spring budget, Chancellor Philip Hammond has said that he will simple give a 15 minute speech on March 13. When Mr Hammond announced his plan to move the Budget from March to the autumn and the scrapping of the Autumn statement, he said; “No other major economy makes hundreds of tax changes twice a year, and neither should we.”

Prior to April 6, we have put together a reminder of the following changes that were announced in last year’s Autumn budget:

Income tax – 2018/19

  • Personal allowance – to increase from £11,500 to £11,850
  • Basic rate – 20% on income from £11,850 to £46,350
  • Higher rate – 40% on income between £46,351 and £150,000
  • Additional rate – 45% on income > £150,000
  • Dividends:
    • First £2,000 – 0%
    • Ordinary rate – 7.5%
    • Higher rate – 32.5%
    • Additional rate – 38.1%

Tax free dividends reduced

The tax rate on dividends was increased by 7.5% from 6 April 2016 as a way of collecting tax from owner managed businesses. However, at the same time, a 0% rate was introduced on the first £5,000 of dividend income.

The government has reduced the 0% band from £5,000 to £2,000 from 6 April 2018. This will see basic rate, higher rate and top rate taxpayers tax bills increase by up to £225, £975 and £1,143 respectively, or double this in the case of husband and wife sharing family income.

Property taxation changes

There have been numerous property tax changes in recent years, including increased Stamp Duty Land Tax on purchases of second homes, a higher rate of capital gains tax on residential property disposal and the withdrawal of the 10% wear and tear allowance for furnished lettings.

The most recent and perhaps significant change was the announcements of a withdrawal of higher rate tax relief for interest expense on debts related to dwelling houses, which is being phased in over four years commencing 6 April 2017 with a restriction relating to 25% of the interest expense.

In the year to 5 April 2019, the restriction will be applied to 50% of the interest expense, with the percentage increasing to 75% and 100% in the years to 5 April 2020 and 2021 respectively. This will add further pressure for buy-to-let landlords with significant income from property funded by debt to de-leverage their property portfolios or alternatively (in some cases) face income losses.

For those individuals who receive significant rents, which have previously been largely covered by mortgage interest, not only may they face a higher marginal rate of tax but in some cases will find their entitlement to the personal allowance and child benefit removed.

If you have any questions on how these changes will affect you get in touch or call 0161 249 5040

Posted in News

Why move to the cloud?

Xero

More and more businesses are moving to cloud based accounting software allowing them to access their accounts on the go whilst they are out and about. Leonherman is proud to be an accountant partner of Xero accounting software. Xero is an online accounting system designed for small businesses to work with their accountants and staff in real time. There is no software to install and can be accessed on the go all you need is an internet connection.

Xero covers everything you would expect from an accounting system from invoicing, managing payables, banking, management reporting to calculating VAT returns and expense claims. As it allows you to access your accounts whilst on the move from your phone or laptop and with its plain English terms and user friendly functionality it won’t take you long to get up and running.

But don’t just take our word for it, here is a review from a client who moved from Sage to Xero – Why choose online accounting?

If you would like to know how using Xero can help your business, get in touch with us. As Leonherman are partners of Xero and can assist you to buy and use the software – call us on 0161 249 5040 or email partners@leonherman.co.uk

Posted in News