Mike Tombs's Blog

This blog provides information about tax, accounting and other issues affecting small owner-managed businesses in the UK. It is intended as a general source of information but you should not assume that everything applies to your specific circumstances. We are always happy to discuss providing tailor-made solutions to suit your individul needs. Visit www.tlaservices.co.uk to sign up for our free monthly Tax Tips and News newsletter.

Monthly Archives: September 2015

IR35: The future for Intermediaries

The Summer Budget 2015 contained an announcement that the government is to consult on proposals to improve the effectiveness of the existing intermediaries’ legislation, commonly known as IR35. The reason for this review was given as the perceived unfairness that two people could be doing the same job and pay very different levels of tax depending on how they are engaged. A consultation document has now been published (Intermediaries Legislation (IR35): discussion document), which sets out the rationale for change, the options to be discussed and the likely next steps.

Because of the interaction between allowances available and rates paid in the corporate and personal tax systems, and the absence of NICs on investment income, including dividends received from personal service companies (PSCs), people who work through their own limited company can often pay a lower effective rate of tax and NICs than either the self-employed or employees. The government estimates that there were around 265,000 PSCs in 2012-13, an increase of 65,000 on the previous year alone. This number is expected to continue to increase over the coming years, particularly given the changes announced at the Summer Budget on the taxation of dividends. The Exchequer estimates that current non-compliance in this area is costing some £430m in tax and NIC receipts each year.

Broadly, the IR35 legislation requires individuals working through an intermediary to pay the same tax and NICs as any other employees, where they would have been an employee if they were providing their services directly. One of the main concerns is that currently HMRC have to enquire into each individual PSC for each individual engagement, even where several PSCs are working for the same engager, often under what appear to be the same terms. Several parties may be involved in the contractual chain in each case and reaching agreement with all of them on their understanding of the contractual arrangements can be complex. HMRC also believe that there is insufficient clarity concerning each party’s responsibility for cooperation with any intervention.

The consultation document indicates that the government is not looking to abolish the IR35 legislation, but reform is needed to protect the Exchequer and level up the current playing field for those who are directly employed and those who would be employed directly if they were not operating through their own company.

Reading between the lines in the consultation document, it seems that the most likely change is that the onus to verify the employment status of an individual will be put on the shoulders of the ‘engager’. This means that those who engage a worker through a PSC would need to consider whether or not IR35 applies, and, if so, deduct the correct amounts of income tax and NICs as they would for direct employees. However, the government recognizes that this would increase the burden on engagers and this option is therefore up for (no doubt heavy) discussion.

There is a great deal of complexity associated with identifying whether or not IR35 applies and the consultation document picks up that clarification is required. One option set out in the consultation document is to consider aligning the IR35 test with that used for temporary workers in the agency rules, which is based on supervision, direction or control. Another option could be to introduce a rule that an engagement must last a certain minimum amount of time to be considered one of employment. Again, these options are going to be considered over the coming months.

The consultation closes at the end of September 2015, so we could see further announcements on this subject as early as the 2015 Autumn Statement.

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When tips are taxable

Confusion often arises regarding tips and gratuities as the tax and NIC treatment depends on how they are paid to the recipient.

Cash tips handed to an employee, or left on the table at a restaurant and retained by that employee, are not subject to tax and NICs under PAYE, but the employee will need to declare the income to HMRC – HMRC often make an adjustment to the employee’s PAYE tax code number to reflect the amount likely to be received during a tax year so any liability is collected via the payroll. By contrast, if an employer passes tips to employees that are either handed to him (or the employees) or left in a common box/plate by customers, the employer must operate PAYE on all payments made.

Tips will also be subject to PAYE if they are included in cheque and debit/credit card payments to the employer, or if they pass service charges to employees.

Amounts paid by a customer as service charges, tips, gratuities and cover charges count towards National Minimum Wage (NMW) pay if they are paid by the employer to the worker via the employer’s payroll and the amounts are shown on the pay slips issued by the employer. Tips given directly to the worker by a customer do not count towards NMW pay.

September 2015 Q&A

Q. I have recently registered for VAT. What is the difference between ‘normal’ and ‘cash’ accounting?

A. Under the normal method of accounting for VAT, you account for the output tax on your sales as they take place or as soon as you issue a VAT invoice, even if your customer hasn’t paid you. Then you can reclaim input tax on purchases you make as soon as you receive a VAT invoice, even if you haven’t paid your supplier. This method can cause cash flow problems if you have to pay a VAT bill before your customer pays you.

The cash accounting scheme, which is available to most businesses with an annual taxable turnover up to £1.35m, turns this normal method upside down. In cash accounting, you account for the output tax when you receive payment for the sale, rather than when the customer received the goods or service. So this way, you have the money from your customer to pay the VAT you charged on his bill. However, this scheme cuts both ways because you can only reclaim the input tax once you pay your supplier, which means that when your VAT bill is due you can’t offset the VAT you owe suppliers against your total bill.

The cash accounting scheme can help your cash flow because in general you don’t have to pay VAT until your customers have paid you. The scheme is especially helpful if you give your customers extended credit or suffer a lot of bad debts. However, the scheme may not give you any benefit if you:

  • are usually paid as soon as you make a sale;
  • regularly reclaim more VAT than you pay; or
  • make continuous supplies of services.

Q. I bought my flat in 2008 and lived in it until 2013 when I moved into my now wife’s house. The flat was in negative equity so we kept it and rented it out. Now that the housing market has improved we have decided to sell it. We plan to use the proceeds to buy my wife’s parent’s house jointly with my wife’s sister and her husband. If we reinvest the profits on the sale of my flat in my wife’s parent house, will we avoid paying any capital gains tax?

A. Unfortunately rollover/holdover/reinvestment relief is not available for residential investment property, unless it relates to furnished holiday lettings, or where there is a compulsory purchase order. However, as you lived in the property from 2008 until 2013 and then rented it out, you should be able to claim some relief from capital gains tax via a combination of principal private residence relief, lettings exemption and the capital gains tax annual exemption.

Q. I am thinking of starting my own business and can’t decide whether to incorporate straight away or not. I will need to make a substantial investment in my business so it is likely that I will make a loss in the first, and maybe even second, year of trading. Is loss relief the same for sole traders and limited companies?

A. Taking all the pros and cons of incorporation into account, you may come to the conclusion that you’re best to carry on your business as a sole trader in the early years. This situation may be particularly relevant if you envisage making losses in the early years of trading, because you can carry back losses made in the first four years against personal income of the three preceding years, often resulting in a substantial refund of tax becoming due. However, don’t miss out on the opportunity of forming a limited company later on when the benefits of company status may be more valuable.