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Setting up as a contractor? Read about expenses and dividend rates first

Setting up as a contractor? Read about expenses and dividend rates first

The dawn of the new financial year in April 2016 saw several key changes for contractors come into in effect. These span various areas of accounting – we’ll look at many of them in detail (not to mention plain English) below:

  • Travel and Subsistence expenses
     
  • IR35
     
  • Dividend taxation and other changes

So let’s dive straight in.

Changes to Travel and Subsistence expenses: a ‘loophole’ is closed...

HMRC has closed what it viewed as a travel and subsistence ‘loophole’ which had benefited some umbrella companies whose contractors were able to claim tax relief on work-to-home travel and subsistence (T&S) expenses.

Chancellor George Osborne said, in his Budget speech:

“We will stop employment intermediaries exploiting the tax system to reduce their own costs by clamping down on the agencies and umbrella companies who abuse tax reliefs on travel and subsistence – while we protect those genuinely self-employed.”

Previously, if a contractor remained unidentified (ie, they weren’t named on the contract) , they wouldn’t be subject to supervision, direction or control (SDC) and would therefore be entitled to continue claiming T&S relief.

But the HMRC move addresses this, meaning the supervision, direction or control test is applied to the person who actually provides the service – regardless of whether they’re named on the contract or not.

If an end-user supervises, directs and controls a worker, T&S relief for contractors will be removed.

This means that tax relief for work-to-home travel expenses will no longer be available to umbrella or limited company workers if there is a ‘SDC’ (Supervision, Direction or Control) of a person.

But that’s where things get interesting, as workers don’t have to be subject to actual supervision, direction or control – merely subject to the right of supervision, direction or control.

 

 

 

 

 

 

 

 

Below are the government’s definitions (source):

 

Supervision is someone overseeing a person doing work, to ensure that person is

doing the work they are required to do and it is being done correctly to the required

standard. Supervision can also involve helping the person where appropriate in order

to develop their skills and knowledge.

 

 

Direction is someone making a person do is/her work in a certain way by providing

them with instructions, guidance or advice as to how the work must be done.

Someone providing direction will often coordinate the how the work is done, as it is

being undertaken.

 

Control is someone dictating what work a person does and how they go about doing

that work. Control also includes someone having the power to move the person from

one job to another.

 

Impact of the changes

Unless the client is willing to do one of two things – increase the assignment rate or minimise the loss – the impact of the new rules, which were implemented in an effort to place contractors on a “level playing field” with permanent workers who weren’t able to claim these expenses, could result in some contractors seeking to work only for clients that are geographically close to them, in order to avoid costly travel and subsistence expenses. 

 

How the changes affect you if you work at a temporary site

Under the new rules, the cost of travelling to your normal place of work cannot be classed as a business expense – meaning, therefore, you won’t be able to claim tax relief on it.

If, however, you need to travel to a different location – for a meeting, perhaps – you’ll be able to claim that cost, simply because that second location isn’t your normal place of work.

 

Underpaid tax and employer’s National Insurance

If you, as a contractor, are subject to the right of supervision, direction or control, but incorrectly claim and receive tax relief for travel and subsistence expenses for normal commuting, it means there’ll be underpaid tax and employers’ NICs – and this is the government’s position:

“Transfer liability for any debt resulting from knowingly failing to apply the correct rules for travel and subsistence to be held, jointly and severally, by the employment intermediary and the director of the employment intermediary. Where the employment intermediary can show it has been misled by a fraudulent document, produced by another relevant party, then the debt will be transferred to that party.”

PRISM, a not-for-profit trade association that represents umbrella companies, continues to campaign against the legislation.

 

...and new tests are brought in

Following the change in T&S relief, contractors who operate through their own limited company now also face a new test to establish their position with respect to IR35 legislation.

 

IR35 – a reminder of what it is

There’s a difference in the way full-time employees are taxed compared to how company directors are taxed.

Taxation of the former is quite rigid and handled by your employer; taxation of the latter tends to be much more flexible.

IR35 is legislation that was introduced to counter tax avoidance by people who could, in theory, work as an employee one week, then leave that company and turn up at that same company the following week as a contractor – and pay a lot less in taxes.

Those who are effectively ‘caught’ by the rules are deemed to be ‘inside’ IR35, and vice versa.

If HMRC decides that you’re inside IR35, they can investigate your business, which can run on for some considerable time and be costly (you could end up paying HMRC all the tax that they would’ve collected from you had you remained a full-time employee).

To determine whether or not a contractor falls within IR35 or not, HMRC will examine what it calls a ‘hypothetical contract’ – a contract that ‘could’ be in place between you, the worker, and the client.

 

Other factors

Other factors also come into play, such as whether you, as the contractor, have to complete the work personally, whether or not you’re able to leave the contract at any time, and whether or not you have control over how the work is completed.

Contractors working ‘outside’ IR35 aren’t affected by the changes but directors of limited companies who are already deemed to be ‘inside’ IR35 won’t be able to claim tax relief on their expenses in the same way as they have previously.

 

So, these new tests...

The government, says HMRC, intends to introduce new tests in April 2017 for workers contracting through PSCs (personal service companies) in the public sector.

A new digital tool will be used to ask contractors a series of questions designed to determine whether a PSC worker is truly self-employed – and, therefore, ‘outside’ IR35, in which case he or she may continue to be paid off-payroll. If a worker’s responses indicate that they operate ‘inside’ IR35, he or she will have to be placed on the public sector payroll.

But can a digital tool such as that being proposed provide information that’s accurate enough to establish an individual’s tax status? It’s a contentious issue. Some say that, at best, many cases fall within a fairly sizable grey area so a black-and-white mechanical test simply falls short of fulfilling its purpose.

 

HMRC says:

“The whole point is that the engager wants clarity at the point of hiring. It is no good having to wait three months.”

A consultation document will be launched in the summer, followed by draft legislation.

 

Other changes from April 2016

Employer expenses – BIKs (benefits in kind)

HMRC now allows employers to process BIKs – such as company cars, fuel benefits and private medical insurance – through the payroll.

 

‘Fair bargain’

HMRC has introduced what it calls ‘fair bargain’, which allows it to impose a tax charge for benefits such as cars, loans or living accommodation even where there’s a fair bargain between employer and employee for the provision of such benefits.

 

Dividend tax

If you receive dividends from your limited company that exceed £5,000, your tax liability will increase. Basic rate taxpayers must now pay tax at 7.5 per cent on dividends over £5,000, while higher rate taxpayers now pay 32.5 per cent. Additional rate taxpayers – whose taxable income exceeds £150,000 – pay 38.1 per cent.

 

International Umbrella, however, can help and give you peace of mind because, whether you’re a contractor or employer, IR35 rules do not apply to us.

Contact us today to learn more about how we can help you.

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