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Changes to the tax regime are driving more and more people to incorporate their businesses.
For the self-employed and landlords who will be impacted by Making Tax Digital (MTD) in April 2018, the easiest way to obtain a two-year deferment is to incorporate, as MTD does not come into effect for a Limited Company until 2020.
Indeed, for landlords affected by the changes to mortgage interest relief that start to come into effect from this April, the imperative is more acute.
As we outlined in our submission to the HMRC consultation on MTD last summer, the effect of the ludicrous revenue threshold of £10,000 for mandatory quarterly reporting would be to reduce tax revenue.
Clearly, the Office for Budget Responsibility concurs as in the 2016 Autumn Statement Philip Hammond stated “…the OBR has today highlighted the growing cost to the Exchequer of incorporation”.
Mr Hammond went on to say “So the government will consider how we can ensure that the taxation of different ways of working is fair between different individuals, and sustains the tax-base as the economy undergoes rapid change. We will consult in due course on any proposed changes.” This has been interpreted to mean that money-boxing in a Limited Company and the differential rates of National Insurance contributions are under scrutiny.
This newsletter looks why now is the time to incorporate if you are self-employed. For the landlord, there are additional tax complexities around Stamp Duty, Capital Gains Tax and, potentially, the Annual Tax on Enveloped Dwellings. As a result, we will be publishing a separate newsletter on The Landlord and Incorporation next week.
For investors, incorporation is also an attractive option and the rise of Personal Investment Companies is growing. Offering a tax-efficient mechanism to grow your capital base, the opportunity to extract income as dividends and with the investment growth outside the scope of Inheritance Tax, this will feature in a third newsletter.
At the heart of the drive to incorporate is the declining rate of Corporation Tax. Currently at 20%, this reduces to 19% from April, then 18% from April 2019 and 17% from April 2020.
Even now, there are significant tax savings to be made from incorporation. In the 2016-17 tax year, a sole trader with taxable income of £30,000 would have an Income Tax and National Insurance bill of roughly £5,900.
On a basic model, under a company structure of a £18,000 PAYE salary, £7,000 additional allowable expenses and a £5,000 Dividend, the overall Corporation Tax, Income Tax and National Insurance liability would be just over £4,900.
Given that the differential rates of National Insurance contributions between the employed and self-employed of 12% and 9% respectively on income up to £43,000 are under review and the reducing rate of Corporation Tax, this gap can only widen.
This is before looking some of the other potential benefits a Limited Company can offer. For instance, in our scenario above, if your partner does not work and was employed by the business on a part-time basis for £6,000 a year thereby reducing your salary to £12,000, the overall tax burden would reduce to a little more than £2,200.
Other advantages include a wider basket of allowable business expenses, the ability for the company to contribute into a pension scheme which in itself is an allowable business expense, and the ability to lend money to the company.
Taking the last point, from the current tax year, a standard rate tax payer has a tax-free annual allowance of £1,000 for interest income. This reduces to £500 for a higher rate tax payer. As long as the loan into the company is structured with a commercial rate of interest, the resulting interest payments count towards this allowance.
For example, if you are a standard rate tax payer with £20,000 in an ISA earning 0.5%, this could be loaned to the company at an interest rate of 5.0% increasing the interest earned from £100 to £1,000. The interest is another allowable expense for the company reducing the Corporation Tax by £200 as well as adding £1,000 to the money available to extract from the company without tax.
Finally, although the Corporation Tax payment deadline of nine months and a day after the financial year-end is broadly similar to the Self-Assessment payment term, there are no advance payments for the current year.
Whilst there is an additional cost involved in running a Limited Company, the current and prospective tax and compliance benefits far outweigh this.
We await to see if Philip Hammond elaborates on his comments in the Autumn Statement in the upcoming Budget in March.
In the meantime, if you would like to discuss your circumstances, please email us at tax@cooperfaure.co.uk.
The latest update from HMRC is that the public beta version of the is the Employment Status Service Tool will be launched tomorrow.
As we outlined in our last newsletter, the concept is that by answering a number of questions around the relationship between the contractor and their Public Sector client, the tool will provide an assessment of whether IR35 rules should apply. HMRC has reiterated that it intends to abide by the outcome.
We have had the opportunity to review the private beta version of the software and, whilst no single answer will lead to a determination, the simplest way to achieve an outcome that the contractor is outside IR35 revolves around substitution.
As it stands, if there is a ‘Contractual Obligation For a Substitute’, the obligation is demonstrable and the contractor is liable for the payment to the substitute, the Employment Status Service tool will show that the contractor is outside the scope of IR35.
For those contractors looking to continue an engagement with a Public Sector client, our two key recommendations are to ensure that a new, appropriately worded contract is in place to come into effect from April and to make arrangements to support your ability to provide a substitute.
In our view, an addendum to your current contract is not sufficient and those engaged via an intermediary need to be in active dialogue with them on this.
Transport For London were at the vanguard of the Public Sector in banning their contractors from using a Personal Service Company from April and giving them an ultimatum to either be paid under PAYE, work through an umbrella arrangement or leave.
Friday 17th February was the deadline for a decision and the rumour is that the groundswell to leave has been so overwhelming that the wholesale ban on Personal Service Companies is now under review.
There is no doubt that the new rules put an extra burden on the engager. However, Public Sector bodies are slowly awakening to the impact on their services should the latest surveys indicating that around 80% of contractors would move to the private sector rather than accept the PAYE deductions be accurate.
As a result, engagers are putting proper procedures in place to enable the contractor provide a substitute and, thereby, remain outside IR35.
To validate this, the contractor can aid their cause by making mutual arrangements with another contractor with similar skills and experience to provide substitution services. In this context, a substitute is not expected to be ‘on the bench’ waiting to be introduced.
For those working in an area that requires security clearance, it will be the responsibility of your Personal Service Company to ensure that the substitute has the appropriate level of security clearance.
At CooperFaure, we are working with a portfolio of contractor clients working in the Public Sector. If you would like any further information or to discuss your concerns, please contact us at tax@cooperfaure.co.uk.
HMRC has finally published an update on their proposal for contractors working in the Public Sector including those working for HMRC itself. However, like the recent Making Tax Digital proposal, the key part is missing.
The kernel of the change that comes into effect from April is that the responsibility for deciding whether off-payroll working rules (aka IR35) should be applied to a contractor shifts to public sector authority that engages the contractor.
As well as national and local government departments, executive agencies and authorities, the public sector covers educational establishments and others such as the BBC, Channel 4, TFL and the Bank of England.
Where the rules are deemed to apply, the fee-payer will calculate Income Tax and National Insurance contributions and deduct them from the contractor’s fee for service.
An important point is that this reform applies to payments made on or after 6th April 2017 rather than work done after that date.
Given that most contractors invoice on a monthly basis, payment terms are generally thirty days and that there is often slippage, the reality is that the new rules in many cases will be applicable to the invoice raised for services provided in February.
The latest announcement states “Public authorities, agencies and third parties supplying contractors should consider existing contracts and prepare for the change.”
However, whilst confirming the name of the new digital service that will provide the HMRC view of the employment status of a worker will be the Employment Status Service tool, this is only “is expected to be made available by the end of February 2017.”
The idea for this service is that by answering a number of questions around the relationship between the contractor and the public sector client, the tool will provide an assessment of whether off-payroll working rules should apply. HMRC has previously committed to abide by the outcome.
On the basis that this software was originally scheduled to be in place before the end of January, we can only presume that developing this product to give a definitive view is proving challenging!
However, the fact is that both the public authorities and contractors are in limbo at a time where this new legislation will apply to work being done now.
The contractor in particular has every reason to be nervous. If the Employment Status Service tool indicates that off-payroll working rules now, logic dictates that HMRC could argue that this should have been the case since the inception of the contract.
We are already hearing that public sector bodies are opting not to engage contractors working through their own Personal Service Company.
One solution is for a team of contractors to band together and form a consultancy for the provision of their services.
A common misconception is that the remuneration from the sum of the whole would be less that from the individual components. As the VAT Flat Rate Scheme benefit is also being withdrawn from labour-only businesses from April, this will certainly not be the case.
Another is that if, say, four contractors form a consultancy the revenue would be pooled and divided equally so each would be entitled to a 25% distribution irrespective of their contribution to the pool. Having a 25% shareholding does not equate to 25% distribution rights.
So long as the company is incorporated with the necessary clauses in the Articles of Association and supported by a shareholder agreement to cover future events, each individual will be protected.
For this, the company formation is far beyond an off-the-shelf online solution. At CooperFaure, we specialize in creating company structures to ensure that the interests of each of the participants are protected.
If you would like any further information or to discuss the options, please contact us at tax@cooperfaure.co.uk.
On Tuesday 14th February, we will be hosting a Free Webinar on ‘The Property Investor and Tax’ between 7:30pm and 9pm. Highly recommended for those who have or are looking to build a buy-to-let property portfolio. As well as expert advice and a free copy of the presentation, you can ask that nagging question in our Q&A session.
As ever, places are limited so please click here to register.