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.

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.

Uncategorized

Advisory fuel rates for company cars 1st June 2019

Advisory fuel rates for company cars

New company car advisory fuel rates have been published which take effect from 1 June 2019. The guidance states: ‘You can use the previous rates for up to one month from the date the new rates apply’. The rates only apply to employees using a company car.

The advisory fuel rates for journeys undertaken on or after 1 June 2019 are:

Engine sizePetrol
1400cc or less12p
1401cc – 2000cc15p
Over 2000cc22p
Engine sizeLPG
1400cc or less8p
1401cc – 2000cc9p
Over 2000cc14p
Engine sizeDiesel
1600cc or less10p
1601cc – 2000cc12p
Over 2000cc14p

HMRC guidance states that the rates only apply when you either:

  • reimburse employees for business travel in their company cars or
  • require employees to repay the cost of fuel used for private travel.

You must not use these rates in any other circumstances.

The Advisory Electricity Rate for fully electric cars is 4 pence per mile. Electricity is not a fuel for car fuel benefit purposes.

Internet link: GOV.UK AFR

DMS Posts

Changes to income tax for 2019/20

The new tax year brings changes to income tax bands and allowances.

The personal allowance is £11,850 for 2018/19 and increases to £12,500 for 2019/20. There is a reduction in the personal allowance for those with ‘adjusted net income’ over £100,000. The reduction is £1 for every £2 of income above £100,000. So for 2018/19 there is no personal allowance where adjusted net income exceeds £123,700. For 2019/20 there is no personal allowance available where adjusted net income exceeds £125,000.

The marriage allowance permits certain couples, where neither pays tax at more than the basic rate, to transfer 10% of their personal allowance to their spouse or civil partner.

The basic rate of tax is 20%. In 2018/19 the band of income taxable at this rate is £34,500 so that the threshold at which the 40% band applies is £46,350 for those who are entitled to the full personal allowance. In 2019/20 the basic rate band increases to £37,500 so that the threshold at which the 40% band applies is £50,000 for those who are entitled to the full personal allowance.

Individuals pay tax at 45% on their income over £150,000.

DMS Posts, PAYE, Tax

Reporting Benefits in Kind – Forms P11D

The forms P11D which report details of benefits and some expenses provided to employees and directors for the year ended 5 April 2019, are due for submission to HMRC by 6 July 2019. The process of gathering the necessary information can take some time, so it is important that this process is not left to the last minute.

Employees pay tax on benefits provided as shown on the P11D, generally via a PAYE coding notice adjustment or through the self assessment system. Some employers ‘payroll’ benefits and in this case the benefits do not need to be reported on forms P11D but employers should advise employees of the amount of benefits payrolled.

In addition, regardless of whether the benefits are being reported via P11D or payrolled the employer has to pay Class 1A National Insurance Contributions at 13.8% on the provision of most benefits. The calculation of this liability is detailed on the P11D(b) form. The deadline for payment of the Class 1A NIC is 19th July 2019 (or 22nd for cleared electronic payment).

HMRC has produced an expenses and benefits toolkit. The toolkit consists of a checklist which may be used by advisers or employers to check they are completing the forms correctly.

DMS Posts

Be prepared for new IR35 rules

Rebecca Seeley Harris drills into the proposals for off-payroll working (IR35) rules to apply in both the private and public sector from 6 April 2020 and provides tips on how to prepare.

The latest consultation on the off-payroll working rules offers wide-ranging insight into what is to come and also provides some clarification on the existing public sector rules. The consultation refers to the customer or engager of the worker as the “client” throughout, and this is the term that is used in this article.A

The April 2020 reform will use the off-payroll working rules in the public sector as a starting point. The client will be required to make a determination of a worker’s employment status and communicate that determination. If the determination of employment status is “deemed employee”, the fee-payer will need to make deductions for income tax and NICs, and pay any employer NICs.

The small company exception

The reforms will only apply where the client is a medium or large business, or a public body, which means there is an exception for clients who are small businesses. The government has chosen to use the definition of ‘small company’ in the Companies Act 2006, mainly because businesses and accountancy professionals should already be familiar with this definition and to what extent it applies to them.

The Companies Act definition doesn’t include non-corporate entities so, the government is proposing two options:

a)           to apply the reform to unincorporated entities with 50 or more employees and to entities with a turnover exceeding £10.2m.

b)           to apply the reform only to unincorporated entities that have both 50 or more employees and a turnover in excess of £10.2m.

When an organisation becomes or ceases to be “small” in an accounting period, the change relating to the off-payroll rules will apply from the start of the tax year following the end of that accounting period. This is the case regardless of whether the organisation is incorporated or unincorporated.

Practical effect

From 6 April 2020, any client organisation which falls within the rules will be liable for any income tax and Class 1 employee NICs due on deemed payments of employment income until it has fulfilled its obligations. These organisations will also be liable for employer NICs due on those same payments.

It is not clear how an off-payroll worker would know whether the engager should be applying the rules or not or whether, as in the case of the small company exception, the off-payroll worker themselves should be making the determination.

Information sharing

The proposed reforms are designed to ensure the determination of employment status, and the reason for that determination, are cascaded to all parties within the labour supply chain. The consultation document doesn’t comment on whether the client is required to make the determination themselves, or whether the client could outsource the employment status decision and the whole process could be handled by an external team.

For off-payroll workers, the client will be required to provide the determination of employment status and, if requested, the reasoning for the determination, to the worker directly. The legislation will be changed to provide clarity that the client must provide both the contracting party and the off-payroll worker with the determination of status for each engagement.

Under the current public sector rules, the fee-payer is not entitled to see the determination of status, but the government intends to legislate to require all recipients of a determination to pass that information on to the next party in the contractual chain at, or before, they make the first payment.

Long chains

A ‘short circuit’ solution will be available where labour supply chains are long and complex. In this version, the fee-payer would receive the determination of status directly from the client. This would require the client to know who the fee-payer is. As a result of the complexity, the government is seeking views on how the client may be in a position to identify the fee-payer and provide the determination to the party they contract with, the off-payroll worker and the fee-payer directly.

What is clear is that all parties in the labour supply chain will need robust systems to ensure that they can track that the determination of status has been cascaded and received by the next party in the chain. Otherwise, they risk having the liability for tax transferred to them.

Tax liability

In the event that HMRC does not receive the tax due, the government is proposing that the liability should initially rest with the party that has failed to fulfil its obligations. If, however, HMRC was unable to collect the outstanding liability from the defaulting party if, for example, it ceased to exist, the liability should transfer back to the first party or agency in the chain. If HMRC could not collect from them, it would then default back to the client.

The government believes that as the agency is the first supplier of labour to the client, it should be responsible for the behaviour of the chain. The government also believes that the agency has a number of options open to it such as getting an indemnity against non-compliant fee-payers, taking on the fee-payer responsibility themselves or choosing to only work with reputable firms.

Challenging status

Currently, there is no mechanism for challenging a status determination other than the off-payroll worker using the end-of-year processes for overpayment of tax. In addition to the off-payroll worker being entitled to receive the status determination and the reasoning for the determination from the client, the government understands that the off-payroll worker or the fee-payer may disagree with a client’s determination. This might be either because it is believed that the full circumstances have not been considered, or that the client has not taken reasonable care in making the determination.

There are two steps proposed for resolving any status disagreements:

  1. To have the right to seek the status determination directly from the client.
  2. To allow for the status determination to be challenged.

The government plans to introduce a client-led status disagreement process where the client will develop and implement a process to resolve disagreements based on a set of requirements laid out in legislation. This client-led process should also mean fewer off-payroll workers using the end of year processes to reclaim tax, and it is hoped that it will provide a resolution in real time.

No employment rights or benefits

As applies in the public sector, statutory payments and other employment rights will not be affected by the proposed reforms to off-payroll working rules from April 2020. This means that the deemed employment relationship for tax purposes will not result in employment rights or statutory payments obligations for the deemed employer or for the fee-payer.

Be prepared

Organisations affected by the reforms to off-payroll working should take the following actions now to prepare:

  1. Identify and review their current engagements with intermediaries, including PSCs and agencies that supply labour to them.
  2. Review current arrangements for the use of contingent labour, particularly within the organisation functions that are more likely to engage off-payroll workers.
  3. Put in place comprehensive, joined-up processes (assess roles from a procurement, HR, tax and line management perspective) to get consistent decisions about the employment status of the people they engage.
  4. Review internal systems, such as payroll software, process maps, HR and on-boarding policies to see if they need to make any changes.

Written by:

Rebecca Seeley Harris

Employment Status & IR35 expert

PKF Francis Clark LLP