Category: Contractor

  • Public sector contractors

    Public sector

    This post only applies to off payroll “contractors” (including locums or consultants etc) who are working in the public sector, such as for the NHS, a government agency, university or local authority and use a limited company to raise invoices.

    Contractors working in the private sector will not currently be affected by these rules, although there could potentially be a risk of similar legislation in the future for the private sector.

    Old IR35 rules

    The old IR35 rules are explained in detail here, but basically if a contractor can demonstrate that they are not a “shadow employee” because they have rights of control over how/when they work, rights of substitution and no mutual obligations then they can raise an invoice via a limited company and avoid payroll taxes.

    Under the old rules it was up to the contractor to decide if they were inside or outside of IR35, and so they could use their judgement or obtain professional advice about this. If HMRC disagreed with the contractor and believed that they were inside IR35, then the liability for unpaid salary taxes was on the contractor.

    New IR35 rules from 6 April 2017

    If the new rules are found to apply, then contractors will have to pay employment taxes similar to those paid via payroll/PAYE, even if they are using a limited company.

    Under the new rules, it is up to the public sector body to decide if the contractor is inside or outside of IR35.

    If the public sector body is later found to have made an incorrect decision then they will be held liable for the unpaid salary tax/NIC. Therefore, it will be less risky for public bodies to apply a blanket rule of paying all contractors as employees and deducting tax/NIC, rather than verifying whether each and every single contractor is outside IR35 and paying the full invoice amount.

    Our understanding is that the NHS and locum agencies will be generally by paying all doctors and nurses via PAYE under the new rules. IT and other consultants may also be caught by the NHS or other public bodies.

    Impact of new IR35 rules for public sector contractors

    The fee payer (eg NHS or agency) will calculate income tax and employee NIC and deduct these from the fee payable to the contractor. The contractor’s limited company will get a tax deduction for the income tax and NIC, but will then have to pay a further 20% corporation tax on the profit.

    However, if all the public sector net income is withdrawn as salaries then there will not be any profit left and this is exempt from income tax/NIC as it has already been deducted at source.

    The 5% allowance normally available to contractors inside IR35 is also removed for public sector contracts.

    Overall, we CANNOT see any significant benefits from using a limited company if a contractor will be caught by the new rules. The normal tax planning using dividends or multiple shareholders will be affected by the extra corporation tax that is payable on top of income tax/NIC unless all net income is withdrawn as salaries.

    In this case, the contractor would be better off being employed directly via the agency/NHS without the limited company. The limited company can also be closed down.

  • BREXIT: A GUIDE FOR SMALL BUSINESSES

    BREXIT: A GUIDE FOR SMALL BUSINESSES

    DOWNLOAD THE FULL BREXIT REPORT HERE

    Background

    As readers are no doubt aware the UK voted to leave the EU in June 2016. We were shocked that Brexit actually happened and were worried about the impact on our clients.

    The long lasting effects are unknown and much will depend on the negotiation of trade agreements with the EU. Some commentators have suggested that the UK could be in recession for many months whilst others have suggested that this will all blow over and the UK will rapidly recover.

    We have attempted to evaluate the worst case scenarios and impact on our small business clients.

    We all need to be aware of the potential threats to the UK economy and our clients/customers and take appropriate steps in order to survive and to thrive.

    Summary

    The Bank Of England is likely to cut interest rates and provide liquidity facilities to banks in order to prevent another credit crisis and to calm the markets. Financial markets could be due to political or financial/economic reasons and its too early to predict what could happen in the future.

    However, there is a potential risk of recession due to the fall in exchange rates, inflationary pressure and uncertainties affecting business and consumer confidence. Foreign investment may also fall.

    The full impact of Brexit is not yet known and one of the key factors will be the negotiations of a new trade agreement with the EU. If the Norway/Swiss models are followed and UK businesses can access the Single Market for imports/exports and financial passporting then the impact of Brexit may be limited.

    However, we have considered the worst case scenarios for our core sectors:

    Financial services: In the short term, FCA firms should re-check financial forecasts, risk assessments and capital adequacy requirements. In the medium/long term they will need to consider whether they will need to migrate to the EU or setup a subsidiary to ensure passporting.

    Tech startups: In the short term, cash burn and forecasts should be re-assessed as it could potentially become more difficult to raise finance if investors are nervous about the UK economy. In the long term, restrictions on movement of labour could reduce the talent pool and some of the infrastructure and benefits of operating in the UK.

    Fintech: Could suffer the same problems as tech startups but could also be affected by lack of passporting or reduced demand from the financial services sector if they are suffering from Brexit.

    Import / Export: Amazon sellers could suffer from double layers of taxation and tariffs if they’ll now have to export goods to both the UK and EU separately, depending on how trade agreements are negotiated. Foreign goods could also become more expensive to UK customers, reducing to demand.

    Contractors: Economic uncertainty could increase demand for temporary contracts if businesses are adverse to hiring new permanent staff. However, financial services could potentially suffer from job losses and temporary staff could also be affected. EU citizens need to check if they can stay in the UK and may be able to apply for permanent residence.

    AIM/ISDX plcs: Equity markets have suffered and existing plcs may find it difficult to raise new capital. If the credit crisis of 2007-08 can be used as a guide then it may be difficult for new firms to list or to reverse in the near future, as many deals collapsed after the credit crisis.

    DOWNLOAD THE FULL BREXIT REPORT HERE

  • Setting up company structure

    Factors involved in setting up company structure

    There are different factors involved in setting up company structure and it depends on the type of business, circumstances of the shareholders and their aims for the business.

     

    Shareholders:

    • if you may sell the company and re-invest the profits a holding company may be useful
    • otherwise, the co-founders can be the shareholders
    • for contractors and family owned businesses, husband/wife can be shareholders to maximise dividends
    • ambitious startups looking to grow should setup a share cap table
    • leave an option pool for key staff
    • eg 2 co-founders setup a company owning 45% each and leave 10% option pool

    Multiple trades:

    Clients often have more than 1 business. The simple and efficient solution is to have 1 company and run the different businesses as divisions of this company.

    For tax purposes, the different trades need to have separate profit and loss calculations. This is because losses from a trade can be set against the profits from another trade in the same year. But if losses are carried forward against future profits they can only be used against profits from the same trade.

    If you’ll be expecting to sell a business/trade, it can be hived out into a separate company before sale. If its held for at least 1 year before sale, then there is no tax due to Substantial Shareholding Exemption.

    Sometimes its better to start off with a group structure, so 1 holding company and 3 subsidiaries for the different businesses/trades, although this can also be achieved later on.

    Dividends:

    Profits after tax can be given to shareholders, and this is normally the most tax efficient way to extract profits.

    Dividends have to be paid according to shareholding. So if a husband and wife hold 50% each, they have to receive equal dividends. Sometimes, it may make sense for 1 spouse to hold 100% shares and shares can be transferred between spouses without tax at any time (with the right paperwork) to maximise differences in tax rates and allowances.

    If you’ll be receiving investment, the investors will also be able to receive dividends. So if you have a separate side business operating out of the same company, it will normally be better to hive this out before receiving investment.

    Need help?

    If you need more help on setting up company structure then please contact us for a free consultation.

  • 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!