MAH, Chartered Accountants

Author: Mohammed Haque

  • FCA audit

    FCA audit

    FCA audit:

    Do you need an FCA audit?

    Under the Companies Act 2006 (or as applied to LLPs) a business will normally need an audit if it is fairly large and exceeds 2 out of the 3 size limits of a small firm:

    • assets > £3.26m (£5.1m from 1/1/16)
    • turnover > £6.5m (£10.2m from 1/1/16)
    • employees > 50

    However, an FCA registered firm which is an MiFID investment firm is likely to require an FCA audit even if it would otherwise be a small firm (see notes below)*.

    FCA registered

    “FCA registered” refers to financial firms registered and authorised by the Financial Conduct Authority which is one of the successor bodies to the Financial Services Authority (FSA).

    FCA registered firms come under intense scrutiny and so it is vital that they only engage auditors with the skills and resources to ensure that their financial affairs are in order. This is also mentioned in the FCA handbook:

    [quote style=”boxed”]SUP 3.4.2R: Before a firm, to which SUP 3.3.2 R applies, appoints an auditor, it must take reasonable steps to ensure that the auditor has the required skill, resources and experience to perform his functions under the regulatory system[/quote]

    How we can help

    We have experience of auditing FCA registered firms and use all of our skills, resources and experience to ensure that the audit goes smoothly. Some of the key aspects of our work specific to an FCA audit are:

    1. checking your FCA permissions and capital requirements in detail;
    2. obtaining a full understanding of your business and systems;
    3. understanding your key risks and the controls to mitigate them;
    4. recalculating fees/commissions/brokerage;
    5. reconciling open positions, trading balances and fund/managed accounts to 3rd party reports;
    6. checking if you have held client assets or money;
    7. investigating any regulatory breaches;
    8. working fast and efficiently to meet your audit deadline;
    9. submitting client asset reports to the FCA upon completion

    Expertise

    Despite our small size we are highly skilled auditors. For example, we were invited to respond to the FRC’s new draft standard about FCA client asset audits. In fact, we were the only firm to participate not ranked in the Top 10 audit firms:

    MAH response to FRC consulation

    Are you paying too much for your audit?

    Some firms may ratchet up their prices as soon as they hear “FCA”, however we prepare our quotes on a fair basis and will normally be able to offer very competitive prices.

    *Detailed notes about the audit exemptions for MiFID firms

    Under s.478b(i) of the Companies Act 2006 MiFID investment firms are not exempt from an audit, even if they would otherwise be small companies.

    s.539 explains that an “MiFID investment firm” means an investment firm within the meaning of Article 4.1.1 of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, other than—
    (a) a company to which that Directive does not apply by virtue of Article 2 of that Directive,
    (b) a company which is an exempt investment firm within the meaning of regulation 4A(3) of the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2007, and
    (c) any other company which fulfils all the requirements set out in regulation 4C(3) of those Regulations;

    We can review your situation to check if your firm meets any of the exemptions under Articles 2 and 3 of Directive 2004/39/EC. If it doesn’t, Title II of Directive 2004/39/EC is likely to apply under 4A(3) of FSMA 2000 (MiFID) 2007. This means that your firm could be an MiFID investment firm which doesn’t appear to meet any of the exemptions in s.539 (a,b,c) , and therefore, required to have an audit.

    Want to find out more?

    Please contact us for a free, no obligation consultation to discuss your requirements.

  • Pre trading expenses

    Pre trading expenses: summary

    You can get a tax deduction for pre trading expenses incurred upto 7 years before your business started trading.

    Pre-trading

    Under CTA2009 s.61, if a company incurs expenses for the purposes of a trade before (but not more than 7 years before) the date on which the company starts to carry on the trade and a deduction would be allowed for them if they were incurred on the start date, then the expenses are treated as if they were incurred on the start date (and therefore a deduction is allowed for them).

    Pre-incorporation

    Note that CTA2009 s.61 mentioned above relates to pre trading expenses incurred by the company. If a company doesn’t yet exist, how can it buy goods or services?

    There could be a risk that this legislation technically may not apply to pre-incorporation expenditure, as this has been incurred by a person who is intending to incorporate.

    However, a pre-incorporation contract could potentially be used which states that the founder/director will be acquiring fixed assets and incurring expenses on behalf of a new company yet to be incorporated, not on behalf of themselves.

    This would then need to have been ratified after incorporation, in accordance with Companies Act 2006 s.51 “A contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.“ (this legislation normally applies to contracts with external parties, but should be relevant to this context).

    When does “Trading” start?

    Just in case you’re interested in the details behind commencement of trading or tax periods:

    Under CTA2009 s.9 (1) an accounting period of a company begins when the company comes within the charge to corporation tax.

    S.9(2) also mentions a company is treated as coming within the charge to corporation tax when it starts to carry on business.

    Therefore, if a startup has not started to carry on its business by the end of its accounting year, it would not have come within the charge to corporation tax, and therefore there would not be any accounting period for corporation tax purposes.

    BIM70505 provides guidance that the House of Lords judgements in Ransom v Higgs [1974] 50TC1 stress the active nature of trading – the need to be providing goods or services, to be trading with someone.

    The courts have distinguished between preparing to commence business and actually commencing business. As a general rule a trade cannot commence until the trader:
    – is in a position to provide those goods or services which it is, or will be, his or her trade to provide, and
    – does so, or offers to do so, by way of trade.

  • Startup equity, dilution and cap table

    Startup equity, dilution and cap table

    If you’re raising funding or startup equity you need to work out how many shares to issue to investors. The easiest way is probably to work out the % holdings after the share issue and work backwards.

    For example, if there are 2 co-founders with 100 shares each who are raising £100k and the investor will get 10%, you might think that the investor will get 20 shares (10% of 200 total shares), however this would give them 9% as there would be 220 shares in issue.

    The investor would need to receive 22 shares, as this would give them 22/222=10%. This would also dilute the co-founders down to 100/222=45% each.

    Take a look at our template for a share capital table and play around with the figures to see how it works:

    Share capital table

    Share options / option pool

    We’ve also included an option pool for share options to be granted to key staff or even advisors. Share options are contracts which specify that the option holder can purchase shares at a specified price if certain conditions are met, for example 1 tranche of options could vest every quarter, whilst another tranche only vests if performance conditions are met.

    Need help?

    Please get in touch if you need any help with any of the following:

    – getting your house in order prior to receiving investment

    – calculating number of shares to be issued to investors or option pool

    – preparing board minutes, shareholder resolutions, investor offer letters and Companies House forms for share issues

    – tax advice for EMI share options or SEIS/EIS tax relief for investors.

    However, we highly recommend using a lawyer to draft or check the shareholders agreement or subscription document to ensure that co-founders’ rights are protected as much as possible.

  • VAT on Bitcoins

    VAT on Bitcoins

    see here for latest HMRC guidance on Bitcoins.

    http://www.hmrc.gov.uk/briefs/vat/brief0914.htm

    The post below was written before their guidance was published:

     

     

    VAT on Bitcoins

    Download the full report here

    There has been a lot of uncertainty regarding the treatment of VAT on Bitcoins and other cryptographic currencies. This uncertainty has led to a VAT risk as individuals and businesses are not sure of what their VAT liability, if any, could be from being involved in transactions with Bitcoins and cryptographic currencies.

    This report sets out to explore the various VAT issues surrounding the Bitcoin ecosystem, apart from whether or not Bitcoins could be classified as “money” or “currency” for VAT purposes, as this is still a work-in-progress.

    We have not identified any significant differences between the different crypto coins for VAT purposes.

    Are Bitcoins face-value vouchers or something else?

    HMRC appears to have classified Bitcoins “face-value vouchers” which may be single purpose.

    There may not appear to be any basis for this as demonstrated in the full report.

    However, Bitcoins could still be classed as digital commodities (software) or non-face value vouchers, in which case VAT would still be chargeable. This is unless an exemption can be found for them.

    Bitcoins do not appear to be Electronic Money as defined by EU Electronic Money Directive Directive 2009/110/EC.

    The ideal scenario would be if Bitcoins were classified as “money” or “currency” as these are exempt. Although VATA 1994 doesn’t define money, the EU Sixth Directive does make mention of legal tender. However, this is something which we are exploring in case there is any legal precedent to allow Bitcoins to fall within the exemptions.

    If there’s VAT on Bitcoins, how should people deal with VAT

    If merchants accept Bitcoins as payment for goods and services, then they would need to account for VAT on their services as normal. The amount is likely to be the market value of Bitcoins as at the tax point.

    However, it may be possible for merchants to avoid VAT on Bitcoins when exchanging for legal tender, as they would be used as consideration for a VAT exempt item (money).

    Miners, investor/traders and exchanges selling Bitcoins may need to account for VAT at 20% if they are supplying taxable supplies in the course of business. This will need to be looked at on a case by case basis, and there are 6 key tests.

    Donations received in Bitcoins may be able to avoid attracting VAT if they are freely given without expectation of goods or services in return, and not in the course of business.

    Is there VAT on Bitcoins if customers are located overseas?

    Bitcoins are likely to be classified as electronically supplied services in the absence of any exemptions and the special place of supply rules would apply for a UK supplier:

    business customer overseas: supply occurs in their country and not subject to UK VAT.
    consumer in EU: supply occurs in UK and subject to VAT
    consumer outside EU: supply occurs outside EU and not subject to VAT.

    Download the full report here

  • Understanding business accounts

    Whether you are a new startup or a seasoned investor, understanding business accounts is crucial to staying on top of your business. The numbers don’t lie and will tell you if the business is profitable, if new strategies are working or if remedial action is required. They will also be able to tell you about the financial health of the business ; checking the cash balance at your bank will only tell you part of the story.

     

    http://www.youtube.com/watch?v=HYY_1xf3XPY&feature=youtu.be

    Profit & Loss (to record income and expenses)

    The Profit & Loss Statement will show the performance of the business over a period of time, usually 1 month or 1 year and will generally have the following headings:

    Turnover is the income from selling goods/services to customers.

    Cost of sales are the direct costs of materials, manufacturing,  labour and other inputs that are used to provide the goods/services)

    Gross profit is turnover less cost of sales. If this is negative (ie gross loss), something is not quite right with the business model.

    Administrative expenses are the overheads and running costs, such as rent, legal fees and marketing.

    Tax is normally due at 20% for limited companies on their profit (ie turnover less costs of sales & admin expenses)

    Net profit is the amount left from turnover after deducting all of the costs, expenses and taxes.

     

    Balance Sheet (to record assets & liabilities)

    If a property business owes less to its mortgage lender than the value of its property, they will commonly be referred to as having “equity”. Whereas, if the property is worth less than the mortgage, we would say they have “negative equity”. The Balance Sheet helps us to know if any business is in good health or if it is in negative equity.

    The Balance Sheet is a snapshot in time at the end of the accounting year and will show the financial position of the company. It will show what assets a business owns or has the rights to, and how much they owe to others in the form of liabilities. If assets exceed liabilities, they will have equity.

    The Balance Sheet will also separately show how that equity is made up, whether it is from share capital injected into the business by the owners, or whether the equity is made up from accumulated profits. Going back to the property example, if a house was purchased with 25% deposit, on day 1 the equity would relate to the owners investment. However, if at the end of the year the value has increased, the equity will now also include the unrealised profit.

    Common items on the balance sheet:

    Fixed assets computers, property, vehicles, websites, goodwill: the business uses these assets to carry out its trade and to generate revenue.

    Debtors relate to money owed by customers or other borrowers of the business

    Stock relates to unsold goods at the end of the year, as well as the value of any work in progress or incomplete projects.

    Cash shows the balance at the end of the year.

    Liabilities relate to money owed to suppliers, banks, HMRC or other creditors

    Share capital is the value of funds injected into the business in exchange for shares. This gives the shareholder a right to the profits after tax.

     

    Accounting adjustments

    The final accounts will normally look quite different to the figures you originally provide.

    This is because accounts have to comply with laws and regulations, so that they are produced fairly, reasonably and are comparable with other businesses.

    For example, if you pay for 1 quarter’s rent in advance and 2 months are after the year end, only 1/3 will be expensed in the current year. The remaining 2/3 will be held on the balance sheet as a prepayment, so that the cost is recognised in the accounts in the same year in which the benefits of the rent are received. This is called the matching principle.

    Likewise, if you received a product or service prior to the year end but the supplier didn’t raise an invoice yet, an “accrual” would be recognised to bring the cost into the accounts in the correct year.

    Another common adjustment will be for fixed assets. If something is purchased which will give benefits for many years (& it meets certain criteria) then it will normally be “capitalised” on the balance sheet as a fixed asset. For example, a computer will normally be used for at least 2-3 years, so would be a fixed asset. However, if a 6 month warranty was purchased at the same time, this would only give benefits in the current year, and so would be expensed in the P&L as normal

    Analysis

    There are many ratios and techniques which can be used when analysing and understanding business. We’ll be covering this fully in a future post and so are only briefly mentioning it in this post.

    By analysing the Profit & Loss statement you can measure the performance during the last period and also compare to previous periods & expectations. For example, you can monitor gross profit margin and other key performance indicators to check the impact of a new marketing campaign or to see if raising prices has been good for business.

    However, profit is not the same as cash. If your customers pay you in 90 days, and but your suppliers only give you 30 days, you could be making a profit but still run out of cash.

    Always consider if the liquid assets, such as cash and trade debtors are sufficient to pay back liabilities as they fall due. For example, a business could have plenty of cash and stock available. But if it made a bad choice and can’t shift its stock, it may not be able to repay a bank loan or other creditors for example.

  • Residential property tax planning

    residential_property_tax_planning

    Residential property can be a lucrative business, but profits or gains will be subject to tax. In this post we discuss some of the property tax planning options, including using limited companies or LLPs, trading vs investment property, capital gains tax and entrepreneurs relief. Please download the full report on residential property tax planning for full details.

    Trading stock vs Investment property tax planning

    Residential property can be purchased for different motives and this will impact upon the property tax planning:

    • to be resold in the short term at a profit (trading stock)

    • for capital appreciation whilst generating rental income (investment property)

    When trading stock is sold, it will generate trading profits which are taxable as business income. A trading business will also be eligible for additional tax reliefs such as Entrepreneur’s Relief and Substantial Shareholding Exemption to minimise tax.

    An investment property, however, will generate capital gains or losses which are taxed differently, and many of the reliefs available to trading businesses are not available to investment businesses.

    For properties held individually, higher or additional rate taxpayers will pay a much lower rate of 28% on capital gains from investment properties compared to 40% or 45% on profits from trading stock.

    Limited company vs Individual property ownership

    The tax liability will depend on whether owners are basic, higher or additional rate taxpayers.  The example in the table below shows the tax payable on a gain/profit of £80,500 for a higher rate taxpayer:

    Total tax paid using:

    Investment property (£)

    Trading stock (£)

    Ltd co. & all profits retained

    14,600

    16,100

    Ltd co. & all profits distributed

    31,075

    32,200

    Individual purchaser

    19,488

    29,845

    This clearly shows that for both investment properties and trading stock, a limited company would save tax if profits are kept within the business or are re-invested. This is because a company only pays tax at 20%.

    However, if the company were to pay out the profits as dividends, there would be another level of tax. So if the intention is to extract significant profits on a regular basis, it may better to hold the properties individually. This is especially the case for investment properties as individuals can also benefit from capital gains tax allowances and CGT tax rates are lower than income tax for higher/additional rate taxpayers.

    If multiple properties are purchased, multiple limited companies could also be used to contain risk if any 1 property runs into difficulties with mortgage repayments. Although lenders may demand cross or personal guarantees.

    A director could also give a startup loan to the company to initially purchase property and this could be repaid tax free.

    At the end of the company’s life, it could be closed down and the shareholder would pay capital gains tax on the return of capital. This may save tax compared to taking dividends out on annual basis. A company with trading stock could also claim entrepreneurs relief and so pay tax at only 10%.

    The main disadvantage of using a limited company is that there is a double level of taxation, as more tax will need to be paid when the shareholders extract profits, 

    A limited liability partnership (LLP) may offer the best of both worlds,. This is because they are transparent for tax purposes and can be structured with 1 individual partner and 1 corporate partner.  This allows capital and income to be allocated to partners in an efficient manner for property tax planning.

    The following table highlights some of the key differences in property tax planninh: 

     

    Trading stock

    (business income)

    Investment property

    (capital gains)

    Corporation tax rate

    20%*

    (*if profits > £1.5m rate is 23% in 2013 & 21% in 2014 & 20% from 2015)

    20%*

    but can also deduct indexation allowance for inflation

    Individual tax rate

    Income tax rate (20/40/45%) plus Class 4 NIC (9/2%) depending on total level of income.

    Capital gains tax at 18% for basic rate or 28% for higher rate taxpayers. (also higher personal allowance for CGT)

    Entrepreneur’s relief 

    Eligible: an individual could pay CGT at 10% on first £10m of lifetime gains, if dispose or close down a trading business

    Ineligible

    Substantial shareholding exemption

     

    Eligible: a company can get tax free gains from selling trading companies if conditions are met.

    Ineligible

    Expenses (repairs vs capital)

     

    Expenditure on the property will be added to stock, and so will normally get the tax deduction on sale.

    Immediate tax deduction for repairs which do not improve the property. Capital expenses will get relief from CGT on sale.

     

    Please download the full report on residential property tax planning for full details, including the following areas:

    Loan interest

    Substantial shareholding exemption

    Principal private residence exemption

    Investment property expenses: revenue vs capital

    Valuation of trading stock 

    Further considerations

     

  • Delay VAT liability

    It is sometimes possible delay VAT liabilities on invoices, and extra care should be taken with the timing of invoices close to the VAT quarter end.

    VAT Act 1994

    The legislation states that VAT becomes due on the earlier of the following possible tax points:

    • the services or goods have been supplied to the customer s.6(2,3)
    • a VAT invoice is issued s.6(4)
    • payment is received s.6(4)

    14 day rule

    An exception to this is if the VAT invoice is issued within 14 days of the service/goods being provided s.6(5). For example, if you completed the transaction 7 days before the VAT quarter end, the invoice could be raised within 7 days after the quarter end. This would defer the VAT liability for 3 months until the next quarter.

    Use proforma invoice / request for payment to delay VAT

    You can also use proforma invoices or requests for payment to delay VAT. Proformas are especially useful if your business takes advance payments/deposits or if services are provided on a continual basis. This will help delay the VAT liability arising until the payment is received. If using proformas or requests for payment make sure that they don’t mention any VAT amount or VAT registration numbers, and also write that “This not a tax invoice”.

    But note that some businesses hate requests for payment as it may delay their own claim for input VAT on your invoice!

     

  • Pursuit of profit in Bangladesh

    Entrepreneurs normally become wealthy by exploiting the capital and production of the labour force. Whilst that may be true in terms of financial wealth, I believe that having an extremely imbalanced economy in which an elite minority controls a poor majority will create a host of problems, leading to low qualities of life for entrepreneurs despite their wealth. Paying higher wages to workers would reduce the financial wealth of entrepreneurs but would increase their quality of life in the long term as Bangladesh is lifted out of poverty. An even better scenario would be if the entrepreneurs created or supported social enterprises, to avoid wealth being extracted for the benefit of an elite minority.

    Why did Savar happen?

    The recent tragedy at Savar in Bangladesh in which over 1,100 people died got me thinking because there was a bank housed in the same building which sent its staff home, however, the garments factories did not.

    Why was this? I can only guess that it was in the pursuit of profit.

    If the factories were to close, production would have ceased and deadlines may not have been met. The owners could possibly have been worried about losing future contracts or maybe they could have been liable to pay damages for late delivery, breach of contract or non-performance.  In addition, each day in which physical premises are not utilised by a business  represents wasted rent and overhead costs. Possibly staff would have had to have been compensated for not working.

    In the pursuit of maximising shareholder wealth, financial profits were prioritised ahead of staff welfare.

    In economic terms, this was clearly a mistake on this occasion. The earning capabilities of the owners will be £nil if they’re imprisoned and their business in ruins.

    But what about all the other garments factories which exploit their labour forces in terrible conditions for miserable pay on a daily basis?

    Shareholder wealth is not the whole story

    I  have nothing against the traditional capitalist business model in which entrepreneurs employ capital to maximise wealth for shareholders. This model can be used to generate wealth and to help nations to grow and to keep pace with an increasing population. However, a society which cannot feed, house and clothe a significant proportion of its population will suffer from major problems.

    Looking only at shareholder wealth, therefore, ignores the non-pecuniary poverty of entrepreneurs.  In a country such as Bangladesh, even if factory owners and entrepreneurs are wealthy in terms of money, they are poor in many ways: they have to suffer from economic and political instability, poor infrastructure, high risk/rate of crime, courts which don’t function, corruption at every level and in every section of society and bureaucracy etc etc. Life is not comfortable at all and I have heard many complaints.

    Potential benefits from higher wages

    I’ve not yet studied the economics of social enterprise or the triple bottom line, but would be interested to see the impact on entrepreneurs from paying higher wages to staff and looking after their welfare. In my mind,  I would like to think that the entrepreneurs would gain overall.

    Direct impact on entrepreneur’s business: Potentially, higher costs from higher wages and running costs may outweigh any increase in productivity from satisfied/motivated staff.

    Indirect impact from wider society:

    • Higher wages will lead to an increase in consumer spending overall. For example, £100 earned by 1 person may spend £40 whereas £100 earned by 100 people will see £1 spent each.
    • The poor spend a disproportional level of their income on the basic goods and services needed to survive. Consequently, as their income levels rise, they will also spend more to first, fulfil their needs, and they will eventually start spending on non-essential items and luxuries. The rich on the other hand, save large proportions of their wealth and much of it will not even benefit the country as it will be saved or invested overseas.

    Effectively, by reducing the profit extracted by entrepreneurs, wealth is spread more equally through society. This should lead to more economic flows from consumers to businesses and back to workers again and the multiplier effect would take hold. I would expect both consumption and investment to increase without being funded by debt. Higher GDP/growth would increase tax revenues which could be used to invest in infrastructure, education and paying higher public salaries to eliminate corruption. Export led industry would help to control the balance of payments and support imports. In the long term, this would ultimately help society to improve as a whole, the benefits to be enjoyed by every citizen, regardless of their wealth.

    It would take a long time and would obviously need a lot of political upheaval as well, but perhaps the children of the entrepreneurs would reap the benefits, as well as the rest of society.

    Asian Miracle/Tigers

    I would also like to consider the Asian Tigers who had export led growth miracles which improved their economies and plight of the poor significantly, whilst initially employing many in sweatshops. They generally moved on to higher tech industries and the skills and wealth of workers generally increased. However, the key issue is that they generally had partially/fully functioning states with civil servants, bureaucrats, politicians and state led companies all working together for the good of their nations (although there were some tyrants and some sectors of society suffered) and significant investment in infrastructure, including FDI. Also, many companies in the Asian Miracle were not focussed on making profits but were solely focussed on increasing output and therefore, wealth, which is why they amassed great levels of debt.

    In the case of Bangladesh, the very people who could help the economy seem to be the worst and siphon off the wealth off the nation through their corruption, so unfortunately it would appear to be impossible to apply the lessons from the Asian Miracle with the current regimes.

    Possible solutions

    In an ideal world, entrepreneurs could be persuaded to extract less profit, and this could be used to pay higher wages.

    Muhammad Yunus would like to see a higher level of minimum wages in export led industries. This should be based on a living wage with which people can support their families. However, its possible that entrepreneurs would seek to protect profits and reduce the labour force whilst increasing workloads or potentially accelerate the mechanisation of production processes where feasible. In a country such as Bangladesh, I understand that there may be many companies who flout the existing regulations and the illiteracy of the workforce and incompetency/corruption of authorities makes it difficult to enforce.

    One possibility could be to encourage social enterprises which operate on sound business principles, but without profit extraction. The profits are ploughed back into the business or community. Could charities/NGOs such as BRAC create or support businesses that would compete with and defeat the major profit making garment factories? Apart from political obstacles, the main problems would appear to be the cost of investment to create factories and then to hire talent to plan/implement strategy, win contracts and to run operations. But I would like to think think that both could be surmountable with enough donations or volunteers. They could potentially start with small operations and increase in scale as more orders are sourced.

     

    Note: this blog is written without any research and I would really like to find out about the profit margins in particular!

  • IR35

    IR35

    What is IR35

    IR35 ensures that contractors who are effectively “shadow employees” pay tax like normal employees.

    There is legislation for substance over legal form of a relationship between a contractor (or freelancer or locum) and client. Some contractors use limited companies to invoice “clients”, but the overall facts suggest they are actually employees and are “inside of IR35”.

    The basic questions to ask are:

    – do you see yourself as an employee of the company or are you genuinely in business on your own?

    – would you be subject to the same rules and control as employees?

    Key factors in particular are:

    • Substitution
    • Right of control
    • Mutuality of obligation

    Take the test! http://www.hmrc.gov.uk/ir35/guidance.pdf

    This doesn’t cover all the aspects, and there are a lot of factors to consider.

    What if IR35 applies?

    If IR35 applies, the consequences are that:

    • Income in form of deemed payment under Sch E
    • S.336 expenses can be claimed for travel, subsistence, PII, benefits in kind (& E’ers NI) etc
    • An additional 5% of turnover can be claimed as expenses
    • Deduct salaries + E’ees NI + E’ers NI paid in yr
    • The income left over will be subject to income tax and national insurance at the same rates as normal employees, ie 20/40% tax and 12/2% NI
    • E’ers NI also has to be paid 13.8% by contractor (client doesn’t pay)

    Factors suggesting IR35

    • No Substitution 
      • Worker cannot delegate or substitute without client’s consent
      • One person companies, unless evidence to contrary
    • Lack of control
      • Worker engaged for period, not specific tasks
      • Client can move worker to other tasks
      • Client directs, supervises and quality controls work
    • Mutuality of obligation
    • Engager obliged to pay a wage/remuneration
    • Worker obliged to provide own work or skill
    • Notice period irrespective of breach could be an indicator

    Potential indicators of employment:

    • work on the client’s premises
    • use the client’s equipment
    • work standard hours
    • be paid at an hourly rate or use of timesheets, no fee retention for performance
    • be subject to a right of control & take direct orders
    • Part and parcel of organisation
    • No financial risk, client obliged to give work, worker has to accept work given
    • Notice period to terminate, not at end of project
    • Right to receive e’ee benefits: sick pay, holiday, staff canteen, Xmas party

    Contract should reflect reality

    The actual working practices are the most important factor. So if the written contract does not reflect these, it will be ignored. HMRC have been known to interview both the contractor and the client to verify the working practices.

    Contract terms should be consistent, eg use company & supplier, not alternate with agency and contractor. HMRC may also have previously made a Status ruling at the client.

    Need help?

    MAH are well versed in the key issues surrounding IR35 and can advise contractors, freelancers and locums on how to proceed. Get in touch!

  • Using a holding company

    Holding company

    Many businesses will structure their affairs by using a group of companies. There will be a parent or holding company at the top, and this will hold 1 or more trading subsidiaries.

    Advantages of using a holding company

    There is no tax on dividends from subsidiaries to the holding company, so you could build up funds to invest without suffering additional tax.

    The holding company could sell shares without suffering tax if eligible for substantial shareholdings exemption (eg hold >10% of a trading company for at least 12 months).

    In my experience, a key reason for using holding companies is to enable losses and assets to be transferred around the group to minimise corporation tax or capital gains. You could also use the holding company to charge “know how” or management fees to the subsidiaries, which could save tax if the holding company is registered in a lower tax jurisdiction (& managed and controlled offshore).

    The major downside to using a holding company is that it may create “associates” for tax purposes which means that the corporation tax limits get split by the number of companies in a group. Although, when the full rate comes down to 20% in 2015 this won’t make any difference.