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Archive for Employee Tax

Changes to off-payroll working (IR35) rules effective from April 2020

The government has reaffirmed plans to make changes to off-payroll working (IR35) rules effective from 6th April 2020. This will affect any contractors working through a Personal Service Company, Recruitment Agencies, and all Large and Medium-sized end clients.

On 11th July 2019, the government published the draft legislation necessary to enact the Finance Bill 2019-20. Among other tax measures, the Finance Bill introduces important changes for workers providing services through an intermediary in the private sector (also known as ‘off-payroll working’ or ‘IR35’).

The final contents of the Finance Bill will be confirmed by the Chancellor of the Exchequer as part of the government’s 2019 Budget. The off-payroll working changes are due to take effect from 6th April 2020 and are summarised in the sections below.

Summary of changes to IR35 due to be implemented in 6th April 2020:

There are a number of changes due to be implemented in April 2020, these will have impacts on end-clients, recruiters, and contractors working through limited companies. We’ve summarised the main changes and impacts below.

The end-client is now responsible for determining whether a contract is inside or outside of IR35 rules

The changes for the private sector mean the end-client is now responsible for determining the IR35 status of a contract with a Personal Service Company (PSC). The rules will be consistent with the changes brought in for the public sector in April 2017.

Small business exemption to new IR35 rules

The legislation applies only to ‘medium or large’ businesses. There’s an exemption for end-clients who are ‘small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:

  • Annual turnover is no more than £10.2 million
  • Balance sheet total is no more than £5.1 million
  • No more than 50 employees.

Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of a contract remains with the PSC and the changes do not apply.

The government has included clauses in the legislation to ensure medium or large businesses do not set-up arm’s length companies or subsidiaries to procure services from PSCs. The legislation will apply to the parent company based on the aggregate amount of turnover and the aggregate amount of the balance sheet total of the connected entities.

There’s no small business exemption for public sector organisations and the legislation will apply to all end-clients engaging PSC workers in the public sector.

IR35 Status Determination Statement (SDS)

The end-client must confirm the IR35 status of a contract by providing a ‘Status Determination Statement’ (SDS). The SDS must be provided in writing to the PSC worker and, if an Agency is involved in the labour supply chain, a copy must be provided to the Agency responsible for paying the PSC.

These arrangements place most of the responsibility for administering an SDS on the end-client and/or the fee payer (if an Agency is involved).

IR35 status dispute resolution process is led by the end-client

It’s the responsibility of the end-client to establish arrangements to consider any disputes from PSCs about the SDS. The legislation does not specify how such arrangements should work in practice but does state a time limit of 45 days to respond, in writing, to the PSC with the outcome of the review of the dispute.

The decision must either confirm the original SDS is upheld, or, if it involves a revised SDS or conclusion, a new SDS must be provided in line with the arrangements outlined above.

Transfer of employment tax liabilities to another relevant person

The legislation is designed to ensure the organisation with responsibility for issuing the SDS, or the fee-payer if an Agency is involved, is responsible for any employment tax liabilities arising.

The legislation also allows HMRC to recover tax liabilities from another ‘relevant person’. A relevant person is any party involved in the payment to a PSC. This means HMRC can recover tax from the highest party in the labour supply chain which is not complying with the legislation. HMRC believes this will ensure compliance with the rules across all parties involved in the labour supply chain.

5% administration allowance withdrawn (mostly)

As expected, the draft legislation removes the 5% allowance for PSCs to meet the costs of administering the off-payroll working rules. The allowance will continue for PSCs working with ‘small’ end-clients as defined above.

Check of Employment Status Tool (CEST)

The government recognises the Check of Employment Status Tool (CEST) needs to be strengthened. It’s expected that a further announcement will be made when further guidance and support for businesses is published throughout 2019.

Conclusion – The new IR35 rules will cause issues

Cloud Accounting NI responded to the government’s consultation earlier in the year. It’s disappointing that most of the issues raised by us, and other responders, have been largely ignored in the draft legislation. Of particular concern remains the:

  • errors and inconsistencies contained in the government’s online Check of Employment Status Tool (CEST)
  • additional investment required to complete an employment status determination by an end-client on a contract by contract basis
  • removal of the 5% allowance for PSCs to administer off-payroll working rules
  • risks to PSCs from the dispute resolution process which are the responsibility of the end-client to administer.

IR35 – 10 INDICATORS TO SHOW YOU’RE NOT A DISGUISED EMPLOYEE

The IR35 'off-payroll' rules will be extended to the private sector from April 2020 onwards, directly affecting a large number of contractors.

Therefore there has never been a more important time to review your business for IR35 and take action if it is affected.

As a Limited Company Contractor or Sole Trader, IR35 is an important consideration for you as it sets out the law relating to tax treatment of your income and also determines your tax position with HMRC. Contractors that fall outside IR35 legislation are entitled to receive payment in the form of dividends. Those who fall inside IR35 are seen as a disguised employee and are only entitled to receive payment on a PAYE basis (albeit through their Limited Company).

Therefore, being caught by IR35 does not prevent you from working through your company, it just means that you need to tax yourself differently with the assignment which is within IR35.

In order to determine if an individual is likely to be caught by IR35, the following series of questions provide a clearer picture as to whether a worker is deemed to be an employee or self-employed. If the majority of answers to the following questions is ‘Yes’, the more likely an individual is to fall inside IR35 and therefore a ‘disguised employee’ of the end client:

  • Do you have to do the work yourselves?
  • Can someone tell you at any time what to do, where to carry out the work or when and how to do the work?
  • Do you have to work a set amount of hours?
  • Can someone move you from task to task?
  • Do you receive overtime pay or bonus payment?

It is important to reiterate that these questions do not set an individual’s IR35 status in stone but do provide a clearer picture with HMRC as to how an individual works. Cloud Accounting LLP offers unlimited IR35 checks when working through a limited company to make sure you operate compliantly.

If you answered yes to one or more questions, please contact us to see how switching to Cloud Accounting LLP can help you with how to avoid IR35.

Speak to Richard Cloud Accounting LLP

THE FOLLOWING TIPS WILL HELP DEMONSTRATE YOU’RE NOT A DISGUISED EMPLOYEE ONSITE AND CAUGHT BY IR35.

1. ENSURE YOUR CONTRACTS ARE ACCURATE AND CONSISTENT

It makes little sense having a contract that states that you will be subject to the control of the client, or that the client’s processes and procedures will apply to you when they don’t in practice. Also, make sure that the contract between the agency and the client does not contain anything that contradicts your contract with your agency.

2. MAKE SURE YOUR CLIENT THINKS THE SAME WAY YOU DO

If your client sees you as an extension of its own workforce, the company is more likely to treat you as an employee. Make sure they know that you are contracted for a specific reason and that they treat you as independent of their organisation throughout your assignment.

3.ENSURE THAT THE CLIENT’S REPRESENTATIVE VIEWS YOU AS AN INDEPENDENT CONSULTANT

This is particularly important where your client representative (i.e. The person who would liaise with HMRC in the event of an IR35 enquiry) is different from the individual who hired your services or worked with you day to day at the outset of the project. If necessary, provide a copy of your contract to the client representative or even a “statement of understanding” which sets out how you intend to work/be treated whilst on an assignment with the client to avoid any misunderstandings.

4.DEMONSTRATE THAT YOU ARE TREATED DIFFERENTLY FROM YOUR CLIENT’S EMPLOYEES

Genuine employees will have certain set working conditions, such as minimum hours, pension arrangements and other benefits, and perhaps subsidised services too. The employer also has a duty to provide work for them, which the employee has an obligation to do – and the employer can stipulate where and how the work is to be carried out. You should be able to show that little if any of this applies to you.

Different pay and benefits will not be enough on their own. Flexible working, assignments for other clients, bring your own equipment, working on a specific package of work for a fixed fee and/or a fixed period are all good ways of showing that you are truly independent.

5. WORKING AS PART OF A TEAM DOES NOT AUTOMATICALLY RENDER YOU A DISGUISED EMPLOYEE OF THE CLIENT

It is essential, however, that you agree to the scope of the work you undertake at the outset of the assignment. Being continually allocated further work by the client, particularly without putting in place additional contracts, could show that you are being treated as an employee. If further work comes up, make sure you put a contract in place before you start working on it.

6. PROVIDE A SUBSTITUTE

Not only does providing a substitute give unequivocal evidence that you are not obliged to offer a personal service, and therefore cannot be a disguised employee, it can also enable you to profit further from the assignment by supplying cheaper labour to perform the services on your behalf. It could also give you the flexibility to work on another contract with a different client.

Having a substitute ready to engage on a project is a strong signal you are running a business. These "employees" can be set up on a zero hours contract. You may want to have arrangements to join a group of fellow experts in your industry niche and make reciprocal zero hours contract arrangements to step into each others project in when necessary - eg if you took ill health, during holidays etc.

7. PROJECT-BASED ASSIGNMENTS ARE SIGNIFICANTLY BETTER THAN PERIOD BASED ONES

Being engaged on a specific project enables you to quote a fixed fee and work flexibly as long as deadlines and project completion dates are met. Being engaged on an ongoing basis may suggest you are only there until the client recruits a permanent employee to do your job. This may indicate that the company is treating you as if you were that individual until someone permanent comes along which can potentially make you a disguised employee.

8. MANAGE YOUR OWN ASSIGNMENTS

As an independent contractor, you should determine the hours required to complete the work. It is important that you take control over managing your assignments and don’t rely on being allocated work. This should also enable you to quote a fixed fee for the project and/or undertake work for other customers alongside your assignments.

9. CALLING YOURSELF A CONTRACTOR AND NOT RECEIVING HOLIDAY OR SICK PAY IS NOT ENOUGH TO PROVE THAT YOU ARE NOT AN EMPLOYEE OF THE CLIENT

Your working practices and other terms of the contract must indicate that you are self-employed. This could involve you showing that you have financial risk in terms of bad debts, rectifying work at your own cost and investing in your company, all good ‘badges of trade’.

10. WORKING FOR MULTIPLE CLIENTS AND INVESTING IN YOUR OWN COMPANY IS A GOOD WAY OF DEMONSTRATING THAT YOU ARE IN BUSINESS OF YOUR OWN ACCOUNT

The more clients you work for, the easier it is to demonstrate that you are self-employed, whereas only having one client as your sole source of income for a lengthy period of time may suggest that you are employed by the end client. To counteract this, pay for your own training and provide as much of your own equipment as possible and pay for them through your business to ensure they are properly accounted for.

HERE ARE SOME PRACTICAL CONSIDERATIONS:

1. Keep client correspondence

If you have emails that clearly state you are not under the control of a manager at the business, but are simply contracted to provide a service, this can be useful too.

2. Don’t name your company after yourself

HMRC knows that a company named after a person may well be just that person, and this fits their profile of a PSC. But if your company has a more ‘business-like’ name, e.g. XYZ Design, it emphasises the fact that your company is distinct from you, and that you could delegate the work to another person if necessary. Employees cannot delegate in this way, so it marks you out as different.

3. Have your own marketing materials

You should be able to demonstrate that you market your contracting services actively. Have a listing on relevant services website, post adverts and print business cards, all of which help to indicate that you are in business on your own account. Never use a business card which includes your client’s branding!

4. Maintain your own office

A well-equipped office, even just in your own home, will strongly imply that your work activities extend well beyond your current client. If you also invest in your own software licences, trade literature and professional memberships, this can help a great deal too.

6. Take out your own business insurance

Having your own business insurance, such as professional indemnity insurance, is a great way of demonstrating that you’re not just an employee.

7. Invest in your professional development

Employees don’t pay for their own training, so if you pay for yours this will be another useful point of difference. Some professions may require you to take continued professional development (CPD) to remain qualified, so by paying for this you’re also reasserting your contractor status.

8. Try to have multiple clients at the same time

It’s not always possible to arrange, but if your time is split fairly evenly between two or more main clients, it’s much harder for HMRC to claim you’re an employee of any of them. However, having a very uneven split (e.g. 90 per cent of your income deriving from one client) may be less convincing.

The more of these strands of evidence you can call upon, the more likely it is that HMRC will accept you are in business on your own account. Having just one or two on their own may not be enough.

FIND OUT HOW MUCH YOU MIGHT OWE

Get in touch with us and we can help you calculate how much you might owe if you fall within IR35.

Potentially being classed as a disguised employee can seem like a confusing scenario but it doesn’t have to be.

Over the last 10 years, Cloud Accounting LLP have helped many contractors, freelancers and self-employed professionals, just like you to save time, money and hassle with our comprehensive range of accountancy, financial, legal, insurance and business services.

Cloud Accounting LLP can help you with the responsibility for determining if IR35 applies and assist you with any concerns you may have about potentially disguised employment. Please get in touch to find out more about how we can help you.

Salary Sacrifice Electric Vehicles


Salary Sacrifice

What is it?
Salary sacrifice is a financial solution offered by an employer to employees through a leasing company. With a salary sacrifice scheme, you can lease a car with no initial, upfront costs on monthly payments and no further obligations at the end of the leasing term. Many leasing companies offer turnkey solutions that can be implemented within 4-6 weeks, including comprehensive maintenance and business insurance plans.

With 0% Benefit-in-kind on zero-emissions company cars from April 6th 2020, there has never been a better time to drive an electric car for business.

What are the benefits of a salary sacrifice scheme for an employee?
A salary sacrifice scheme allows employees drive a fully electric company car, by forgoing a portion of their gross salary. The amount will be deducted before tax and National Insurance contributions are applied, akin to childcare, gym membership or cycle-to-work schemes.

What are the benefits of a salary sacrifice scheme for an employer?
A salary sacrifice scheme allows employers to offer employees a new car at a lower cost with a tax-efficient payment method. Additionally, the company may also benefit from reduced National Insurance contribution payments. Salary sacrifice schemes are HMRC and VAT compliant.

Who is eligible for salary sacrifice?
Eligibility for salary sacrifice is dependent on company policy. If an employer offers a salary sacrifice scheme, it’s available to employees with a permanent contract. Employees can learn more about eligibility from their employer.

How do I lease an Electric Car through a salary sacrifice scheme?
Your employer’s leasing company provides an employee engagement portal, which is usually an online platform with step-by-step instructions. To learn more, reach out to us or visit the HMRC website.

Key Benefits

Employer:
Increased employee engagement and retention
National Insurance contribution maintained and insured company cars with all in-life services managed and no daily involvement needed from the employer.
Proven HMRC and VAT compliant scheme
Reduced fuel costs
No initial upfront costs
Employee interaction and
is covered by the leasing company
Salary sacrifice schemes complement existing employee benefits
Employee:
Access to a brand new electric car, at low monthly Contract Hire rates
Significant National Insurance savings
No initial upfront costs
Flexible mileage and terms
Fixed cost motoring without unexpected bills or service costs
Access to new features and functionality with regular over-the-air software updates
Convenient home or work charging, plus access to the world’s largest charging network for long distance travel

Salary sacrifice is a tax efficient way to drive an electric car, however it is only one of the financial incentives

How to Benefit Employees in a Tax Efficient Manner

employee tax

While most employee perks or “benefits in kind” are taxable, there are still a few which enjoy favoured status, to the advantage of employers and employees. This article sets out some of the key benefits and reimbursements which are... beneficial!

Background

There is a well-established regime for taxing non-monetary “perks” for employees, such as company cars. They are generally reported on a Form P11D for each employee, so that he or she will pay income tax on its deemed value. These “benefits in kind” also cost the employer, who is normally obliged to pay Class 1A National Insurance contributions (NICs) at 13.8%. But note that in most cases, the employee escapes employee NICs.

Why sacrifice your salary?

While it could be argued that there is little point in an employee giving up his or her salary in return for ordinary taxable benefits in kind, there are one or two benefits which enjoy favoured status – so are not taxable. In these cases, replacing taxable income with a valuable benefit means less tax for the employee (so effectively more net pay), and an NIC saving for the employer.

1 Childcare vouchers

One of the most popular benefits co-ordinated with salary sacrifice, the employer can provide a basic rate taxpayer with up to £243 a month (or £55 a week) in childcare vouchers which are free of tax and NI for the employee – so the full amount can be applied directly for approved childcare. £243 a month equates to £2,916 a year, so a basic rate taxpayer can take home £2,916 in vouchers, instead of just £1,982 in cash. The employer stands to save roughly £400 in NIC as well.  Both parents are eligible for the vouchers, potentially saving them over £1,800 a year.

There are conditions for a voucher scheme, and higher rate taxpayers can no longer benefit as much as their basic rate counterparts. Employer-supported childcare in the form of workplace crèches or directly contracted provision also stands to benefit, although vouchers are far more common for small businesses.

2 Employer pension contributions

Here, the employer offers to contribute to a pension scheme on behalf of the employee, instead of salary. The contribution is again free of tax, and NIC. This could be to replace existing salary, or it could be an alternative way to pay a bonus. The employer can put some or all of the NIC it saves towards the pension contribution, making it even larger than the cash alternative.

Of course, the employee cannot normally access the pension fund directly but this is less of a concern as retirement age approaches.

Trap :

Care is needed when drawing up salary sacrifice agreements, in order for them to be deemed effective for tax purposes, as they are frequently scrutinised by HMRC. A key point is that the sacrifice must be agreed before the employee becomes entitled to be paid the salary or bonus payment. HMRC’s own guidance in its Employment Income manual starting at EIM42750 (www.hmrc.gov.uk/manuals/eimanual/EIM42750.htm) is genuinely helpful on this issue.

For lower-earning employees such as those who are entitled to benefits, salary sacrifices may also have adverse effects.

 Mobile telephone

A mobile phone for an employee is not a taxable benefit in kind, nor does it attract NIC. Only one phone per employee enjoys this favourable treatment.

Trap :

A common mistake, particularly with mobile phones, is for the contract to be between the phone company and the employee. Where an employer steps in to pay an employee’s contractual liability, there may be a tax charge and an NIC charge – on both employer and employee.

Computers and office equipment at home

HMRC permits the use of office furniture, stationery, computers, etc., away from the office without incurring a tax charge provided the motivation is for business purposes and private use is not ‘significant’.

Based on the relevant guidance, HMRC appears to have a quite relaxed attitude towards what is regarded as ‘significant’ private use in this context – fairly generous examples can be found at EIM21613 (www.hmrc.gov.uk/manuals/eimanual/EIM21613.htm).

Anyone who has previously tried to claim that there is no significant private use of a company car will be amazed at the difference in HMRC’s approach.

Work-related training

There is a potential trap for self-employed people when it comes to training: simply put, the costs of training for updating/maintaining existing skills are allowable, while acquiring a brand new skill is not.

This distinction is irrelevant for employees (and directors) – provided the training is intended to assist the employee in his or her employment, then the cost is not a taxable benefit for the employee.

Professional fees, subscriptions, etc.

An employer can pay for an employee’s membership of professional bodies, annual subscriptions, licence fees and trade union membership, relevant to the employee’s occupation. There are lists of approved professionals and bodies, which can be found in HMRC’s manuals at EIM32880 onwards (www.hmrc.gov.uk/manuals/eimanual/EIM32880.htm).

Scale rate expenses for travel/subsistence

Many readers will be familiar with the quite stringent rules for claiming deductions for ‘travelling and subsistence’. But HMRC is prepared to agree reasonable flat rate amounts that can be paid to employees working away from home/the business.  (In fact scale rates can be agreed for expenses other than travelling and subsistence, although this is relatively uncommon).

Employers can use either the ‘advisory rates’ for meals published by HMRC at EIM05231 (www.hmrc.gov.uk/manuals/eimanual/EIM05231.htm), or agree specific rates with HMRC. This can be done for the business individually, usually by taking a sample of ‘real expenses’ and agreeing an average, or sometimes when the business is affiliated with a representative body which has agreed a national rate on behalf of its members – classic examples are those for the construction industry, and for long-distance lorry drivers.

Where the employer’s business involves employees spending long periods ‘on site’, this can be a real administrative saving. However, a scale rate payment can be made only if an employee confirms he or she has actually incurred some subsistence expense.

Personal incidental expenses

While HMRC doesn’t like to admit it, there is a long-standing allowance for employees who spend nights away from home. The allowance is intended to cover miscellaneous private expenses incurred, such as laundry or the cost of calling home. The amount is £5 per night away in the UK, and £10 per night outside the UK.

•           It is a round sum that may be paid free of tax and NIC.

•           No receipts are required, nor does any expense actually have to be incurred – it is explicitly for private expenditure, what the employee does with the allowance is irrelevant.

Conclusion

Whether you employ people, or are a director or employee yourself, the items above should offer plenty of opportunities for saving tax. I am particularly a fan of personal incidental expenses, as I enjoy telling tax inspectors that there are in fact some “round sum payments” which aren’t taxable!

 
Practical Tip:

None of these benefits has to be arranged as part of a salary sacrifice agreement – but it does help to sweeten the deal for the employer by reducing employers’ NICs. And where a director’s or employee’s income level is such that he is at risk of having child benefit clawed back, or of losing his personal allowance, then salary sacrifice can prove particularly useful.

CLOUD ACCOUNTING LLP

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