Budget, DMS Posts, Tax

What’s changing for small businesses in the 2020/2021 tax year?

A new tax year is starting on April 6th, which will mean many of the changes announced in recent Budgets will come into effect. Before the 2020/2021 tax year kicks off, here’s a roundup of some of the key changes small business.

Changes to some tax and National Insurance rates and bands

Some of the rates and bands have been frozen, while others have increased. Here are the rates and bands that will come into effect on 6th April:

England, Northern Ireland and Wales

2020/212019/20
Personal allowance£12,500£12,500
Employee’s NI becomes due at£9,500£8,632
Employer’s NI becomes due at£8,788£8,632
Higher rate tax becomes due at£50,000£50,000
Class 2 NI becomes due when profits exceed£6,475£6,365
Class 2 NI per week£3.05£3.00
Class 4 NI becomes due when profits exceed£9,500£8,632

Scottish Tax Rates and Bands

The Scottish rates of income tax will change to the below on 11th May 2020.

2020/212019/20
Personal allowance£0 – £12,500£0 – £12,500
Starter rate 19%£12,501 – £14,585£12,501 – £14,549
Basic rate 20%£14,586 – £25,158£14,550 – £24,944
Intermediate rate 21%£25,159 – £43,430£24,945 – £43,430
Higher rate 41%£43,431 – £150,000£43,431 – £150,000
Top rate 46%Over £150,000Over £150,000

Employment Allowance Increased

The Employment Allowance will increase from £3,000 to £4,000 on 6th April but from this date, only businesses with an employer’s NI liability of under £100,000 a year will be eligible to claim the allowance.

National Minimum Wage / National Living Wage rates per hour increased

The following rates will all increase on 6th April:

2020/212019/20
Employees aged 25 and over: NLW£8.72£8.21
Employees aged under 18: NMW£4.55£4.35
Employees aged 18-20: NMW£6.45£6.15
Employees aged 21-24: NMW£8.20£7.70

Student Loan Income thresholds

The levels of income above which student loan repayments are due will change on 6th April as follows:

2020/212019/20
Undergraduate loan: plan 1£19,390£18,935
Undergraduate loan: plan 2£26,575£25,725
Postgraduate loan£21,000£21,000

Working from home rate for employees increased

If any of your clients operate their own limited company and claim costs for working from home, HMRC will ask them for proof of any working from home costs of over £6 (rather than £4) from 6th April 2020.

Delays and cancellations to planned changes

Corporation Tax rate holds steady

The rate at which limited companies pay Corporation Tax was originally planned to decrease from 19% to 17% on 1st April but these plans have now been cancelled. The rate of Corporation Tax will now remain at 19%.

IR35 changes delayed

Changes to the operation of IR35 legislation in the private sector that were due to take effect on 6th April 2020 have now been delayed until April 2021.

DMS Posts, PAYE, Tax

Coronavirus Job Retention Scheme – What do we know so far?

The Government announced an extensive package of support on Friday 20 March for employers coping with the commercial difficulties arising from Covid-19. This has been welcomed by employers, many of whom we have been speaking to, who have been extremely concerned about how to pay wages when revenues have dried up or they have been forced to close. Those businesses have been facing very tough choices around lay off, short term working and redundancies – while trying to balance the finances, needs of the business and the livelihoods of their staff and communities. 

The key measure announced to help employers is the Coronavirus Job Retention Scheme. Through this, employers can claim a grant to cover up to 80% of an employee’s wage costs. At the time of writing (19:00 on 22 March), we are awaiting detailed guidance as to exactly how this will work: but what do we know about the scheme so far?

Which employers are eligible for the scheme?

All UK employers can apply – you don’t need to be in any specific sectors, just pay people via PAYE. This includes businesses of any size and includes charitable or non profit. 

How do you access the scheme?

According to guidance on the Gov.uk webpage, employers will need to:

  • designate affected employees as ‘furloughed workers,’ and notify their employees of this change – changing the status of employees remains subject to existing employment law and, depending on the employment contract, may be subject to negotiation.
  • submit information to HMRC about the employees that have been furloughed and their earnings through a new online portal. HMRC will set out further details on the information required.

It is unclear at this time what (if any) financial information an employer would need to provide to HMRC to show that you cannot cover staff costs due to Covid-19. 

The employer will be able to claim a grant of up to 80% of the employees wage for all employment costs, up to a cap of £2,500 per month.

The scheme will be backdated to 1 March (useful for employers who have already had to make lay offs) and will be open for at least 3 months, but extended ‘for longer if necessary’. 

As this is a reimbursement grant, the employer will make the wage payment to the furloughed employee and then be reimbursed by HMRC. At this stage the timescale is unknown, although the Chancellor suggested the first payouts could be made by the end of April at the latest. Please see here for more details of support that may assist with cash flow through this time.

What does Furloughed mean?

There is no previous legal term for this and it is a completely new concept to English Employment Law. The common definition of to ‘furlough’ is to allow or force someone to be absent temporarily from work. 

We understand that if an employer needs to make an employee redundant or lay them off, they can instead discuss with the employee them becoming classified as a ‘furloughed worker’. This would mean they would remain on the employer’s payroll, rather than being made redundant or laid off with no pay. Their employment would continue but they could not undertake any work for the employer while classified in this way.  

We are still waiting for the detail, but it seems most likely that if an employee has an express lay off clause in their contract, the employer could designate the employee as a furloughed worker. The employer would need to discuss this with staff. 

If the employee does not have a lay off clause in their contract, the employer is likely to need to have a discussion and seek the employee’s consent to be classified as a furloughed worker.  Given that the alternative could be redundancy, most employees are likely to agree. This may depend on what amount of paid notice, Statutory Redundancy Pay and holiday pay they would receive if made redundant. It may also depend on whether the employer is able to ‘top up’ the pay (so the furloughed worker is paid 100% not 80%) or offer for the employee to take or be paid for their accrued but not yet taken annual leave as well. 

Does the employer have to pay more than 80% to Furloughed Workers?

No – the early guidance is clear that the employer could choose to fund the differences between this payment and the employee’s salary, but does not have to.

At this point in time we don’t know whether the 80% grant is limited to just salary or whether it extends to include Employers National Insurance or costs for any benefits such as pensions, health insurance etc. Although it seems unlikely, this might mean that the sum actually paid to the employee is less than 80% of net salary, so care should be given by employers when communicating with staff to say that wage payments for furloughed employees will be in accordance with the scheme.  

We also don’t know how that 80% would be calculated for those whose monthly or weekly salary varies. Again at this stage it is best to communicate to those staff that payments will be in accordance with the scheme once clarified. 

Possible knock on impacts?

At this stage, it is right to feel relieved that there will be a safety net. Further clarification will be welcome, especially in the following areas which could become problematic as this develops:

  • If an employer need some employees to continue to work, how do they choose who to classify as a furloughed worker and who should work on? In the absence of any guidance, we would recommend a selection criteria akin to a redundancy selection matrix, making sure you avoid any discriminatory criteria. It will be interesting to see whether any Government emphasis is placed on giving furloughed status to those who have medical conditions that place them at higher risk from Covid-19 or those who need to care for dependants. Without that Government emphasis employers may face discrimination risks in doing so. 
  • How do you deal with dissatisfaction of those good employees that you ask to carry working on, when other possibly less high performing employees are offered and become furloughed?
  • How do you deal with those on Maternity? We expect it will be the position that those on maternity remain on maternity leave until they wish to return, at which point you would need to assess whether there is work for them or offer them to be furloughed. This could cause issues given that the payment to employees who are furloughed could be significantly higher than statutory maternity pay.
  • What about those who are currently off sick or self isolating on SSP? Should they be furloughed?
  • If there is a delay in payment by HMRC, can you pass that delay on to your employees? This seems unlikely to be encouraged and without provision by the Government may amount to a breach of contract or unlawful deduction of wages. HMRC has set-up a dedicated helpline on 0800 0159 559 for businesses and individuals in financial distress.

We anticipate HMRC will provide details in due course and we will provide updates regularly. In the interim we recommend you regularly check the Gov.uk website which is being updated most days.

Budget, DMS Posts, Tax

Summary of Budget 2020: Key points at-a-glance

Here is a summary of the main points.

Coronavirus and public services

  • £5bn emergency response fund to support the NHS and other public services in England
  • All those advised to self-isolate will be entitled to statutory sick pay, even if they have not presented with symptoms
  • Self-employed workers who are not eligible will be able to claim contributory Employment Support Allowance
  • The ESA benefit will be available from day one, not after a week as now
  • £500m hardship fund for councils in England to help the most vulnerable in their areas
  • Firms with fewer than 250 staff will be refunded for sick pay payments for two weeks
  • Small firms will be able to access “business interruption” loans of up to £1.2m
  • Business rates in England will be abolished for firms in the retail, leisure and hospitality sectors with a rateable value below £51,000
  • £6bn in extra NHS funding over five years to pay for staff recruitment and start of hospital upgrades

Personal taxation, wages and pensions

Pay slip
  • The tax threshold for National Insurance Contributions will rise from £8,632 to £9,500
  • The move, first announced in November, will take 500,000 employees out of the tax altogether
  • Those earning more than £9,500 will be, on average, £85 a year better off
  • 5% VAT on women’s sanitary products, known as the tampon tax, to be scrapped
  • No other new announcements on income tax, national insurance or VAT
  • Tax paid on the pensions of high earners, including NHS consultants, to be recalculated to address staffing issues

Alcohol, tobacco and fuel

Man paying for a pin of beer
  • Fuel duty to be frozen for the 10th consecutive year
  • Duties on spirits, beer, cider and wine to be frozen
  • Tobacco taxes will continue to rise by 2% above the rate of retail price inflation
  • This will add 27 pence to a pack of 20 cigarettes and 14 pence to a packet of cigars
  • Business rate discounts for pubs to rise from £1,000 to £5,000 this year
Men and a woman with laptops
  • System of High Street business rates to be reviewed later this year
  • Firms eligible for small business rates relief will get £3,000 cash grant
  • Entrepreneurs’ Relief will be retained, but lifetime allowance will be reduced from £10m to £1m
  • £5bn to be spent on getting gigabit-capable broadband into the hardest-to-reach places
  • Science Institute in Weybridge, Surrey to get a £1.4bn funding boost
  • An extra £900m for research into nuclear fusion, space and electric vehicles
  • VAT on digital publications, including newspapers, e-books and academic journals to be scrapped from December

Environment and energy

Plastic bottles
  • Plastic packaging tax to come into force from April 2022
  • Manufacturers and importers whose products have less than 30% recyclable material will be charged £200 per tonne
  • Subsidies for fuel used in off-road vehicles – known as red diesel – will be scrapped “for most sectors” in two years’ time
  • Red diesel subsidies will remain for farmers and rail operators
  • £120m in emergency relief for English communities affected by this winter’s flooding and £200m for flood resilience
  • Total investment in flood defences in England to be doubled to £5.2bn over next five years
  • £640m “nature for climate fund” to protect natural habitats in England, including 30,000 hectares of new trees

Transport, infrastructure and housing

Traffic on the A303 near Stonehenge
  • More than £600bn is set to be spent on roads, rail, broadband and housing by the middle of 2025
  • There will be £27bn for motorways and other arterial roads, including new tunnel for the A303 near Stonehenge
  • £2.5bn will be available to fix potholes and resurface roads in England over five years
  • Further education colleges will get £1.5bn to upgrade their buildings
  • £650m package to tackle homelessness, providing an extra 6,000 places for rough sleepers
  • Stamp duty surcharge for foreign buyers of properties in England and Northern Ireland to be levied at 2% from April 2021
  • New £1bn fund to remove all unsafe combustible cladding from all public and private housing higher than 18 metres

DMS Posts, Tax

An essential IR35 briefing for contractors

IR35 legislation allows HMRC to collect additional payment from contractors in certain circumstances. The way in which IR35 operates in the private sector is set to change and this could have a significant impact on many contractors across the UK. This guide provides an overview of IR35 legislation and what it means for all contractors, along with an explanation of the anticipated changes in the private sector.

What is IR35?

IR35 is a piece of legislation designed to seek additional payment from contractors who HMRC believes are working in “disguised employment”. This is when a contractor’s working arrangements and contract are similar to those of an employee but, unlike an employee, the contractor enjoys the tax benefits of working through an intermediary, such as a company or partnership. When a contractor meets the criteria of disguised employment, they are deemed to be “inside IR35” and are required to make additional payments to HMRC.

When is a contractor deemed to be “inside IR35”?

The question of whether a contractor is deemed to be inside IR35 depends on a variety of factors relating to both the contract itself and the contractor’s working practices. There are three employment tests designed to help contractors and engaging organisations make this assessment, along with a number of additional factors that HMRC takes into consideration.

The employment tests

The “direction, supervision and control” test

This test focuses on the level of autonomy given to the worker. HMRC considers contractors to have more autonomy when it comes to choosing what work they do, while employees are more likely to be assigned tasks by their employer. This does depend on the individual’s skill and expertise, however, as a highly skilled employee is likely to enjoy a greater degree of autonomy than a less experienced contractor. The “direction, supervision and control” test asks the following questions of a contractor’s working practices and the wording of the contract itself:

Direction: is the worker told how to do the job at hand?

Supervision: is the worker supervised while they carry out their work?

Control: does the engaging organisation have control over aspects of the worker’s working practices, such as their work schedule?

If the answer to any of these questions is “yes”, then there’s a chance that the contractor might be inside IR35.

The “substitution” test

The test of substitution considers whether the engaging organisation would be prepared to accept someone else to do the contractor’s work in the event of them being unavailable. If the engaging organisation would not be prepared to do this and would only accept the personal service of that particular contractor, it would suggest that a traditional employment relationship exists and that the contract could therefore be inside IR35.

The “mutuality of obligation” test

Mutuality of obligation (MOO) means that one party – the employer – is obliged to provide work and the other party – the employee – is obliged to accept it. Unlike employees, contractors have no obligation to accept work and unlike employers, the companies that contract them have no obligation to provide it. As MOO is a feature of an employment relationship, if it is present in a contract it suggests that the contract might be inside IR35. When assessing a contractor’s working practices and contract, there are certain factors that would indicate that MOO isn’t present and that an employment relationship, therefore, doesn’t exist. These include:

• the use of specific projects with set end dates

• the ability for either party to stop the work with very little notice

The ‘CEST’ checking tool

HMRC developed the Check Employment Status for Tax (CEST) tool to help contractors and the companies who engage them to check whether a contract and the contractor’s working practices fall inside or outside IR35. However, some questions were raised relating to the initial version of this tool and its exclusion of the mutuality of obligation test. An updated version of the CEST tool was released in November 2019.

Additional factors that might affect a contractor’s IR35 status

HMRC doesn’t just consider the outcome of the three employment tests when assessing a contractor’s IR35 status. It looks at a wide range of factors that might indicate that the contractor is “part and parcel of the organisation” and that a traditional employment relationship might, therefore, be in place. These factors include:

• the contractor having an email address at the engaging organisation

• the contractor having permission to use company equipment

• the contractor receiving the same company ‘perks’ as their employed colleagues

• the contractor being line managed in the same way as their employed colleagues

What are the consequences of being inside IR35?

Contractors who are inside IR35 and work through an intermediary in the private sector are currently required to declare this to HMRC. If the intermediary is a limited company, the company would add a deemed payment in the contractor’s salary and deduct tax and National Insurance accordingly. If the intermediary is a partnership, the partnership would work out the deemed payment and deduct tax and National Insurance in the same way. The partner would then report this amount on their individual Self Assessment tax return as if it were income from employment.

If a contractor fails to declare their IR35 status and HMRC challenges this in an investigation, the contractor may face a penalty. Penalties are levied as a percentage of the additional tax that the contractor is liable to pay and are determined by HMRC’s perception of the contractor’s intent and the degree to which they “failed to take reasonable care” to declare their IR35 status. If a contractor knows that they are inside IR35 but chooses not to take action, they are likely to be fined more than if they had simply made a mistake in failing to declare their IR35 status. In the public sector, the onus is on the engaging organisation to assess the IR35 status of its contractors. Anyone who the engaging organisation deems to be inside IR35 is usually brought on to the organisation’s payroll as an employee and is then taxed accordingly.

Whose responsibility is it to determine if a contractor is inside IR35?

IR35 was first introduced to all contractors in 2000. At first, it was the contractor’s responsibility to determine whether they were inside IR35 but in 2017, the government rolled out changes to IR35 rules in the public sector which put the onus on public authorities to decide whether their contractors are inside or outside IR35. In the private sector, it’s currently the contractor’s responsibility to determine if they are inside IR35. However, anticipated reforms to IR35 in the private sector mean that for large or medium-sized companies, the onus will soon be on the engaging organisation to make this assessment. It’s expected that the new rules – currently sitting in draft form in the Finance Bill 2019/2020 – will be introduced in April 2020.

Who will the new rules affect?

The new IR35 rules affect contractors who provide services to large or medium-sized companies in the private sector (defined in the draft legislation as having a turnover of more than £10.2 million and more than 50 staff) and who operate through an intermediary, such as a company or partnership.

What impact will the new rules have?

Once the new rules are introduced, if a large or medium-sized private sector company deems a contractor who is working through an intermediary to be inside IR35, the company will have a decision to make. It could either change the contractor’s working arrangements in such a way that the contractor is no longer inside IR35 or it could terminate the contract. If the company wants to continue engaging the services of the contractor, it could pay them through its payroll instead. In this scenario, the contractor would become an employee of the engaging company and would have to make the same tax and National Insurance contributions as other employees. When similar reforms were introduced to the public sector in 2017 The Register reported a “mass exodus” of IT contractors from the public sector, while other news sites claimed that IR35 had made it extremely hard for the public sector to hire for contract roles. However, a report commissioned by HMRC contradicts the news reports, claiming that the change was not substantial and that IR35 had not affected the public sector’s ability to fill contract vacancies.

DMS Posts, PAYE, Tax

Latest guidance for employers

HMRC has issued the latest version of the Employer Bulletin. This April edition has articles on a number of issues including:

  • Cash Allowances, Flexible Benefits Packages and Salary Sacrifice
  • Unpaid work trials and the National Minimum Wage
  • Diesel Supplement Company Car Tax Changes to meet Euro standard 6d
  • Student Loans
  • Construction Industry Scheme – helpful reminders for contractors and subcontractors
  • Welsh rate of income tax and Scottish Income Tax.

If you have any queries on payroll matters please contact us.

Internet link: Employer Bulletin April 2019