HM Revenue & Customs have issued new guidance on their views over when business engagements entered into by workers and their personal service companies may be caught by the IR35 “deemed employment” rules. These are accompanied by a series of business tests with a scoring system that allow businesses to judge if their arrangements can be considered as high, medium or low risk. The guidance and tests were drawn up in conjunction with representatives of both professional and contractor organisations, but since publication of the guidance earlier this week some of these groups have criticised and sought to distance themselves from the final version, in particular the weighting given to scores within the business test.

Guidance

HMRC have published considerable information about how they risk-assess businesses and what they consider to be “high risk” cases. While this is based on HMRC’s views and opinions and does not necessarily sit comfortably with all relevant case law, it is useful to know and will help contractors in addressing those parts of their business relationships which may attract unwanted attention.

HMRC have also agreed that a business which carries out the business tests and falls into the “low risk” category will not be subject to any enquiries for at least 3 years – provided they retain evidence to support their answers, and HMRC accept those answers as being honest and complete.

The guidance also includes a number of scenarios which give further information on HMRC’s views regarding the factors which they consider to be important in establishing if an engagement is either inside, or outside, of IR35.

Business Tests

Twelve business tests have been published, each carrying a specific and different score based on which factors HMRC consider to be the most important when deciding if IR35 applies and it is these which have caused the most controversy. Contractor’s representatives have claimed that the final scoring does not reflect the discussions held with HMRC and gives a slanted and biased view leading to many people wrongly concluding that they are “high risk”.

Taking the test is voluntary and a business doesn’t have to tell HMRC of the result.

Our View

The tests adopt a relatively simplistic and blunt approach and do not cover all of the nuances and factors which are likely to exist in a business relationship. There does appear to be some justification of the criticism of the tests and the scoring system and any business which receives a “medium” or “high” risk score should seek advice rather than simply apply the IR35 treatment to any income derived from the engagement.

However there is good news too. For businesses and contractors who genuinely fall into the “low risk” category when taking the test there is a categoric commitment from HMRC to close down any ongoing IR35 enquiry and not to undertake another within 3 years – and this commitment is given without any examination of either a written contract or the actual day-to-day working arrangements in place. The tests, taken as a whole, do appear to acknowledge that there is a bigger picture than just a contract or the minutiae of the arrangements – whether the contractor is really “in business on their own account”. Demonstrate this, and on the face of the tests and guidance the IR35 problem has been neatly side-stepped.

We offer bespoke advice to contractors and their companies concerned about IR35 including contract drafting and reviewing, planning and advice based on both case law and HMRC views and policies, and help and support for you and your business in dealing with HMRC enquiries and investigations. For more information please contact Peter Davies on 01727 838 255.

Another great turn out at the St Albans Chamber of Commerce St George’s Day Lunch event in which local businesses gathered to celebrate the day and enjoy the entertainment that was laid on, including a presentation by the guest speaker,  legendary Olympian Eddie “the Eagle” Edwards.

The Olympic theme continued with presentations by Paralympics athletes and the presentation of the Vancouver Olympic torch, which Eddie had once been a torch bearer of.

Amongst the sponsors of this event were WMT – Chartered Accountants, a leading Hertfordshire based Accountancy firm. Speaking about the event, Andrew Williamson, Managing Partner for WMT comments:

“WMT were proud to sponsor this event, it is in our eyes the St Albans  event of the year.  As always the St Albans Chamber of Commerce have outdone themselves and made this a memorable event, we look forward to next year.”

WMT hospitality seminar with industry expert speakers including
Tom Aikens and City Cruises Chairman Gary Beckwith

We are pleased to invite you to join us at our free 2012 Hospitality Seminar, which will provide you with an informative and entertaining review of your sector in the current market place and explore issues affecting you and your staff.

Tom Aikens needs no introduction. The youngest ever British chef to win two Michelin stars, he is Proprietor and Executive chef of both Tom Aikens Restaurant and Tom’s Kitchen. Tom will give his personal story on starting and building a business.  Gary Beckwith, Chairman of City Cruises, the leading operator of passenger services on the River Thames, will be presenting on the challenges of running a business on water. Peter Moody, Principal of Red Pie Consulting, specialist advisers to the Hospitality and Leisure sector, will be giving a commercial law update. Steve Wright, Consultant at Paperchase Accountancy Ltd with over 25 years experience exclusively within the hospitality sector will be presenting on increasing your business and what you can do to reap the rewards. Finally, our in-house expert, Peter Davies, will offer an update on the latest tax and VAT developments.

If you are in the hospitality sector then attendance at this event is a must, as our experts will be giving an update on areas that will have a direct impact on you and your business. We do therefore hope you can join us.

When: Thursday 17 May, 9.00am registration and breakfast for a 9.30am start. This event is anticipated to finish at 11.30am when there will be refreshments and networking
Where: R.S. Hispaniola, Victoria Embankment, London, WC2N 5DJ 

Spaces are limited, if you would like to reserve your place please contact Natalie Pouyiouros on 01727 838 255 or email her at natalie.pouyiouros@wmtllp.com. Admission is free but by prior registration only.

To help you to determine whether your contributions are correct, we have highlighted below the two types of pension scheme that employers run:  A company Pension Scheme and a Group Personal Pension Scheme.

Company Pension Scheme

Contributions to this type of scheme are made GROSS for both employer and employee. Employee contributions to the pension scheme are collected from gross pay.

Contributions are then paid over to the pension scheme by the employer.  As the employees contribution is from gross pay there is no further tax relief available. It effectively will include either the basic rate, or higher rate tax that would be due.

Group Personal Pension Scheme (GPP)

Contributions to this type of scheme by the employee are taken from the employee’s net pay.  The contributions are then paid over to the pension administrator, who will allocate them to the individual pension arrangements.  Basic rate tax is reclaimed from HMRC and added to the employee contributions by the pension scheme.  If the individual is a higher rate taxpayer, they should receive a Personal Pension Contribution Certificate (PPCC) from the pension provider. Normally the higher rate relief can be given as a refund through tax coding, although it may also be paid as a lump sum.

It is necessary to claim back the higher rate tax relief through self assessment by preparing a tax return or contacting HMRC with a copy of your pension certificate and asking for the relief to be included in your code.

There are other significant differences: a company scheme must appoint trustees, who have responsibility for fund choices for the members of the scheme.  This tends to result in a limited fund choice being offered.  Under a GPP the fund choice is up to the individual.

Both types of arrangements can utilise salary sacrifice schemes to reduce National Insurance costs.

If you are unsure whether you are claiming the right amount of pension tax relief, please speak to our Senior Private Client Tax Manager, Paula Jeffs on 01727 838 255.  Paula will be able to asses your individual situation and determine whether you are entitled to further tax relief.

We will send a full briefing by the end of the week once we have had a chance to look at all the detail. We will then be in a position to let you know how this budget will affect you and your business. In the meantime the key points from today’s budget speech are outlined below: 

• Main corporation tax rate to fall by 2% to 24% from 1 April 2012, with a further cuts to 22% by  2014
• Personal tax allowance threshold to be raised to £9,205 in 2013
• From April 2013 50p income tax rate to be reduced to 45p
• Age allowance, which is available to those over 65, will be frozen from the 2012/13 tax year. No individual who is currently under 65 will benefit from any age allowance in the future
• Child Benefit will be gradually withdrawn via a new tax charge where one partner earns in excess of £50,000. The Benefit will be lost altogether where one partner earns £60,000 or more
• Stamp duty on residential properties costing over £2m to be increased to 7%
• Stamp duty on residential properties over £2m bought through a company to be increased to 15%
• Tax increases from April 2013 have been announced for company car drivers with the most significant rises from 2015 for cars emitting the most CO2
• The scale charge for private fuel provided with company cars will increase by £1,400 from April 2012
• Zero emission company cars will be taxed from April 2015
• Certain tax reliefs for high earners to be capped
• Freeze in fuel duty
• No change to pension relief for higher earners
• Basic state pension to rise by £5.30 per week
• Headline rate of minimum wage to increase from 1 October 2012 to £6.19 per hour, no increase in the rate for workers aged under 21.

If there was anything covered in the Budget that you would like to discuss further, please contact one of our Tax Team on 01727 838 255.

Currently a Furnished Holiday Let (FHL) is treated as a trade as opposed to a property business resulting in various capital gains tax reliefs and capital allowances on fixtures and fittings expenditure, as well as the income being treated as relevant UK earnings for pensions purposes.

The Government will extend the FHL regime on a permanent basis so that it covers FHLs situated anywhere in the European Economic Area (EEA), so that it complies with EU laws. This has increased the scope of relief although UK and foreign qualifying properties must be kept as two separate businesses for tax purposes

Since April 2011, any loss arising from an FHL can no longer be offset against the taxpayers other income, it can only be offset against future profits arising from the same FHL business.

As of 6 April 2012 the government will extend the minimum periods of time (based on a tax year) that a property needs to be let in order to qualify for relief, as shown in the table below.

Longer term occupation is a letting of more than 31 days.  You can let the property out for periods longer than 31 days in one stretch but none of those days will count towards your minimum days let qualification (70 rising to 105 days).  However, if the total of all or any ‘longer term occupation’ lettings is more than 155 days in the period/tax year, your property will no longer qualify as a FHL for that period.

Occupancy threshold

There are two elections you can make to help you reach the occupancy threshold.  If you have more than one property the ‘averaging’ election might be helpful and if you have a property that reaches the occupancy threshold in some years but not in others you could use a ‘period of grace’ election to help you to reach the threshold.

Averaging

If you have a number of properties that are let as FHL then each of them must separately reach the availability threshold and the pattern of occupation condition, but if some are individually let for less than 70 days (105 days for 2012–13 onwards), you can elect to apply the letting condition to the average rate of occupancy over all the properties..  

However, UK and overseas properties must be averaged separately.

Period of grace

In addition to the option to use averaging to help meet the occupation threshold there is also the possibility of making an election for a ‘period of grace’.

This allows you to treat a year as a qualifying FHL year where you genuinely intended to meet the occupancy threshold but were unable to meet it.  In the year before the first year you want to be treated as a qualifying FHL year the property must have reached the occupancy threshold, either on its own or because of an averaging election.  If, in the following year the property still doesn’t meet the occupancy threshold then, providing an election has been made for the earlier year, that year can also be treated as a qualifying FHL year.

Example

If the property still doesn’t meet the required letting level in the fourth year (after two years being treated as qualifying) then that property is no longer a FHL property.

If a period of grace election is made then it is necessary to show that there was a genuine intention to let the property for that year. The first year that you can make an election for is 2011–12.  You must therefore have met the old 70 day occupancy threshold in 2010–11 and have failed to meet that threshold in 2011–12 (the new 105 day threshold doesn’t come in until 2012–13). 

For more information about the new proposed FHL rules and how these will affect you, please contact our Senior Private Client Tax Manager Paula Jeffs on 01727 838 255.

The Government has recently set out the final timetable for auto-enrolment. Staging dates have changed only for employers with less than 250 employees, the phasing period for contributions will now last until 2018 and this will affect businesses of all sizes. Please click on the following link to view our latest auto-enrolment update.

For more information on auto-enrolment and how this will affect you, call your client partner on 01727 838 255.

HMRC did not disappoint! Well over 1,000 pages of draft legislation and explanatory notes hit the HMRC website. Much of this is very heavy technical material but from within it we have distilled the key issues which update the items covered in the earlier summary.

Please click on the following link to view our Autumn Statement 2011 update.

Research and Development (R&D) is a very valuable relief which many companies are entitled to – even those who may not think they are undertaking ‘classic’ R&D activities. It can double the tax relief you obtain on qualifying expenditure and ease cash flow by reducing your corporation tax liability and in certain circumstances, may even result in a cash repayment!

For small & medium size companies the benefits are going to increase from 1 April 2012 – certain restrictions are planned to be removed and the enhanced deduction increases from an additional 100% to 125% of qualifying expenditure.  

Cash Benefits of an R&D Claim

A unique feature of the scheme for small & medium size companies is the ability to obtain a cash refund from HMRC where the company has made a loss that it cannot otherwise utilise and it has paid PAYE/NIC equal to the refund. The company would surrender the lower of its total loss or the R&D claim and they would receive a refund of 12.5% of this amount. (The percentage may vary depending on the period).

Will R&D work qualify for the relief?

This is generally the most difficult question to resolve. The company needs to identify each of its R&D projects and ensure that they will comply with the HM Revenue & Customs definition of R&D. Essentially, the aim of the R&D project must be to directly contribute to an advance in scientific or technical knowledge through the resolution of scientific or technological uncertainty. Note that a project does not have to result in a successful outcome to qualify as R&D. Even if the uncertainty surrounding the problem is not resolved, the project can still qualify as R&D. There should be sufficient other documentation for each project to ensure that it is relevant.

Even if a product is currently on sale, R&D allowances may still be relevant if there is an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes.

If an advance in science or technology has already been made by another company, but details are not available, then work to achieve such an advance can still be treated as R&D.

Scientific or technological planning activities qualify as R&D. This can include defining scientific or technological objectives, assessing feasibility, identifying uncertainties, estimating development time, high-level outlining of the scientific or technical work as well as the detailed planning and management of the work. Additionally time spent by R&D staff on recruitment, line-management and budget management which are R&D related may be included, however the cost of other departments to support them in these activities cannot (eg HR and Finance).

Design objectives which require the resolution of scientific or technological uncertainty within a project will be R&D.

Work to create a desired cosmetic or aesthetic effect through the application of science or technology can require a scientific or technological advance and would therefore be R&D.

What expenditure qualifies?

There are certain categories in which expediture qualifies, please click on the following link to find out about what categories qualify.

To find out if you are able to make an R&D claim call our corporate tax team on 01727 838 255

We have highlighted the main areas for consideration when looking to extract cash from your business:

Salary, bonus or dividend – As a shareholder, choosing the most tax efficient manner to extract your hard earned money will be dependent upon a number of different factors. These include the income tax and corporation tax rates that both you the individual and your company are subject to. Other factors to consider, including the share structure and any associated companies, will also affect the amount of corporation tax due to HM Revenue & Customs.

Dividends have long been considered the most efficient way of extracting funds from your company however, each individual’s personal circumstances are different. Therefore it is essential to carefully consider, on an annual basis, all factors unique to each individual’s personal circumstance.

If you would like to discuss the options available to you, please do contact a member of our expert Tax Team and they will help you to make the right choices for you.

Salary sacrifice and benefits in kind – A salary sacrifice is a legal agreement reached between an employee and their employer under which the employee agrees to a reduction in their salary. In return, their employer agrees to provide a specific benefit. Where the benefit is either entirely tax-free or has a limited exemption this can result in savings of tax and National Insurance for both employer and employee.

A salary sacrifice is most commonly used for benefits such as pension contributions, childcare vouchers, mobile telephones and bicycles. They must normally last for at least one year in order to obtain the favourable tax treatment. For further advice please contact our Senior Employment Tax Manager Peter Davies.

Company cars – when is it efficient

This is an area of taxation where a little careful planning can go a very long way. Put simply, there is no definitive answer as to whether it is more cash and tax efficient to have a company car or own your vehicle privately; to pay for private fuel or have it supplied by your employer.

The right answer will depend very much on the specific facts. These include the type and age of the car, overall mileage, the business versus private mileage, the running costs of the car and the ability or willingness of the employee to maintain business records. Not considering these factors can leave both the company and the individually considerably and often unnecessarily out of pocket.

We can assist by providing financial modelling of the most tax-efficient treatment for all your vehicles together with comparisons between the various options available. To find out more please contact our Senior Employment Tax Manager Peter Davies.

Capital gains tax and options to use CGT rates  

In certain restricted circumstances, provided that certain conditions are met, it may be possible to use CGT rates and Entrepreneurs Relief to reduce the tax liability on extracted wealth from your company from 25% dividend rates to 10% CGT rates. These opportunities usually arise as part of an exit strategy. For example, where an individual is looking to retire from the business and the company is buying an individual’s shares. Another example is where owner managers are looking to reduce their shareholding and day to day time in the business with a view to bring on a new management team.

If you would like to discuss these opportunities please contact our expert in the field, Tax Partner Anne-Maree Dunn.  

To discuss more about extracting cash from your business, please contact your usual Partner on 01727 838 255.