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Tag: Class 2

Class 2

  • 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.

  • Dear HMRC…Why We Need To Talk

    Dear HMRC

    Why we need to talk to you…..

    As an unrepresented taxpayer with apparently very simple tax affairs, I find myself needing to call you. I really don’t want to. I have better things to do, but I like to know I’m not going to upset you.

    Over the last few years, I’ve needed to talk to you about:

    Incorrect PAYE code – In common with the mightiest Finance Directors, I don’t like surprises. If this code is wrong and you send me a demand after the end of the tax year, it’s a worry. I don’t have spare resources to conjure up extra cash.

    No matter how hard I try, I don’t understand my code. If you change it, I won’t know why and I need to ask you. I need someone to say it’s OK, no need to worry.

    High Income Child Benefit Charge – A couple of times, I’ve earnt over £50,000, and you came back to me a few years later and asked me to repay some child benefit. This is a confusing rule. You saw my income, but child benefit continued to be paid. You told me this is on the website for me to see clearly.

    Sorry, but I don’t hang out on HMRC’s website just in case something applies to me. You know the jargon because you see and hear it every day. I don’t, so occasionally I need a human to explain things to me.

    Pensions – Full Tax Relief – When I earn over £50,270 (different to the £50,000 for child benefit) I’m told I can claim an additional 20% income tax on some of the gross pension payment made to my employer’s pension scheme. I have only the vaguest idea what this means and suspect there are a lot of us missing out on full tax relief.

    I’d quite like you to explain this to me. HMRC’s site assumes a certain level of starter knowledge eg what ‘relief at source’ means.

    Self Employed Class 2 NICs – My side hustle self employed income is sometimes very low and you refunded me the Class 2 NICs I’d asked to pay voluntarily. On enquiry a person explained that voluntary contributions aren’t accepted unless a certain form has been completed.

    For years, I’ve reported a small self employed business on the side. This isn’t enough to earn me a state pension credit should I ever need to pay Class 2 NICs voluntarily. How confusing is that? I couldn’t have worked this out on my own.

    Self Employed Tax Payments Due – In my busier years, no matter how hard I try I don’t understand any statement I see. I pay the figure at the bottom and hope for the best. You tell me the payment on account system is explained online.

    You’re the only organisation I deal with that has a twice a year payment system with half of it in advance and the other half after the end of a period. Unless someone takes me through how that works, I’m not going to understand it.

    It seems the people sitting in rooms talking familiar language make rules that suit their ends. The rest of us get on board as best we can.

    Or are you saying we now all need to pay an accountant?

    Yours confused

    Unrepresented Customer (who can’t choose another ‘supplier’)

  • New Year’s Resolution? – Make Tax Understandable

    1. Training Costs – Allow all relevant business training costs paid by a sole trader to be tax deductible, as they are for limited companies. Surely training is a good thing?
    2. Class 4 National Insurance – Link Class 4 NICs paid by the self employed to benefits. Currently they are the most expensive NICs paid by the self employed but they provide no state pension credit or any link to benefits or the NHS. They are really no different from charging a further 9% of income tax, except they start to be paid at income levels £3.5k lower. 
    3. Gift Aid Carry Back – Allow charitable donations to be carried back to the prior year even if that earlier tax return has already been submitted to HMRC. Why should someone who has delayed sending in a return be treated more favourably?
    4. Corporate Gifts – Apply the same rules for VAT and corporation tax. Corporation tax rules require the presence of a logo and the gift can’t be food or alcohol, but there are no such restrictions for VAT. With a merged tax department surely this can be aligned?
    5. Property Partnerships – Similarly, treat jointly-owned property as a partnership for both income tax and VAT purposes. Currently, only the VAT department will automatically describe this as a partnership.
    6. S/EIS – Be more reasonable with the practical operation of S/EIS. If a taxpayer only needs to claim capital gains tax relief why insist that dummy income tax relief is claimed in a tax return? The investment is either eligible or not. And surely it doesn’t matter if the wrong form is completed by mistake, as long as adequate, relevant details have been provided?
    7. Making Tax Digital – Ensure MPs aren’t exempt from the biggest change to tax reporting for years. If MPs aren’t subject to the same rules, there is no incentive to make them understandable, relevant and proportionate. Is it right that a sole trader preparing perfectly good handwritten tax figures all his working life and filing returns online with HMRC, is now forced to adopt new software because MPs have said so? Whereas well paid supported MPs don’t even need to think about this for themselves?
    8. Personal and Tax Free Allowances – The interaction of these is so complicated even HMRC hasn’t yet managed to code everything correctly into their software. KISS!

    It’s these and many other strange rules which don’t help the public’s perception of HMRC and paying tax, which also adds to the feeling that the system is set up against them. This New Year and decade could be the time to tackle this properly. 

    Thank you. 

    Yours faithfully

    Accountant explaining tax to people every day…

  • 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. 

     

  • Budget 2017 – Brexit and Bricks

    The Brexit Effect – Changes effective from 2019 onwards

    VAT Registration Threshold

    This will be frozen at £85k for 2 years until 31 March 2020. In the meantime the threshold will be reviewed to establish how it might incentivise businesses further. It is true that many businesses selling to consumers deliberately stay under the threshold to avoid the administration and not to increase prices to their customers. With inflation, freezing the threshold itself might force many businesses to become VAT registered. If so, it’ll be a good time to review business models and how to grow successfully.  

    Travel and Subsistence

    From 6 April 2019, the overseas travel and subsistence allowances can be paid when on a business journey without needing to prove that some expenditure has been incurred by employees. This is a very welcome administration saving. A similar approach will be taken for UK subsistence rates. 

    Research and Development

    A pilot advanced clearance service will be available for SMEs to encourage them to make more claims. This is an excellent relief, but as usual there are some complicated parts which make many would-be claimants uninterested. Simplification is the real answer here.

    Entrepreneurs Relief

    Sometimes this valuable 10% capital gains tax rate isn’t available where new shares are issued at the same time as the founder is selling his/her final few shares. This issue will be looked at to see whether entrepreneurs can be encouraged ‘to remain involved in their businesses after receiving external investment’ presumably for the next phase of business growth. 

    Enterprise Investment Relief

    This change is effective a year earlier in April 2018 and will help businesses raise more much needed capital by doubling the tax efficient thresholds, but it comes with a price of more complication. HMRC is very quick to withdraw this relief for the smallest of reasons such as using the wrong form. As mentioned above, simplification at the same time would be very welcome for the busy growing business.

    Intangible Fixed Assets

    These have suffered many adverse tax changes recently and this will be reviewed to see whether UK companies can be better incentivised. 

    Disguised Employment

    AKA How can the government make sure it doesn’t lose out from the new flexible economy? The Matthew Taylor review will be consulted on to prevent the Chancellor from suddenly announcing an increase to Class 4 National Insurance, or similar, in the future. The delay to April 2019 in abolishing Class 2 National Insurance had already been announced.

    The possibility of extending the responsibility of deciding whether your supplier is really an employee from the public sector to the private sector will also be consulted on with the results due in 2018. This will be a worry to the many consultants who genuinely work on different projects for different clients and don’t require or want any employment related benefits.

    Making Tax Digital 

    Nothing new here except to confirm the delayed timetable to April 2019 for VAT registered businesses with a turnover of over £85k and to at least April 2020 for other businesses and individuals.  

    Property and Other Assets 

    Stamp Duty Land Tax  

    The house building, estate agent and related industries presumably will benefit from the abolition of stamp duty land tax for purchases of residential property up to £300k. Stamp duty is driven by completion dates so even if you’ve already exchanged, you will benefit now from this change on completion. 

    Companies Capital Gains Tax Indexation 

    This often valuable additional tax deduction for companies on the sale of an asset will be frozen at December 2017 inflation rates. This seems to be a further attack on residential properties where many buy-to-let landlords are incorporating in response to earlier adverse property tax changes. 

    Residential Property Capital Gains Tax Payment Date 

    The much reduced payment window to only 30 days will be deferred until April 2020, a welcome delay and perhaps not a government priority for now. 

    Conclusion 

    Many other initiatives were announced to make the UK Brexit-ready and to encourage house building. These were the main themes, but we can always expect anti-avoidance measures to be in Budgets for the foreseeable future. There were several of these, such as taxing Royalties from UK sales in the UK, which don’t affect most SME businesses. 

     

  • Budget 2017 – So will the Chancellor be sacked?

    The thing about national insurance

    It’s complicated.

    The Chancellor referred to the lack of payment for public services but the national insurance of £6,170 due on a salary of £32,000 includes £3,297 paid by the employer, not the individual. Plus the employer receives corporation tax relief reducing the net amount paid to the Treasury by £659 to £2,638 from the employer.

    If you look at what the individual pays, the correct comparison is £2,873 from the employee versus £2,300 from the self-employed, a reduced differential of £573. On a salary or profit of £32,000, this gap will drop to about £240 from April 2019. 

    This £240 is effectively the price of no holiday pay, sick pay, maternity pay, having to pay all your own pension contributions etc. 

    Hopefully, the announced review of benefits available to all will improve these comparisons. 

    15 MARCH 2017 UPDATE – THIS CLASS 4 NATIONAL INSURANCE INCREASE HAS BEEN SCRAPPED. 

    Making tax digital

    On top of this a 1 year delay to ‘making tax digital’ quarterly reporting where your turnover is less than £83k won’t reduce this new self-employed burden by much and the self-employed may start to feel a bit hard done by today.

    Dividend tax 

    The 0% tax rate on £5,000 of dividends will from April 2018 be available on only £2,000 of dividends. This will adversely affect small owner-managed businesses but it’s still likely to be beneficial to run many businesses through a limited company, if only to be able to control the timing of your personal taxable income.

    Perhaps when HMRC was told that its example of the interaction of the £5,000 and the tax free personal allowance was wrong, the Treasury had to re-run its numbers and discovered that £5,000 would cost more than they realised!

    Research & Development 

    As part of the Chancellor’s determination to tackle our poor productivity, he seems willing to be more lenient about the details required when making an R&D claim. This needs to be an instruction to HMRC, as the most lengthy information requests are made by inspectors after submission, sometimes for relatively small claims. 

    Conclusion

    The Chancellor’s error in the national insurance comparison and HMRC’s error in calculating the effect of the £5,000 tax free dividend, show how complicated the tax system has become. Even those legislating and running it don’t always understand the interactions across different parts of the system. There has to be more inroads into simplifying the tax system so taxpayers have more certainty over the tax they’ll have to pay.

    On the basis the Chancellor is waiting for the Autumn to deliver a more comprehensive budget, and will check with practitioners before making comparisons, perhaps he won’t be sacked this time. And perhaps we’d like to hear a few more jokes yet.