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Tag: Class 1

Class 1

  • Autumn Statement 2023 – More Drip Than Waterfall

    This was very much about ‘making work pay’ and aiming to improve productivity. Important though national insurance tax reductions are to help sole traders and partnerships, they do nothing to help those caught by frozen thresholds or running small limited companies.

    Sole traders and partners

    With Class 2 national insurance abolished and Class 4 national insurance reduced by 1% from April 2024 but dividend tax unchanged, more businesses may decide to remain as sole traders rather than incorporate or even prefer to disincorporate.

    When you add in that the cash basis will become the default way to measure tax profits from April 2024 (for any size sole trader) together with the previously known companies house reforms requiring more company information to be made public, the government clearly wants small businesses to stay as sole traders unless they’re large enough to embrace being a limited company in full.

    To back this up, the cash basis for measuring tax profits from April 2024 will allow losses to be offset in the same way they are for the accruals basis (the one that accountants with use) and there won’t be an interest deduction cap of £500 with all trading interest becoming tax deductible.

    The cash basis may have been improved to also ease the introduction of Making Tax Digital – MTD – which will benefit from some simplifications from April 2026 (with over £50k turnover or rents) and from April 2027 (over £30k) where the quarterly submissions will now be cumulative and there won’t be an end of period statement (EOPS). MTD won’t yet be required for partnerships or jointly owned property. 

    NB For sole traders and partners with profits under £6,725, or tax losses, who want or need a state pension credit year, can still voluntarily pay Class 2 £3.45 a week, so Class 2 will still exist for many. 

    Owner-Directors

    With dividend tax at 8.75% between £12,570 and £50,270 but employee national insurance at 10% from January 2024, this differential is narrowed further, making it more likely than before that an owner-director should take a salary instead of a dividend. If you continue to take dividends, your income tax return will need to show your own company dividends separately from any others and your percentage share ownership, presumably to help HMRC track these back to your company.

    If you continue to embrace being a limited company, investing to save the higher corporation tax, but need funding to do so, you might benefit from an external EIS investor who will continue to benefit from tax breaks until 2035, which should encourage more investors to enter the small business scene.

    If, despite it being harder, you remain eligible for research and development tax credits, the R&D work you’ll need to do if you’re loss-making to maximise your cashback at 14.5% will fall from 40% to 30% from April 2024, meaning that you’re not expected to spend as much on R&D. Perhaps the 40% threshold was probably too high for many!

    Limited companies – 100% tax relief on new assets – ‘Full expensing’

    Much is said about full expensing but it has no value for most small limited companies who already benefit from 100% tax relief, called AIA, on most fixed asset spend of up to £1m per year. Full expensing only applies to new assets purchased by limited companies whereas AIA applies to sole traders and partners and second hand assets. 

    And don’t forget the same Chancellor increased corporation tax from 19% to 25%/26.5% meaning many companies won’t be better off overall. 

    After all the media interviews I was expecting a waterfall of tax improvements for small businesses, but we’ve  ended up with a dripping tap.

  • Health & Social Care Reform or Sticking Plaster?

    To set the scene,

    From April 2022, the following NICs will increase by 1.25% for one year only:

    • Employee NIC (over £9,568)
    • Employer NIC (over £8,840)
    • Benefit in Kind Class 1A (all levels)
    • Payroll Settlement Agreements Class 1B (all levels)
    • Class 4 NIC for sole trader and partners (over £9,568)
    • Employees of umbrellas companies (over £8,840, 2.5% over £9,568)
    • Limited companies within IR35 (over £8,840, 2.5% over £9,568)

    And the following income tax will increase by 1.25%:

    • Dividend tax (over £2,000)

    From April 2023, the NIC % will revert to current levels and the amounts above will be renamed a ‘Health and Social Care Levy’ showing up as such on payslips and start to apply to employed pensioners.

    It’s a common trick to call a new tax, a ‘levy’, but it’s a tax.

    What will you get for it? From October 2023, lifetime care home fees will be capped at £86k presumably hoping that the family home doesn’t need to be sold to pay for this level of fees.

    Employers may not pay the new tax:

    • If employers NIC is less than £4k
    • An employee is an apprentice
    • An employee is a veteran
    • The employer is in a freeport

    Apart from looking at these exceptions, how might you respond?

    Shareholder-directors – use your normal dividend tax threshold in full before April 2022

    If you tend to keep your dividends in the basic rate band paying 7.5% dividend tax on total income up to £50,270, ensure you use this band in full before 5 April 2022, before the increase to 8.75% from 6 April 2022. 

    Ditto for higher rate band dividends from £50,270 up to,say, £100k to pay as many dividends at the current 32.5% rather than the increased 33.75%. 

    You’ll need enough after-tax profits to pay the dividends, as usual, and check the effect of your other taxable income such as property rents.

    Sole traders and partners –  ensure you use accruals accounting, rather than cash accounting

    Unrepresented taxpayers tend to report cash income (and costs), not allowing for unpaid invoices or work-in-progress.

    You may wish to revisit this, to ensure as much net profit as possible is taxed at 9% NIC rather than the increased 10.25% on profits between £9,568 and £50,270 or 3.25% in the higher rate band on profits above £50,270.

    All businesses – revisit other ways to take money out of your company/business from April 2022

    The new tax increases the value of tax efficient alternatives, such as replacing existing dividends with a new electric car or employer pension contributions. Sole traders and partners will benefit from investing in plant and equipment including a new electric car or van for use by the business.

    Increase prices?

    Prepare or update your business plan, checking your margins, to see how you might recoup this additional cost to you and your business.

    Sell up or retire? 

    This may be another reason, after the pressures of the pandemic, to sell up or retire from your business, possibly paying 10% capital gains tax on its value.

    Interesting that this announcment, well before the budget on 27 October, leaves the Chancellor clear space to focus on his other tax and spending plans. What will we see then? 

    Further details as always can be obtained from your On The Spot Accountant. 

  • #Budget2018 – IR35 – What yesterday’s press release should have said

    If your clients are medium or large businesses, they’ll be deciding whether you’re self employed or an employee for tax deduction purposes only. Or put it another way, if they are a small company, the rules don’t apply and you may be able to continue as normal.

    If your client decides that you’re effectively an employee, then your client (or its agency) will need to deduct income tax, employee NIC and pay employer NIC without any associated employment rights.

    This means:

    1. Consultants, you are likely to suffer the employer’s NIC because your clients won’t be willing to pay it. If they’d needed and budgeted for a permanent employee you or someone else would presumably be on an employment contract, with all the benefits of that.
    2. This leads us on to the very uncomfortable outcome that a Consultant may pay full PAYE income tax and NIC, but without any employment rights at all.
    3. The mechanics of this are predictably complicated and involve a payslip being issued to your limited company, although your company’s accounts will show it has paid you dividends.
    4. Issuing invoices and being VAT registered makes no difference. Your clients work with the net of VAT invoiced amount and deduct tax from that, regardless of how you’ve taken the money out of your company.
    5. Regarding whether your client is a small business, if the usual Companies Act definition is used, your client should be under at least two of the following:
      • Turnover < £10.2m
      • Gross assets < £5.1m
      • Number of employees < 50
    6. How will you be able to check if a prospective client is small or not? You could look at filed accounts at Companies House, but these don’t have to be filed until 9 months after the year end.
    7. Will you have to trust your prospective client to get this right? Will procurement managers have this information? What if it changes mid-contract? Who will pass on this information to you, the procurement department or an agency? Does the definition of small also apply to the agency?

    What can you do about this?

    1. You may decide to work only for small companies! You’ll need to ask for written confirmation that your clients are small and are therefore not applying these rules. Try to have contract terms that your clients will pay any tax due if they make an incorrect assessment. Commercially, however, this may be unlikely!
    2. On the other hand, if your clients are medium or large, you’ll need reassurance they still regard you as self employed. HMRC has a ‘CEST’ tool (Check Employment Status for Tax) but it has its limitations.
    3. Your clients are expected to use the CEST tool to determine whether you are self employed or an employee. If they get a favourable result, ask for a copy and keep it on file in case of a future enquiry. If they get an unfavourable result, ask to look at it in case it’s been used incorrectly.
    4. HMRC recently admitted that the tool isn’t required if there’s no Mutuality of Obligation (‘MOO’) to offer and accept work. Tribunal cases have confirmed this point. If this stands, then being self employed might simply be determined by that point, if it’s clear.
    5. If your clients insist they need to apply these rules and they have assessed you as an employee, have contractual terms that mean they pay the employer’s NI if, commercially, this is available to you.
    6. Consider whether you can increase your fees to offset the increased tax burden. Again, commercially, this may not be available to you.
    7. If you do have one longstanding client, you may decide that now is the time to end your contract and apply for a different employment with them or another business. We’ve seen this to some extent with the public sector version. At least you won’t pay employer’s NI and you’ll get employment rights in return for paying PAYE.

    There is a consultation period and we expect many comments will be given resulting in clarifications or even improvements to the above! 

     

  • Uber reaction – How should businesses react to recent employment law cases?

    Why does it matter?

    As a business owner, HMRC may decide that your longstanding sub-contractors are actually your workers or employees for tax purposes and should be subject to higher rates of national insurance. This is in addition to providing workers’ rights under employment law.

    How can you be self-employed, a worker or an employee?

    It used to be simpler to know whether you’re taking on an employee or a self-employed sub-contractor or supplier. The EU introduced a new definition of worker, a sort of hybrid between the two, which has caused some confusion. 

    What’s the point of being a worker?

    A worker enjoys many rights, just not quite as many as an employee. For example: 

    • Statutory maternity pay but NOT statutory maternity leave
    • Statutory paid holiday but NOT the right to time off for emergencies
    • Protection against unlawful discrimination but NOT protection against unfair dismissal

    So my self employed sub-contractors could win an employment law case, be classed as a worker, enjoy all the benefits but not necessarily pay any additional national insurance?

    Yes. In addition, you’d be required to include workers in pensions auto-enrolment paying up to 3% employer pensions contributions.

    HMRC might also require me to pay employer’s national insurance (13.8%) and deduct employee national insurance (12%) and income tax from the payments I make? 

    Yes.

    Does this additional national insurance buy the worker any more benefits?

    Not much. Assuming the worker already paid self employed Class 2 national insurance, the additional benefit is an enhanced job seeker’s allowance, if he needs it.

    That doesn’t make much sense.  I thought national insurance was a system you paid into to buy extra benefits.

    The state pension will usually be the most valuable benefit, but this is currently available anyway by paying £153.40 per year self employed Class 2 national insurance. 

    What should I do?

    1. Review all your contracts and practices with your self employed sub-contractors and suppliers to establish whether in the light of these recent tax cases they may be seen as workers or employees. 
    2. Use HMRC’s new Employment Status Tool to see whether HMRC agrees that your sub-contractors are self employed or not.
    3. If not, don’t necessarily rely on HMRC’s conclusion which ignores a vital Mutuality of Obligations (MOO) test. 
    4. Decide whether your contracts need to be amended to reflect your business arrangements more accurately or if you need to set up new employment contracts. 

    How does this apply to my limited company which provides services to my clients?

    If, through similar tests, you were found to be an employee of your client and caught within the ‘IR35’ rules, your company is obliged to pay PAYE and Class 1 employee and employer national insurance. As this wouldn’t have been factored into your pricing, this will make a big dent in your profits. 

    What should limited company contractors do?

    You can follow similar advice to above checking the details of your contracts and practices with your clients, as the points at issue are the essentially the same.

    This is a developing area of tax and employment law, so please check with your advisers before making any decisions.