Final Freelancers Handbook 2010-11 v2(3)

8/13/2019 Final Freelancers Handbook 2010-11 v2(3)

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FREELANCERS HANDBOOK

Prepared by Beever and StruthersChartered Accountants and Business Advisors

2010/2011


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Beever and Struthers Chartered Accountants

Providing all accounting and taxation services for contract workers from formation to finalaccounts.

Contact Details

Beever and StruthersSt George's House215 - 219 Chester RoadManchesterM15 4JE

Tel No: 0161 832 4901Fax No: 0161 835 3668

General email: [email protected]

Main Contacts: Phil Hollinshead (accounts) e: [email protected] Dutton (tax) e: [email protected] Torres (tax) e: [email protected]

B&S Financial Management LimitedProviding independent financial advice for pension schemes, life cover, permanent healthand sick pay schemes, mortgages and personal investment advice.

Contact Details

B&S Financial Management LimitedSt Georges House215 - 219 Chester RoadManchesterM15 4JE

Tel No: 0161 833 1001Fax: 0161 835 3668

Main Contacts: Idris Davies e: [email protected]

Stuart Johnson e: [email protected]

John Hall e: [email protected]


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BEEVER AND STRUTHERS FREELANCERS HANDBOOK

CONTENTS

AN INTRODUCTION TO FREELANCE CONTRACTING ........................ ........................... ....... 1 1 GOING LIMITED ............................ ............................. .............................. .................... 1 2 ADVANTAGES AND DISADVANTAGES OF FREELANCE CONTRACTING ............. 1 3 POSSIBLE METHODS OF OPERATION ............................... ............................... ....... 3

SETTING UP IN BUSINESS ............................. .............................. ............................. ............... 4 4 OBTAINING THE COMPANY ............................. .............................. ............................ 4

5

COMPANY DOCUMENTATION .......................... ............................. ............................ 5

6 VAT REGISTRATION ........................... .............................. ............................. ............. 6 7 OPENING A COMPANY BANK ACCOUNT ........................... ............................. ......... 7 8 SETTING UP PAYE ............................ .............................. ............................. ............... 8 9 TAX FORMS .......................... ............................. .............................. ............................ 8 10 OTHER TAX MATTERS ............................. ............................. .............................. ....... 8 11 NOTEPAPER ........................... .............................. ............................. .......................... 8

OPERATING THE COMPANY ................................................. ............................. ..................... 9 12 TAX AND THE BUSINESS ......................... ............................ ............................. ......... 9 13 BUDGETING TAX AND DRAWINGS ......................... ............................ .................... 12

14 PAYMENT OF TAX ............................... .............................. ............................. .......... 15 15 BUSINESS EXPENSES .................................................. ............................ ............... 15 16 MAKING WITHDRAWALS FROM THE COMPANY ............................. ...................... 21 17 WHO DOES WHAT? ............................................. ............................. ........................ 23 18 BOOKKEEPING ................................................... ............................. ......................... 24 19 APPROVED MILEAGE ALLOWANCE PAYMENTS (AMAPs) ............................. ...... 26 20 TAX CHARGES FOR COMPANY CAR USERS ..................................... ................... 26

IR35........................................................................................................................................... 27 21 WHAT IS IR35? ............................................ ............................. .............................. ... 27 22 EMPLOYMENT OR SELF EMPLOYMENT ....................................................... ......... 27 23 THE STATUS TESTS .............................. .............................. ............................. ........ 28 24 AVOIDING IR35 ............................. ............................. .............................. .................. 32 25 HOW TO CALCULATE THE EXTRA TAX DUE UNDER IR35 ................................... 36 26 THE ARCTIC SYSTEMS CASE .............................. ............................. ..................... 37

OTHER MATTERS ............................. .............................. ............................. ........................... 37 27 SAVINGS AND INVESTMENT .............................. ............................... ...................... 37 28 CONTRACTING OVERSEAS ............................. .............................. .......................... 39 29 RESUME AND TIPS ........................... ............................. .............................. ............. 40 30 ADDITIONAL SERVICES ............................ .............................. ............................. .... 41

Appendix of blank forms


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AN INTRODUCTION TO FREELANCE CONTRACTING

If you have read Going Limited, our short guide to Personal Service Companies, then youmay already have some idea about why you would wish to operate through your own limitedcompany. This handbook goes into more detail. You can read this through to gain morebackground in all areas or you can read just those sections which interest or affect you.

In case you have not read "Going Limited" this is reproduced as the first section of thishandbook as a general introduction.

1 GOING LIMITED

Tax legislation gives you only two options for carrying out agency contract work - eitherworking for the agency as an employee on PAYE or carrying out the contract through aseparate limited company. If you intend to contract for longer than six months it isprobably beneficial to work through your own company, but we will carefully review yourindividual circumstances to ensure you make the choice of business medium (selfemployment, company, partnership etc) that is right for you.

We are a firm of qualified Chartered Accountants with specialist expertise in dealing withworkers operating in the Information Technology and engineering fields. We can adviseyou and lead you through the initial steps to set up in business and then look after youraccounts on an ongoing basis. This enables you to concentrate on your work and

maximise your after-tax income with no need for you to have any specialist accountancyknowledge. We will give you appropriate advice at every stage in the life of your business.

QUESTIONS AND ANSWERS

Q1. What is IR35 does it affect me?

A. IR35 is a piece of tax legislation which took effect from April 2000. The legislationmeans that the Revenue can tax some freelancers as though they are employees oftheir clients. Contractors caught by IR35 pay significantly more tax and national

insurance contributions, further reducing their take home pay by up to 25%.In the 2007 Budget the tax and National Insurance advantages of Managed ServiceCompanies (MSCs), used by many freelancers to avoid IR35, were also abolished.Companies formed by us are carefully structured to avoid the MSC issue.

Q2. Why may it be better to work through a limited company?

A. Surprisingly income tax is only a secondary consideration. The prime reason forworking through your limited company is to minimise national insurance - typicallysaving around 10,000 per year. Income tax savings vary with the particular

circumstances of the individual.


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Q3. Why does national insurance affect me so much? Income tax is a much biggerfigure in relation to my current earnings.

A. In normal staff employment the major National Insurance contribution is paid by youremployer and you do not see it. In contracting the end user of your services agrees atotal price for your services. National Insurance and taxes have to come out of thisfigure so you become responsible for Employers National Insurance of 12.8% aswell as your own National Insurance Contribution of 11 or 12%.

Q4. How does having my own limited company help?

A. By having your own limited company National Insurance can be avoided on asizeable part of your income. You pay National Insurance on your salary from yourcompany but not on dividends paid to you or any other shareholders. With your owncompany you can control how much is paid out under each of these headings andyou will be advised how to do so to your best advantage.

Q5. So is there no income tax advantage?

A. Most people find that they can make substantial tax savings, but the savings varyconsiderably depending on individual circumstances and choice. We can show youthe best ways to make savings based on your circumstances.

Q6. Will I be self-employed?

A. No. You will be an employee of your company even if you are the sole director, as itis the company that is operating the business. You will be a PAYE employee of yourown company and your status will be unchanged for the purpose of state pensionsand other social security benefits.

Q7. What happens about my tax and national insurance contributions?

A. You will be paid net by the company. The company will make the appropriatedeductions for tax and national insurance and then pay these over to theGovernment, normally on a quarterly basis. We calculate the net sums due for you.

Q8. Give me an example

A. Example A is a person on PAYE, example B is the worst position that could beachieved by a person on a limited company basis and example C is the position thatcould be achieved by a person with a non-working spouse or partner being allocatedpart of the income from the limited company.


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EXAMPLE A EXAMPLE B EXAMPLE C

Total potential income 98,000 98,000 98,000National insurance 15,106 425 425Corporate and personal tax 24,941 29,026 19,275

------- -------- -------

40,047 29,451 19,700-------- -------- --------

Net after tax income 57,953 68,549 78,300COSTS

Accountancy fees - 1,200 1,200-------- -------- --------

Net spendable income 57,953 67,349 77,100===== ===== =====

Minimum saving over PAYE basis - 9,397 19,148===== ===== =====

In both examples B and C no expenses (other than typical accountancy fees) have beenallowed for. Therefore the actual tax saved may be higher than the illustration. Theseexamples show the absolute minimum savings that will be made by operating throughyour own limited company; the actual savings are likely to be much more as your daily

commuting expenses would be tax deductible. These apply for the year to 5th April 2009and may subsequently change.

Working as an employee you would need a pre-tax income of over 134,000 to be left witha spendable income of 77,100 as in Example C.

2 ADVANTAGES AND DISADVANTAGES OF FREELANCE CONTRACTING

There are many reasons why an individual may be attracted to freelance contract work,but in general the advantages fall into two distinct areas:

i) Financial advantages

a) Due to the nature or urgency of the work most employers are prepared to paysubstantially higher rates to freelancers than to staff employees. The employersees a benefit as he is not responsible for holiday pay, sick pay, redundancy,pensions or other job related expenses.

b) Operating through your own limited company brings in your full gross income and,correctly managed, you can maximise your net spendable income. This handbookis designed to show you how to achieve these benefits. As tax is not deducted at

source from your income you can also control the timing of tax payments to earnmore interest on these funds.


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c) Travelling expenses and the extra cost of living away from home (subsistence

expenses) are usually tax deductible. This can make all the difference to theeconomic viability of taking on work far from home.

ii) Non-financial advantages

a) The chance to gain experience from a variety of work in a situation wheresuccessfully changing jobs on a regular basis enhances your CV.

b) Enjoy the freedom that comes from effectively being "self-employed" - the freedomto take holidays when you want and even take extended holidays betweencontracts for example.

These advantages are mirrored by their disadvantages:

iii) Financial disadvantages

a) You will almost certainly need an accountant, who will charge for their services, butif they dont save you several times their fee in good advice then you have thewrong accountant.

b) You need to take active management of your business to make reserves forholidays, sickness, pensions etc. These may not appear urgent and so receive lowpriority, but this could be a costly mistake. You may have lost substantial life-cover,which existed for death in service in your old employment. In addition you mayhave to make important decisions concerning your existing pension rights, whichmay significantly affect their future value.

c) We have experience of the special circumstances of contract workers and areuniquely positioned to advise on these matters. An initial financial health checkforms part of our set up procedures. Where necessary our in-house financialservices company, Beever and Struthers Financial Management Limited canprovide independent advice on the best-cost options. We would recommend that

you talk to one of our financial advisers to ensure that your financial requirementscan be met in the future.

iv) Non-financial disadvantages

a) You will need some involvement in the day to day running of the company affairs.

b) You need to exercise self-control to ensure you have enough money to pay taxeswhen they fall due.


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3 POSSIBLE METHODS OF OPERATION

There are two possible methods of operating when entering a contract:

i) as an employee of an agency (on PAYE).

ii) between your own limited company and an agency or the end user of your services.

A question often asked is "Can't I be self-employed?". The answer is "no" because specific taxlegislation prevents an individual, even one currently self-employed, from being treated asself-employed by an agency. Tax legislation forces the agency in every case to be theemployer of the freelancer for the period of the contract and to deduct PAYE and NationalInsurance as for any other employee. This legislation (Part 2 Chapter 7 ITEPA 2003) also

covers any other circumstances e.g. partnerships which might be used to try to get round it. Ifyou do nothing your status will be that of an agency employee as follows:

i) Agency employee

The individual automatically becomes an agency employee for the period of the contract. Yourgross earnings will almost certainly be higher than those of direct employees but will beapproximately 12% lower than the gross income arising under methods ii) and iii) above. Theagency must pay a lower rate to cover the cost of the employers share of National Insurance,currently 12.8%, which they are obliged to pay on top of the gross salary paid to you. In

addition full tax and national insurance will be deducted from your salary as with any otheremployment, and none of the possible advantages (travelling expenses, tax savings etc) ofrunning one's own business will accrue to an agency employee.

ii) Limited company

Except where the contract is for a very short period (say less than six months) and you haveno intention of continuing to do contract work then the route of forming a limited companywhen starting your contract career makes financial sense. You obtain a suitable limitedcompany and it is the limited company and not the individual who enters into a sub-contractarrangement with the agency to provide the services to the third party client. This avoids anydirect association between the agency and the individual, so you will not be an agencyemployee but become an employee of an independent limited company subcontractor.

You will normally also be a director of the company. This in itself brings little benefit, the majorbenefit arising from your other position as a shareholder of your own company. In businessterms it is the company that is "self-employed" and will achieve significant National Insurancesavings plus some possible tax benefits. As the owner of the company such benefits accrueindirectly to you. As shareholders, your spouse (or partner) and yourself can take dividendsfree of Employers NIC (saving 12.8%) and Employees NIC (saving at least a further 11%).

This is in addition to the Income Tax savings described in this guide.


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Umbrella Company (Composite Company)

With the abolition of the tax and National Insurance advantages for Umbrella Companies,also called Composite or Managed Service Companies (MSCs), we can no longerrecommend this business arrangement.

The rest of this handbook assumes that you will choose to follow the route of having yourown limited company and then describes the procedures in more detail.

SETTING UP IN BUSINESS

What will happen when you start in business?

4 OBTAINING THE COMPANY

Normally we are responsible for obtaining a suitable company for you, as this is likely tocost less than doing it yourself. The alternatives are to directly approach a companyformation agent or form a company through a lawyer.

After verifying your identity and address, and that of any other intended directors, from apassport etc, in accordance with the Anti Money Laundering Regulations 2007, a newcompany can be incorporated within two working days with your own choice of companyname. However, we would check any names before application to ensure there are noproblems with that name.

You should bear in mind that after formation another week to ten days are usually requiredto complete the other initial formalities of opening a bank account and VAT registration.Companies formed in Scotland are different to those formed in England and Wales andcannot have their registered office changed from one country to the other but we canobtain either for you.

We presently charge 193.87 (inc VAT) for company formations and our initial meeting andadvice on set-up, including the appointment of company officers and shareholders, thecompletion of the initial registration forms for VAT, PAYE and Corporation Tax and IncomeTax purposes, and assistance in opening the companys bank account.

In order to comply with the requirements of the Companies Act and the Registrar ofCompanies the following forms will be completed:

i) Application to Register a Company (IN01)

ii) Appointment of Director (Form AP01) and Company Secretary Form (AP04)From the 6th April 2008 each newly formed company is obliged by law to appointone or more separate individuals to be Director. It is no longer necessary to appoint

a Company Secretary but we recommend you do. The Director would normally beyou, and the Secretary can be a spouse, close friend or relative. The CompanySecretary needs no detailed knowledge of Company Law.


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iii) Notification of Registered Office (AD01)The company is required to file its registered office address at Companies Houseand file any change. This is the official address of the company for the service of alllegal documents and can be different from the trading address of the company. Allformal statutory correspondence and some tax correspondence will be sent to thisaddress. This is usually your home address and this will not affect the status of yourhome as a private residence.

iv) Issue of Shares (SH01)The shareholders own the company and by law there must be at least oneshareholder although most companies are formed with two or more.

If it is advantageous in order to save tax we change the initial two issued shares intoone "A" share and one "B" share enabling different amounts of dividend to be paid toeach shareholder. This is particularly important in spreading income betweenspouses/partners to avoid higher rate tax and is a matter that will be discussed withyou at an initial meeting. The Arctic Systems case showed that properlyundertaken these arrangements are entirely lawful and effective.

v) Notification of Accounting Reference Date (AA01)The company must notify the Registrar of Companies of a year-end date to which itwill draw up its financial statements. This will normally be a year from starting trading

rounded off to the nearest month end. There is no tax or other advantage to anyparticular year-end but you may wish to nominate an accounting date for otherreasons.

5 COMPANY DOCUMENTATION

After completing the various statutory forms to obtain your company the followingdocuments will be sent to you:

i) Certificate of IncorporationThis is the birth certificate of the company. The Certificate of Incorporation is animportant document and every agency your company works for is likely to wish tosee it, as will the bank, to open an account in the company name. In strictness thecertificate should be clearly displayed in a public place at the registered office of thecompany but this requirement is never enforced.

ii) Memorandum and Articles of AssociationThis is a small booklet comprising the constitution and rulebook of the company. Itsets out the objects for which the company was formed, its powers in conducting itsday-to-day business and indicates the share structure of the company and theoriginal subscribers to the company. Copies of the Memorandum and Articles are


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required by the bank, H M Revenue & Customs and may be requested by anyothers who intend to provide finance to the company or rent premises etc. Yourname will not appear in the Memorandum and Articles as these are a copy of theoriginal filed at Companies House on formation and so contain the names of theformation agents, but this in no way affects your ownership of the company.

iii) Statutory booksThese comprise various registers showing names of shareholders, directors,company secretary and minutes of important meetings of the company. These arereally a requirement of larger companies with numerous owners and managers. Forsmall companies the only practical requirement is to ensure that external records atCompanies House are updated as appropriate. We do this for you.

6 VAT REGISTRATION

There are very few circumstances where you would not want to register for VAT.

If your annual turnover is 70,000 (from 01.04.2010) or more, registration is compulsory.

If your annual turnover will be less than 70,000, voluntary registration has definiteadvantages in that:

VAT on sales can be placed on deposit until it is due for payment each quarter.

VAT on company purchases can be reclaimed.

We will contact our VAT Department and complete an application for VAT Registration onyour behalf. Your VAT registration number will be sent to you direct from HM Customs &Excise shortly thereafter. During the period before the VAT Registration is processed youcan bill your customers but with the VAT element. Once your VAT number is supplied youcan claim from your customers the VAT missing from the earlier bills.

Following VAT registration, we also arrange for the online filing of quarterly VAT returns.

FLAT RATE SCHEME

This simplifies VAT Returns by enabling companies to calculate the VAT payment as apercentage of total turnover (including VAT), and is available to companies whoseestimated annual VATable turnover (excluding VAT) does not exceed 150,000. The flatrate percentages are based on trade sectors and include the following:


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Flat Rate Trade Sectors (since 01.01.2010)

Trade sectors Flat rate to03.01.2011Flat rate from

04.01.2011

Computer and IT Consultancy orData Processing

13% 14.5%

Civil or structural engineering(including Engineering Design)

13% 14.5%

Management Consultancy 12.5% 14%

Business Services not elsewherelisted

10.5% 12%

A 1% reduction applies for the first year after initial VAT Registration.

Your customers are charged VAT at the standard rate, presently 17.5% (20% from04.01.2011). You pay VAT at the appropriate flat rate percentage on the gross invoicedamount. It is not normally possible to claim back the VAT, as input tax, on the things yourcompany buys. If however it buys an expensive capital asset with an invoice value,including VAT, of 2000 or more, you can also claim the input tax on your VAT return inthe normal way.

The Flat Rate VAT saving on a turnover of 80,000 is usually over 3,000 in the first year.

7 OPENING A COMPANY BANK ACCOUNT

You must open a bank account in the company name, and we can help you to do thiseasily. Opening the account with your normal bank will prevent delays, as banks are nowobliged to make greater checks on new accounts opened by people not previously knownto them. You will have to complete an account opening form and the bank will need sightof the Certificate of Incorporation and will keep a copy of the Memorandum and Articles.

Always ensure that the bank does not keep the original certificate of incorporation of thecompany and that this is returned to you.

Company accounts are classified as business accounts and bank charges will be leviedeven if in credit so you should open both a current account for day to day transactions anda deposit or high interest account which will be used to save funds for payment of VATand tax bills. We recommend the opening of two bank accounts to ensure that funds setaside for tax or day-to-day surplus funds earn interest to counter bank charges made onthe current account. The company will receive gross income but you will be paid net sothe company will always have sizeable funds and should never need an overdraft. At your

leisure you can then consider opening accounts with other specialist financialorganisations that may not make charges or may pay interest on all credit balances.


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8 SETTING UP PAYE

We will arrange the set-up of an online PAYE scheme to cover the salary element of yourdrawings. In order to do this we may need you to complete an online authorisation form(FBI 2), we will also need your P45, which you should receive when you leaveemployment or when you sign off from unemployment. If you do not have a P45 for anyreason then you need to let us know immediately and we will complete an application for atax code-number (Form P46).

9 TAX FORMS

When the Registrar of Companies forms a new company they advise HM Revenue &Customs and it is presumed that your company has started in business at that point intime. You will then start to receive large amounts of unsolicited mail from HMRC thatshould all be promptly passed on for us to deal with. The most important item is FormCT41G, which requests the initial setting up details for the business. Please do not try todeal with the Revenue direct even if the matter seems straightforward as generally theyattempt to use such occasions to obtain other information, which may later be used toyour disadvantage.

10 OTHER TAX MATTERS

We will also ask you to complete tax mandates (Forms 64-8) for both yourself and thecompany. These will to allow HM Revenue & Customs to correspond directly with us, inrespect of yourself and the company. We will complete Self Assessment Tax Returns bothfor you and the company, as necessary. We may not receive tax pay-slips so if you areunsure whether to pay anything send the pay-slip to us for checking.

11 NOTEPAPER

There is no need to spend money on professionally printed stationery for the companyunless you wish to do so. Often a computer will produce all that is required for yourpurposes. The following information must appear on your letterheads and invoices etc:

i) The full name of your company including the word 'Limited' or 'Ltd'.

ii) Your company's registered number.

iii) The country in which your company was incorporated.

iv) The address of the Registered Office. If you also have a different trading address it isusual to put the Registered Office address in small print at the bottom of the page.


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If you are using a trading name or style instead of the official company name then theofficial company name must appear somewhere on the letterhead. This is usually in smallprint at the bottom of the notepaper. It is usual to put the names of the directors on yourletterhead but you do not have to. If you do then you must include all the directors namesand not just some of them.

For invoices you may use pre-printed invoices or letterheads or a pre-numbered invoicebook, which is obtainable from any good stationers. These need to contain a date andcompany registered number along with any other information you wish to include. You donot have to put your VAT number on letterheads but it must be shown on invoices.

OPERATING THE COMPANY

You are now ready to start in business and make money. Read through sections 12 - 18then complete your own budget using the model in section 13.

12 TAX AND THE BUSINESS

The biggest practical difference you will find is that tax is not deducted from your companysincome when it is paid by its customers. This puts the onus on you to calculate how muchsalary to pay yourself and when. We will show you how to handle this area, and make all thecalculations for you, completing the appropriate returns, as part of our service. PAYEdeductions from your salary will usually be payable quarterly, and we will write to youquarterly, to advise you how much tax to pay. Other taxes are payable annually and, again,we will advise you in good time, how much to pay.

It is important to understand that you will still be paid net of tax. You should notice littlepractical difference, as money paid out of the company into your personal bank account isyours to spend or do with as you wish. Tax monies are left behind in the company bankaccount from which to make payments, from time to time, to the Inland Revenue as we

advise.

Being a Director means nothing more than being a senior employee, so for legal purposeslittle will change and you will still in paid employment, and your tax and national insurance willbe deducted at source by your new employer company. The major difference is that yoursalary will become only a small part of the total net income you will draw from the company.The main part will be dividends.

There will be two separate taxpayers, you, and the company, but cheques to HM Revenue &Customs will almost exclusively be written by the company from the companys account. Youwill know that PAYE and NI contributions are deductible from the salary element of yourdrawings from the company, but in addition there will also be Corporation Tax payable by thecompany on its profits.


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i) Taxes on salary drawings

These comprise two separate items as follows:

a) PAYE (Pay as You Earn)

You will be paid a small net salary as a director each month. After PAYE Income Taxhas been deducted by the company the salary is paid to you. This tax is paid over tothe Inland Revenue quarterly by the company on the 19th of the month following theend of each calendar quarter i.e. 19th April, 19th July, 19th October and 19th January.

b) National insurance contributions (NIC)

Class 1 NI Contributions will also be deducted from your monthly salary as with yourpresent employment. This is still the same in nature as your previous NI Contributionsand is all you need to pay to keep up your NI history and maintain your entitlement tothe full range of Social Security benefits. In addition the company is also liable to paythe Employers NIC on your salary. Both sets of contributions are paid to the InlandRevenue along with PAYE Income Tax on the same dates as above.

ii) Taxes on the Company

Corporation Tax (CT) The company will be taxed on its profits. Company profits represent income from the agencyless your salary and other deductible expenses. Corporation Tax is charged at 21%.

This tax is due nine months after the companys year-end.

To enable the company to have enough cash to pay its CT bill it is important that youalways leave at least 1/5 th (20%) of the companys estimated profits within the companywhen drawing dividends.

iii) Other personal taxes

a) Higher Rate Income Tax on dividends

To calculate how much dividends may be paid to yourself (or anothershareholder) before you become liable for higher rate tax it is necessary to takeaccount of your other income and to be aware that dividends taken are treatedunder the tax mans rules as net of tax.

From the figure of 43,875 (which comprises the personal allowance of 6,475and the basic rate band of 37,400) deduct your other income. This willnormally be your expected gross earnings for the year (6 April 2010 to 5 April

2011) usually 7,500, plus any earnings and P11D benefits in the year from anyprevious job.


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43,875

Less gross earnings 7,500Previous gross earnings 18,500

Other incomeGross bank interest 150

-----------26,150-----------

17,725======

The figure of 17,725 represents the gross dividends which can be taken before higherrate becomes due. This gross dividends figure must be converted from gross to net togive the amount which can be transferred from the companys account to your own.

17,725 x 9/10 = 15,952

If you have already taken some dividends but now want to take more these must bededucted. If for example you have already transferred 12,000 as dividends from yourcompanys bank account to your own.

15,952

Less dividends (net) previously taken 12,000-----------

Maximum net dividends which can be 3,952taken free of income tax ======

If more dividends than this are taken further tax at the higher rate will become due. Thiscan be calculated as 25% of the excess dividends taken.

If your total income exceeds 150,000 in the year, the higher rate of tax will beapproximately 36% of the excess dividends taken.

If your spouse/partner is a B shareholder then dividends may be applied to her afterapplying the same calculation. This may greatly increase the aggregate total amount ofdividends which may be taken free of personal tax.

If you are in doubt call Jim Dutton or Clara Torres.


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13 BUDGETING TAX AND DRAWINGS

To explain this let us look at the following example of a freelancer earning 1,850 perweek for a 46 week working year 2010/2011. The end column shows the total tax that willbe paid out of the company either as its own corporate tax or by way of sums deductedfrom your salary.

Tax etcCompany income (net of VAT) 85,100EXPENSES (net of VAT)Director's Salary 7,500 }

} 629Employers NIC 228Mileage Allowances 1,500Stationery, postage and telephone 300Books, journals etc 100Pension Scheme 3,600

Accountancy fees 1,200Use of home as office 104Sundries 156

--------- 14,688--------

Net company profit before tax 70,412Corporation tax due (21%) 14,787 14,787

--------Net after tax profits available as dividends 55,625Dividends drawn net to private bank account 50,000

--------RETAINED PROFITS 5,625

===== ----------- TAX ETC 15,416

======


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Tax will be paid on the two separate sources of income during the year being the salaryelement as follows:

PAYE

PAYE is calculated on a salary of 7,500

Less: personal tax free allowance 6,475----------

Total taxable salary 1,025======

Income tax due 20% on 1,025 = 205.00 205======

NIC

Employers contribution on 7,500 228

Employees contribution on 7,500 196-----------

424-----------

TOTAL TAX AND NIC ON SALARY DRAWINGS 629

======

Secondly, tax is payable by the company on its own profits. Where these are paid out asdividends the tax credit attached to the dividend is only 10% (of gross). As long as youare only liable to tax at the basic rate there is no further liability. The 10% tax credit is notrepayable.

Corporation Tax

Total Corporation Tax due is

70,412 x 21% = 14,787====== =


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Additional personal taxes

In this particular case part of your income would fall to be taxed at the higher rate ondividends of 32.5% so a charge for Higher Rate Tax (HRT) would arise. This would have tobe paid by the individual and not the company, as it is a personal tax liability. This iscalculated as follows:

Salary gross 7,500

Net dividends 50,000Tax credit at 1/9 (of net) 5,555

--------Gross dividends 55,555

--------Total gross income 63,055

Less: personal tax free allowance 6,475---------

Taxable income 56,580

Basic rate tax band 37,400---------

Excess income 19,180

=====Higher rate tax payable on dividends (19,180 x 32.5% less 10% tax credit) 4,316

=====

Total tax payable in this situation would be:

Payable by the company

PAYE 205NIC 424Corporation Tax 14,787

----------

15,416Payable by the individual

Higher Rate Tax 4,316-----------

19,732=======

In this example total tax of 19,732 represents 21% of the VAT inclusive turnover of97,865. So as a rough guide around 20% of your income will go to meet tax bills at onetime or another.

This proportion can sometimes be reduced to under 16% by sharing dividends with aspouse or partner.


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14 PAYMENT OF TAX AND NI CONTRIBUTIONS UNDER PAYE

We will follow through the same example as above to show when tax is payable. If youstarted trading through the company on 1st April 2009 and were withdrawing funds evenlythroughout the year tax would fall due as follows:

19th July 2009 PAYE/NIC 51.00

19th October 2009 PAYE/NIC 51.00

19th January 2010 PAYE/NIC 51.00

19th April 2010 PAYE/NIC 475.83

1 st January 2011 Corporation Tax 14,787.00

31st January 2011 Higher Rate Tax 4,316.00-------------19,731.00

========

15 BUSINESS EXPENSES

UK tax legislation contains little detail of what comprises tax-allowable expenses. It ismainly through past legal cases by individual taxpayers, and which are technically onlybinding on that individual, that guidance has been given. These cases give an indicationof what may be allowed but often there is also a similar decision that may be cited whichgoes the other way.

The expenses position of contract workers is very complex. The Inland Revenue isundertaking a greater number of detailed investigations into claims for expenses to see ifthey can be challenged. You will be claiming your expenses on an ongoing basis fromyour company, but these expenses can be challenged at a later date by HMRC, to see ifthey can be taxed on you personally as a benefit. This usually happens several yearsafter the event, and you may then be unable to recall all the circumstances. In effect youare obliged to prove yourself innocent in these circumstances, so if such a challenge wereto arise, you must ensure that any papers you hold contain sufficient information tosupport your case.


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The general rule is that business expenses are allowable and private expenses are not.There is no clear legal definition of what items are, or are not allowable, and it is open tointerpretation of the circumstances, in each individual case. In an owner-controlled businessit may be impossible to demonstrate whether the motivation for expenditure was abusiness or private purpose where there is some form of personal benefit to the proprietor.The following can only be a guide to the types of expenditure that are often claimed. Theyare not a guaranteed list of expenditure that you should claim or which will be allowed bythe taxman in specific circumstances.

ALLOWABLE EXPENSES COMMENTS

Directors gross salary

Spouses/partners salary Only if actually paid, and not excessivehaving regard to duties performed.

Employers NIC Including Class 1A NIC on company carand fuel benefits

Motor expenses See note i)

Travel and Accommodation expenses See note ii) Note these expenses rulesare much more generous than for staffemployees.

Personal Incidental Expenses 5 per night allowance for each nightspent working away from home (inaddition to the Travel & Accommodationabove). 10 outside the UK

Staff Christmas Party etc Up to 150 spent per employee nottaxable. If the costs exceed this - fullamount taxable.

Employer Supported Childcare See note vii

Printing, stationery and postage

Computer related costs Software & Consumables


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Books, magazines and subscriptions Business related only

Bank charges and interest For company bank accounts

Telephone charges For telephone lines in the companyname. Private lines (see note iii)

Mobile phones contracted by the company One mobile provided per employee, linerental and call costs paid for by the

company

Protective and safety clothing High visibility jackets, waterproofs etc

Pension scheme contributions Where contracted by company for anInland Revenue approved scheme (seesection relating to B&S FinancialManagement Limited)

Accountancy Fees

VAT on expenditure If not VAT registered

Charitable Donations If paid under gift relief rules

Professional Indemnity Insurance (PII) To protect if sued for negligence by aEmployers Liability Insurance client. Also amounts paid in settlement

of such claims.

Training Costs Deductibility can depend on your IR35status. Seek advice from our tax

department .

Company Closure When your company is dissolved,currently 20,200 per couple canusually be taken in cash, tax-free bymost spouse/unmarried partnercompanies. The excess is normallytaxed at only 10%


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NOT ALLOWABLE COMMENTS

Private or domestic expense See note iv)

Lunches

Entertaining expenses

Political donations

Parking fines, motoring fines or No tax deduction even if business relatedclamping

Clothing Except for specific protective or safety clothing

Capital assets Special allowances see note v)

Company formation costs Although this is not an allowable expense onthe company you may claim it from thecompany in your expenses if you paid it

personally prior to formation.

Personal insurances, life insurance See note vi)

Keyman Insurance

Permanent Health Insurance


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iii) Telephone

If your home telephone or contract mobile is in your private name the company may paythe entire bill but a proportion will be taxed on you for the private use element. To avoidbeing taxed on a private telephone benefit we suggest you just claim for business callsthrough the company and pay the rental and private calls personally. Any personal benefitfrom a mobile phone contracted in the companys name is exempt from tax.

iv) Use of home as office

An allowance may be available in respect of certain home expenses where it can bedemonstrated that they have increased as a result of working at home. This is anadjustment we will put in your accounts and you should not claim a proportion of these

bills as an expense. You cannot claim a proportion of your Council Tax as this relatessolely to your private occupation.

v) Capital expenditure

Expenditure on computer and other equipment, other than cars, can be written-off for taxpurposes at the rate of 100% a year, up to a limit of 100,000 per year.

vi) Insurances

Normally there is no tax relief for any form of personal insurance. Tax relief may be possible

if you are able to set these up in a particular way and our independent financial servicescompany, Beever and Struthers Financial Management Limited can advise if you wish.

vii) Employer Supported Childcare

Payment for childcare costs can attract tax breaks if the following conditions are met:

The childcare is provided under a contract between your company and the childcareprovider.

The child is your child or stepchild, and maintained wholly or partly at your expense, ora child for whom you have parental responsibility.

The childcarer is either registered or approved.

The tax break is 55 per week (243 per month) for each employee, not per child. If bothparents are employees of your company both can benefit in respect of the same child.Your child will qualify up to 1 st September following his or her 15 th birthday, or if your childis disabled, up to 1 st September after his or her 16 th birthday.

In addition to nursery care, after-school care, music lessons, dance classes and sportscoaching can also qualify in some conditions are met. These arrangements may reduceany Tax Credits you currently claim.


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16 MAKING WITHDRAWALS FROM THE COMPANY

Your companys agency will make payments to your company and not to you so you needto consider how to control and account for withdrawals from the companys bank account.There are five ways in which funds are drawn from the company's current account. Theseare as follows:

i) payments representing tax-allowable company expenses

ii) withdrawal of net-of-tax salary

iii) withdrawal of net-of-tax credit dividends

iv) payments of VAT and taxes

v) transfers to deposit account for tax reserves

As outlined in the example, tax is payable on your salary and dividend withdrawals. Thefirst charge on company funds will be for tax-allowable business expenses. After theseexpenses you would next withdraw your net salary and the balance of the remaining after-tax profits would support your dividend drawings.

i) PAYMENTS REPRESENTING ALLOWABLE COMPANY EXPENSES

It will be possible to pay certain expenses directly from the companys bank account e.g.telephone bills, accountancy fees. You will have an invoice as a supporting voucher to theseexpenses and this will identify the VAT content contained within the payment. Other directexpenses such as spouses salary and company pension payments will have no voucherand have no VAT content. If you are in doubt as to whether a direct payment containsVAT e.g. car finance payments then you should refer to the initial agreement for guidanceor failing this ask us.

Where expenses cannot be met by direct company payment you should pay these firstyourself and you should complete an expense sheet each month covering such items thatyou will then present to the company who will write a cheque to you to reimburse yourpayment. The effect is that all allowable expenses have ultimately been paid out of thecompany funds before taxable payments to you are considered.

If you regularly incur business expenses with third parties e.g. buying petrol for a companycar then you may wish to consider using a credit card. This could be either a companycredit card or a personal card exclusively for company use. Tax-allowable businessexpenses would be paid with the credit card and the monthly bill paid with a companycheque. You would need to keep the supplier invoices for the expenditure to prove the

expense and to analyse the VAT content, if any, of each item on the statement.


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It is best practice for the company to purchase items in its own name and pay for thesedirect with a company cheque. The reason is that certain expenses incurred directly in thecompany name for business purposes may not need to be disclosed on the annualexpenses return to H M Revenue & Customs on form P11D.

ii) WITHDRAWAL OF NET SALARY

Each month the company will pay to your personal bank account an amount representingyour net-of-tax salary. In this example your net salary would be approximately 584. Asthis varies by a small amount each month and can change at Budget times we normallysuggest that you withdraw the same round figure each month.

iii) WITHDRAWAL OF NET DIVIDEND

The balance of net funds due to you will come by way of net dividend payments from thecompany. The pattern of withdrawal is very much based on personal choice and is underyour control. You need to exercise discipline to ensure that there is enough money left inthe company to pay the appropriate amount of tax. Around 20% of the profits need to beretained for corporation tax so 80% can be withdrawn as dividends over the year.

The way you operate the company will follow the trading example above. The company

will bank gross fees plus VAT but as VAT will eventually be paid out, the company onlyends up retaining the net fees. The next payments are business expenses followed byyour net salary and PAYE and NIC. This leaves in the company bank account its pre-taxprofits, which split 20% for tax and 80% for you as dividends.

You may chose to draw dividends whenever you like i.e. regular payments or irregularamounts at irregular times. The withdrawal of dividends is under your control.

iv) PAYMENT OF VAT AND TAXES

From your records you will be able to calculate and pay over VAT each quarter or annually.This is the normal way in which contracting companies operate but if you wish we can keepyour ongoing records and calculate your VAT returns for you for an extra charge.

We will advise you quarterly of the sums due for PAYE and NIC payable by the companyand you will write the appropriate cheques to the tax man. We will also inform you ofCorporation Tax based on dividends drawn and this can be saved in your companys taxreserve account.


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17 WHO DOES WHAT?

Our service is designed to be comprehensive and cost effective. Our system enables you tomanage your business and have day-to-day control of those areas that you can handle,while not have to worry about the areas requiring specialist knowledge which are dealt withautomatically by us. The following is an illustration of what would happen in a typicalcompany, from the start-up situation to the subsequent ongoing tasks during the yearlycycle, with an indication of who would normally be responsible for dealing with those tasks.

We would initially liaise with you to set up your limited company as discussed above andthen show you what you need to do on a regular basis to run the business. Typically thiswould be:

You B&SFrequency to do to do

Set up accounting records with you INITIALLY X

Advise on the level of your personal drawings INITIALLY("your salary") from the company and how tosplit this X

Review records and assist in completion of your EVERY 3 MONTHSonline VAT Return as necessary X

You will control the day-to-day affairs of the company and run the companys bankaccount so you will need to keep basic records of what you are doing. You will need helponly in technical tax matters so things will run as follows:


Pay salary MONTHLY X

Calculate and pay dividends MONTHLY X

Reimburse expenses MONTHLY X

Maintain accounting records MONTHLY X

Prepare and submit VAT Returns QUARTERLY X

Maintain payroll QUARTERLY X

Calculate PAYE/NIC liabilities QUARTERLY X

Calculate CT from Dividends drawn QUARTERLY X


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There are a number of matters that only arise annually but they tend to be the most

important. At the end of the tax year on 5th April there are returns to be made to thetaxman and at the companys year-end annual accounts are required.


Prepare annual accounts for shareholders and forfiling at Companies House ANNUALLY X

Prepare corporation tax computations ANNUALLY X

Complete corporation tax return Form CT600 ANNUALLY XComplete your personal Self Assessment Tax Return ANNUALLY X

Complete Employers Annual Return (form P35)and submit after 5 th April ANNUALLY X

Complete Return of Benefits and Expenses foremployees (form P11D) after 5 th April ANNUALLY X

Complete and submit the Annual Return of thecompany to Companies House ANNUALLY X

In addition we can offer other services should you require them e.g. tax planning forInheritance Tax and other special situations, raising funds, bookkeeping and generalfinancial health checks.

18 BOOKKEEPING

You will be operating a personal services company with a limited number of transactions

so record keeping should not be a major task.

This can easily be handled manually and a simple system is shown as an example. Youmay prefer to use a spreadsheet or accounting package and we will be happy to advise ifrequired.

It is important to understand that the company bank account is a business account and shouldnot be used as your personal account for paying private transactions. These should continueto be paid for out of your private account that will be funded by planned withdrawals from thecompany.


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The simplest records arise when the company bank account fully reflects all businesstransactions so bookkeeping consists solely of detailing the bank statements. These willneed to identify the VAT content of each deposit or withdrawal to enable the quarterly VATreturn to be completed. Alternatively if you use the flat rate scheme (see below) the VATcontent is not required and this will much simplify your record keeping.

To keep matters simple you should not withdraw cash from the company account. This cuts outthe need for a second set of records to record petty cash transactions in addition to banktransactions.

The model records consist of the following items:

i) a monthly transaction sheet detailing each bank deposit and withdrawal andreconciling these movements to the balance on the bank statements

ii) a VAT summary of the monthly transaction sheets to produce figures for the quarterlyor annual VAT return. Unless you use the flat rate scheme (see below)

iii) a sample expense sheet detailing the monthly claim

iv) a business mileage log detailing the claim on the expense sheet

v) a drawings schedule to enable tax calculations to be made for you

Blank examples of these documents are contained in the appendix so you can copy thesefor future use.

When completing a VAT return you need to consider those expenses where all the VATcannot be reclaimed because part of the expense is considered to be private. This islikely to be either VAT on your private telephone bill or VAT on private use of a companycar. You need to estimate a percentage of VAT to disallow for the private use of hometelephone. For company car users the amount of VAT disallowance is a fixed sum forprivate petrol that can be obtained from the VAT booklet you have been sent. Again this

does not apply to those using the flat rate scheme.

We also attach details of the approved rates for business mileage claims and the benefitdetails for company car users.

If you are using the VAT flat rate scheme you need only to charge VAT at the full rate(presently 17.5%) to your customers. When completing your VAT Return you simply applythe relevant Flat Rate Scheme percentage to your gross sales and remit this amount to H MRevenue and Customs.


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19 APPROVED MILEAGE ALLOWANCE PAYMENTS (AMAPs)

These are Inland Revenue approved mileage rates for using your own vehicle on companybusiness and it is recommended that you use them. If you claim at any other rate you may beliable to tax and will have to keep full records of all expenditure with receipts. The InlandRevenue fixes the mileage rates each year.

The rates applying to claims for business mileage for the 2008/09 tax year are as follows:

Car or Van Motorcycle CycleUp to 10,000 miles 40p per mile } 24p per mile 20p per mileOver 10,000 miles 25p per mile }

The first 10,000 mile rate restarts on the 6th

April each year.The rates are designed to cover all costs such as petrol, depreciation, insurance, road tax,servicing and spares so you cannot make separate claims over and above these rates. Youcan however claim non-mileage related expenses such as parking, congestion charges androad etc tolls in addition.

A mileage log detailing each business journey must be maintained to evidence the claimsmade. An example of a mileage log is contained in this handbook.

20 TAX TIPS FOR COMPANY CAR USERS

If you are thinking of having your company buy a car and making it available for both yourprivate and business use, there are likely to be substantial tax disadvantages for all models ofcars except low-emission vehicles, and some double cab pick ups.

Low Emissions CarsFor cars with CO2 emissions of 110g/Km or less, for a basic rate tax payer the annualpersonal tax charge is only about 2% of the cars cost i.e. 120 for a car costing 6,000.

If your petrol is paid for by the company, the personal tax charge could be increased by aslittle as 260 a year (463 for diesel). The company will get full Corporation Tax relief for:

the cost of buying the car (the tax relief is given in full in the year of purchase)the cost of buying the fuelthe other motor running costs e.g. Insurance, maintenance etc.

Tax relief for these costs is given in the year of purchase significantly reducing the companystax bill for that year.

The car can be provided for a family member including a teenager, as the actual privateusage is disregarded in calculating the tax payable.

Double Cab Pick UpsDouble Cab Pick Ups with a payload of 1000kg or more are another tax efficient companyvehicle. The Personal Income Tax charge for a Basic Rate Payer is 600p.a. (3,000 x 20%)and a further 110 (550 x 20%) if fuel is also provided for all qualifying pick ups. The vehiclescost, CO2 emissions and actual private usage are all disregarded in calculating the tax payable.


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IR35

21 WHAT IS IR35?

Prior to April 2000 a worker could provide services to clients, through a company heowned, drawing only a small salary and taking the remaining profits as dividends (onwhich no National Insurance Contributions are payable), split between his wife or partner(saving Income Tax at the higher rate).

In April 2000 the tax rules were changed to try to eliminate these tax & NIC savings wherethe worker provides personal services.

The coalition government has announced they are reviewing the IR35 rules.

Where personal services, are provided through a company you own, the IR35 rulesbroadly say that:

If you (the worker) personally perform services for a business carried on by anotherperson (the client) but the services are provided not under a contract directly between youand the client but through your own company, and the circumstances are such that, if theservices were provided under a contract directly between you and the client, you would be

regarded for income tax purposes as an employee of the client.

The effect being that the fees generated by you for your company, subject to some limiteddeductions, rather than just the low salary actually taken, are taxable & chargeable to NIC(by your company) as if those fees received by your company, were your personal salary.

The issue is therefore whether you, the worker would be regarded as an employee of theclient using the existing legal tests of employment and self-employment, but applyingthese tests to the hypothetical contractual arrangements directly between you and theclient. These arrangements normally comprise the contract of employment between youand your company, the contract between your company and an agency, and the contractbetween the agency and the end client.

22 EMPLOYMENT OR SELF EMPLOYMENT

The Contract

The terms of a contract can be written, oral or implied or a combination of all three. Indeciding what a contract says the Revenue may wish to see not only the contract itself but

also handbooks and procedures manuals etc in addition to evidence of oral and impliedterms.


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Working ArrangementsWhere the parties to a contract do not behave in the way described by the agreement theRevenue take the view that they can look at the working relationship rather than be boundby the written contract, which they say, may bear little resemblance to reality. Workingpractices are less relevant where there is a written contract that contains all the terms ofthe agreement between the parties. It is therefore important that written contracts areprepared and that they are as comprehensive as possible.

New DevelopmentsThere have recently been a number of court cases where the terms of the contractbetween the company and the employment agency (the lower contract) fell outside IR35,but the terms of the contract between the agency and the end client (the upper contract)did not. These cases were decided by the courts on the basis of the terms of the uppercontract i.e. that the chain of contracts fell within IR35.

To minimise this risk of the upper contract terms being different from the lower contractterms, you should seek a clause in your contract (the lower contract) requiring that theupper contract is in all material respects the same as your lower contract.

23 THE STATUS TESTS

These tests are not contained in the legislation but have developed over time as caseshave been argued in the courts, but as the cases concerned have not until recentlyinvolved IR35 many are not entirely appropriate; and as a result their application to IR35may be uncertain.

The Major Tests

The Right To Send A Substitute

If an individual does not have to do the job personally but can send a substitute he is not

an employee, personal service being an essential requirement of employment. A contractthat gives your company the absolute right to replace you with another worker without theclients permission being needed is, if combined with a similar right of substitution in thecontract between the agency and the end user of your services, probably the strongestindicator that the contract is not within IR35. The Revenue has said, that a right that islimited only by a requirement to substitute a worker of suitable experience and ability isalso acceptable. Letters to this effect from the agency and the end user can be veryhelpful.

It is not necessary to actually send a substitute, or to have a one available (although thismakes your case stronger) but merely to have the right to do so. It is however importantthat your company is responsible for paying the substitute.


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Control

The level and type of control by the engager over the worker has historically been a factorin deciding whether the contract is one of employment. Rights of control were divided intocontrol over what, where, when and how the work is done. More recently the courts havedealt increasingly with skilled and professional workers over whom control is necessarilymore limited. As a result the control test has declined in importance but is still a factor.

What is done. The right of a client to move the worker to areas of higher priority is highlyindicative of employment.

When and where the work is done . If the client can control when and where the work is

done the worker is more likely to be an employee. If the nature of the work or securityissues dictate where the work is done, this is likely to be neutral in determining IR35status.

How it is done. This can be a strong indicator of employment but where skilled professionalsare involved and the complex nature of the work, rather than the client, dictates how thework is done, this does not point to employment.

It is important to note that it is the clients right of control over these aspects which maybe an indicator of employment and not the exercise of that control.

Mutuality of obligationsMutuality of obligations is a fundamental aspect of a contract of employment and isconsidered along side personal service and control to be one of the three fundamentalcriteria for the existence of a contract of service.

Mutuality of obligations is a concept developed over the years through the courts. Itrelates to the ongoing relationship between the parties and involves a high level ofcommitment to each other. In an employment relationship the employer is obliged toprovide work or pay and the employee is obliged to accept it. However, the mere offer andacceptance of a specific piece of work does not amount to mutuality of obligations in thecontext of employment status. There must also be an obligation on the employer to offerongoing work and the employee to accept such work if offered, either during the course ofthe Contract of Service or once the contract is over.

The trinity of personal service, control and mutuality had first to be considered before theother factors. It is only necessary to go to the second stage of considering all the otherstatus criteria if personal service, control and mutuality are all fulfilled. If they are not, thestatus will not be one of employee and the argument need go no further.


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The In business on own account test

This test draws a distinction between an individual who works under the control of and aspart of the business of another and the individual who goes it alone and sets up on hisown account, bearing responsibility for the success or failure of the enterprise, regardbeing had to the workers exposure to bad debts and the amount spent on organising,obtaining or carrying out the work.

This test can be helpful to individuals with highly marketable skills, evidenced by a highrate of pay, who contract over time with numerous different customers.

Other Factors

Significant financial risk and opportunity to profit from sound management

The tests of taking on significant financial risk, and the opportunity to profit from soundfinancial management, are a strong indicator of self-employment. Incurring significantamounts on training expenses to provide skills, which are hoped to be used in futureengagements, can indicate financial risk.

If your company agrees to perform work for a fixed sum, and therefore stands to lose if the

work is done incorrectly, or it has to be put right at the companys own expense , and toprofit if the work is done quickly and efficiently, is an indicator of self-employment. For thistest to be conclusive evidence of losses being suffered, or insurance being in place tocover such losses, may be required.

Minor Factors

Provision of equipment

The provision by your company, of significant equipment, which is essential to carry outthe task, can be a significant indicator but it is unlikely that these conditions would be metin the case of an IT specialist.

Payment termsWhilst being paid a fixed sum on a project basis is typical of self-employment, payment byunit of time is usually inconclusive.

Intention of the partiesThe Revenue has stated that the intention can be decisive but only where the relationshipof the parties is ambiguous and the other factors are neutral.


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Notice PeriodLack of a notice period is indicative of non-IR35 status.

Length of EngagementIn general, the longer the engagement, the more likely the contract will fall within IR35 andthe shorter the engagement the less likely. This is because the engager will, over time,want to, or need to, exercise greater control of the worker. Additionally the worker maybecome integrated into the engagers business in a manner indicative of employment.

SUMMARY: EMPLOYMENT OR SELF-EMPLOYMENT

There follows a brief summary of pointers that would indicate self-employment and somecaveats on each:

Test Try to establish Watch out for

Control The work is not subject to control bythe client. You have agreed to do aspecific job to an agreed standardand after that it is up to you how,when and where the job is done

This will be the most difficultarea to satisfy. Go as far as youcan with it, and accept thatsome will never work.

Substitutes andhelpers

You have a right to substitute asuitably qualified alternative, orengage help. This should be anexplicit contractual right

May be difficult to establish.If you can you must beresponsible for the substituteand their quality of work. Youmust pay them.

Mutual obligations Both parties declare that they do notwish to create or imply any mutualityof obligations whatsoever, eitherduring the course of this Contract forservices or during any period whencontracts are not available

A key condition but one whichthe other side will readily accept.

Equipment Equipment fundamental to the taskis important

Again difficult. Do not acceptfree equipment provided by theclient. You will be closer toemployment.

Financial risk You need to make profit other thanby doing more hours

Fixed price contracts are theonly way. Do you want this?Your costs are probably notsufficient to swing this factor.

Method ofpayment

Quoting fixed prices for a specifiedtask

Payment by the hour or day isindicative of employment


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Other rights No rights to normal employeebenefits

You will usually satisfy this. Donot accept what would otherwisebe benefits in kind.

Exclusive services You can work for as manyorganisations as you wish

Useful but not conclusive. If youwork full time this is notpractical.

Rights of dismissal You are engaged for a particulartask. No rights of dismissal apply

Clients may be unwilling toaccept this. It is often part oftheir control aspects.

Part and parcel of

the organisation

You are an independent expert, not

part of the company paying you

If you work in a team with

company employees you willneed to show that you differsubstantially from them.

24 AVOIDING IR35

It is important to implement a sound comprehensive written contract (that is, a contract

which contains all the terms of the agreement between the parties), which embodies asmany of the favourable factors above as possible i.e:

gives your company the final say over the appointment of a substitute worker.

gives the agency/client as few rights of control as possible.

Indicates a lack of mutual obligations.

affords your company the opportunity to profit from sound financial managementetc.

Also note that IR35 liability is largely decided on a contract by contract basis, so itis important that we review and amend if necessary, each proposed new or variedcontract, before it is signed , dated and implemented.

Maintain records to show that the contract is being followed. Invoices should show theprovision of services not the supply of personnel. Record any instances of unsatisfactorywork and its correction.


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Letter of Clarity

If your work is undertaken through an agency rather than directly with the client, theRevenue will take the view that the terms of contract between the agency and the clientare as important as the terms of the contract between your company and the agency indeciding your IR35 status even though you are not a party to the agency/client contract. Inaddition that contract may not be made available either to you, or the Revenue.

Whether your companys contract is with an agency or directly with the client, if yourcontract is not fully explicit, or important factors are not covered, it will be helpful inestablishing improved IR35 friendly terms, to send a suitable letter of clarity to the

agency and/or the client, and obtain from them, if you possibly can, written confirmation ofagreement. This should be done at the time of the contract or soon afterwards to avoidarguments later. The more factors in your favour, evidenced in writing by the other party,the more likely you are to send the Inland Revenue away in search of an easier target. Aspecimen letter is shown below.


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SPECIMEN LETTER OF CLARITYCONFIRMING CONSULTANCY APPOINTMENT

Dear

I write to clarify and confirm the arrangements between my company ..Ltd, and . (the agency or client).

This is to confirm that ...Ltd, (your company ) , is providing services to

. (This is to show that services not personnel are being provided)

These services consist of . (description of services).

They commenced on .(date) and can be terminated by either party atany time/with .. days notice / are contracted to continue until at least ..(date).

My company has the right to select and send a substitute to carry out the servicesspecified in the contract in place of the named individual. ( A good substitution clause is

very effective in avoiding IR35, the lack of a right of substitution should be avoided)

My company has the right to sub-contract the services to another party . (A right to subcontract would again be very effective in avoiding IR35)

My company has the right to subcontract the services and/or send a substitute; the clientagrees that he will accept a substitute or subcontractor if the latter has the skills to carryout the services specified in the contract. (This slightly more limited right ofsubstitution is also acceptable to the Revenue and should be established if it is notclearly stated in the contract)

The basis of payment for the contract is: (select one only)

on a project basis and for a fixed sum which has been agreed in advance, (Project based payment carries the opportunity to profit from soundmanagement and can be effective in avoiding IR35, other bases of paymentare fairly neutral).

or, on a project basis for a fixed sum, although adjustments to that fixed sum canbe negotiated.

My companys representative does not work as part of a team that includes members ofyour staff. (It can be helpful to show that you are not part and parcel of the clientsbusiness operation.)


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My companys representative can choose which hours he works as long as he gets the jobdone within the agreed period , (This points towards non IR35, an agreement to workthe clients normal hours points the other way ).

The work can be carried out as my company chooses, but within the requirements of theproject, including reaching necessary quality standards. (This level of control isacceptable, but any agreement to be subject to the clients day to day control as tohow the work is carried out should be avoided)

My company carries the risk that work, which is not to specification, is rectified at mycompanys own expense. (The significant financial risk and ability to profit fromsound financial management, which would result from agreeing to put rightdefective work at your own expense, is a strong pointer towards non IR35. You mayfor commercial reasons not wish to agree to this)

We hereby confirm that the above summary reflects the true nature of the contractualrelationship of the parties during the period.

For and on behalf of the freelancer:

Name:.

Signature: .

Date :

For and on behalf of the agency/client:

Name : ..

Signature : .

Date : ..


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25 HOW TO CALCULATE THE EXTRA TAX DUE UNDER IR35

Your company will operate PAYE and pay NICs in the usual way on any salary paid duringthe year and report any taxable benefits to us at the tax year end.

Your company will also need to work out (with our help) if any additional tax and NICs onIR35 contract work will be due for payment on 19th April following the end of the tax year.

The Calculation

Cash received (by your company) in the year (ended 5 th April) X

from IR35 work (excluding VAT paid by the customer)(but include VAT retained if under the Flat Rate Scheme)

Expenses & non-cash benefits from the client. X

X

Less 5% Deduction (X)Less:

Salary and Employers NIC already paid (X)Expenses allowable on IR35 work (X)Company Pension contributions (approved) (X)Subscriptions to professional bodies (X)Professional Indemnity assurance premiums (X)

Total Expenses and Deductions (X)

Bonus for IR35 purposes including Employers NICs X==

Expenses Allowable for IR35 work

The 5% deduction

This allowance, being 5% of the total income from IR35 work is intended to cover all of theexpenses of running the company including accountancy fees and Companies Housefiling fee. Although for this deduction it is not necessary to show how or even if theexpenditure has been laid out it is necessary for the company to record all its expenditurefor its accounts.

Expenses Allowable

See the travel and accommodation notes in Section 15.


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26 THE ARCTIC SYSTEMS CASE

HM Revenue & Customs (HMRC) have not had the success they anticipated in raisingadditional taxes from freelancers by the IR35 rules. As a result they have sought otherways to raise taxes from one-man companies.

HMRC have unsuccessfully tried to use a new and controversial view of old legislation(formerly known as Section 660A) to prevent the tax benefits of splitting dividendspayments with spouses in husband and wife owned companies. This is normally done toequalise income levels and so avoid higher rate tax. The effect of S660A is to tax all the

dividends as if they belonged to one spouse thereby increasing income for tax purposesand pushing the individual into higher rates that much quicker. In simple terms the personseen to be earning all the income will be taxed on all the income.

The House of Lords has ruled against the Revenue and in favour of the taxpayer.

The law is not expected to be changed in the foreseeable future so dividend splittingthrough the use of appropriate shareholdings remains an excellent way of tax saving.

If you require further information please contact Jim Dutton or Clara Torres for advice.

OTHER MATTERS

27 SAVINGS AND INVESTMENT

Loss of benefits

When you change from an employed status to a contract worker are likely to lose many

company benefits such as non-contributory pension scheme, medical insurance and deathin service benefits.

Even though you may consider contracting as a short-term career, your earnings will behigh. It is important that you recognise that part of your earnings need to be put back intopreserving these benefits.


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B&S Financial Management Limited is authorised to provide independent financial adviceand is regulated by the Financial Services Authority.

B&S Financial Management LimitedSt Georges House215-215 Chester RoadManchesterM15 4JE

Telephone number: 0161 832 4901

Contact names: Idris Davies e: [email protected]

Stuart Johnson e: [email protected] Johnson e: [email protected]

The majority of financial advisors are not familiar with the freelancer market and so rarelyunderstand the special circumstances of contract workers. Beever and Struthers set up aseparate limited company, B&S Financial Management Limited, to provide further taxplanning and independent financial advice to our clients.

The following areas of tax planning and financial advice should be discussed with anadvisor at B&S Financial Management Limited. It is important that you discuss any

insurance/pension contracts before entering into them as our financial servicesdivision can ensure that these apply to your freelancer status and that you aremaking full use of the tax advantages available . Please feel free to contact them director we can arrange an appointment for you.

a) Pension PlanningPension planning is the major consideration for anyone entering the contractingmarket today, as it offers no direct pension benefits. Making pension contributionsthrough a limited company can achieve major tax planning advantages. The rulesregarding pension schemes for freelancers are complicated and you need to beaware of all the options and their effects. In addition, for many people contractingmay be short-term and steps are required to safeguard the contributions made duringthe relatively short time that you may be contracting. The uncertain long-term natureof contracting poses unique questions about the type of financial advice that shouldbe given. Changes in pension legislation since A Day (6 April 2006) mean that areview of all existing pension schemes is recommended.

b) Permanent Health Insurance (Income Protection)Many freelancers are very concerned about what would happen if they were unable towork as a result of an accident or illness. Permanent health insurance contractsprovide a replacement of income during periods of incapacity. The particular nature of

contract workers and their methods of payment complicates this provision andspecialist advice is needed to ensure full cover is available.


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c) Life InsuranceDid you know that arranging life cover for yourself can be treated as a legitimatebusiness arrangement and, with your company paying the premiums, there is also thepotential of reducing your companys Corporation Tax liability? Often substantial lifecover benefit will be lost when you cease work with a large company. Life insurancecan be arranged for family protection or in conjunction with loans etc.

d) InvestmentsOffshore investment products and other personal investments can further enhancethe tax efficiency of your company and personal savings.

e) Critical Illness CoverInvariably clients will have life cover in the event of death, but what would be the

implications for your business and family if you were to be diagnosed with a criticalillness. A critical illness plan can provide a financial buffer in such circumstances.

f) MortgagesIt can often be difficult to secure the most competitive mortgage deal when youbecome a freelancer as few mortgage providers understand your remunerationstructure. B&S F M Ltd have many years experience in dealing with both newmortgages and remortgages for freelancer clients and will be able to secure for youthe most competitive deal.

28 CONTRACTING OVERSEAS

An increasing number of individuals are looking at contract opportunities overseas. This isa complicated area and a number of factors have to be considered before decidingwhether to undertake such a contract either as an individual or through your limitedcompany. In certain jurisdictions the use of other offshore structures may be advisable.

It is impossible to give anything other than the most general of information, as this is aconstantly changing area. It depends on the interplay of tax legislation in the UK with that of

the overseas country and is subject to alteration at either end by reference to different dates.

There is generally less scope for advantageous tax planning if you carry out a contract inanother EEC country due to the amount of reciprocal European legislation. Normally thefurther away, and less sophisticated the country, the more likely there is to be asubstantial tax advantage. These are often arranged for your benefit by the agent as anincentive to carry out the contract.

When you work overseas the normal pattern of operations described above will changesubstantially. Your company will always be liable to UK taxation no matter how long youwork overseas. There will only be an advantage in using the company if you can eliminatethe profits by taking all your drawings as a salary that is either tax free or taxed at anadvantageous rate.


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The matters that need to be considered with any overseas contract are:

i) the agency will dictate whether it is willing to deal with you or your company,whatever the merits or demerits for tax purposes.

ii) you may well have a responsibility to make a tax return for the same period bothoverseas, and in the UK, but normally there is a double taxation agreement in force,which ensures that you pay tax in only one country.

iii) the tax rules of other countries may not recognise your companys corporate statusand may look through the arrangement to deal with you as an individual.

iv) foreign tax rates may be higher than those in the UK, and you may wish to makeyourself a UK taxpayer.

It is important that you seek advice from Jim Dutton or Clara Torres as early as possibleas it will rarely be possible to rearrange your affairs once they have been set up.

29 RESUME AND TIPS

i) Your salary does not have to represent any particular proportion of your totali

Documents

Final Freelancers Handbook 2010-11 v2(3)