VAT is the most complicated tax that business owners have to deal with. To start with, a business must register for VAT if it has a taxable turnover that reaches £85,000.

If you take over a trade this will also count towards the threshold. The limit is on a rolling 12-month period, not an accounting period, it is possible to exceed the threshold between accounting periods. Using Xero can help identify any potential breaches.

A business may also register voluntarily before the threshold. This is particularly useful where a business is starting out and the VAT-able costs are high. These early refunds can help develop the business further without the need for extra cash injections. Up to 1/6th of expenses can be recovered.

Our team can help you navigate the VAT issue, please book a call with one of our expert team here.

Example:

Competition Net VAT Gross
Sales £20,000 £4,000 £24,000
Purchases (£10,000) (£2,000) (£12,000)
VAT return £2,000

In the example above the total amount payable to HMRC is £2,000 because you have charged your customers £4,000 in value added on services, but this has cost you £2,000 in VAT on delivering those same services. The value added is said to be £2,000, hence Value Added Tax (VAT)

In the example above the total amount payable to HMRC is £2,000 because you have charged your customers £4,000 in value added on services, but this has cost you £2,000 in VAT on delivering those same services. The value added is said to be £2,000, hence Value Added Tax (VAT)

Flat Rate VAT scheme
Businesses with a turnover of below £150,000 excluding VAT need only apply!
You must leave the scheme if:

  • you’re no longer eligible to be in it
  • on the anniversary of joining, your turnover in the last 12 months was more than £230,000 (including VAT) – or you expect it to be in the next 12 months
  • you expect your total income in the next 30 days alone to be more than £230,000 (including VAT)

The best scheme to be on if you have reduced VAT-able expenses, you invoice your customers 20% VAT but only pay a fixed rate to HMRC.
To benefit from a reduced flat rate you must have expenses / goods costing:

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

If you don’t qualify it means you pay a higher rate of 16.5%. You can calculate if you need to pay the higher rate and work out which goods count as costs.

The amount of the fixed rate depends on your type of business. A full list can be found here: https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay

For example an accountants flat rate is 14.5%
An invoice to a client is for £100 + VAT of £20 = £120
VAT payable to HMRC would be £17.40, being 14.5% of £120
That’s a saving of £2.60 per £100

It’s not all good news though, as you cannot reclaim any VAT on purchases, so that meeting room hire at £100 + VAT £20 = £120 cannot be recovered.
If your VAT on purchases outweighs the benefit you should switch to the Standard VAT scheme.

At Craig Callum Associates Ltd we help guide you whether the flat rate scheme is right for you, the best time to switch and how to get the most from VAT in your business. Contact one of our expert team here.

What support is available to businesses from the government?

The Coronavirus (COVID-19) pandemic has had an enormous impact on everybody in the UK. Whether you’re self-employed, a business owner, employee, contractor, or freelancer, you’ll be facing a whole range of personal and business challenges.
The government has announced unprecedented support to protect the UK economy as well as everyone’s health. We’ve put together this COVID-19 Hub to try to make it easier to navigate the constantly changing support available.

The situation is evolving rapidly and it can be hard to keep on top of everything, so we’ve arranged the support available into three main areas. The government have also published an online Coronavirus Business Support Finder tool.

Self-employed

The Chancellor announced a range of measures to support the self-employed.

Applications for the first two grants are now closed but if you’re eligible you can apply for the third grant, covering the period 1st November 2020 to 31st January 2021, of up to £7,500 or 80% of average monthly trading profits.

There are plans for a fourth and final grant covering February 2021 to April 2021 with the amount yet to be announced by the government.

Other, previously announced support includes deferral of Income Tax payments on account and VAT, grants for businesses that have business premises, changes in the eligibility criteria for Universal Credit and Employment Support Allowance, Coronavirus Bounce Back Loans as well as support for renters and delays to mortgage payments.

Business

There are a range of measures intended to support businesses, including the Coronavirus Job Retention Scheme also known as the furlough scheme.

The CJRS has changed a number of times. The latest version of the scheme is currently open for claim periods from 1st November 2020, it will remain open for claims until at least 30th April 2020. Employees can be furloughed full-time or part-time with employers paying for any hours worked.

Employers are able to make claims under the new rules if they furlough eligible employees after 1st November, whether they were previously furloughed or not. This is a major change to the CJRS.

If employees were on an employer’s payroll on 23rd September 2020 (i.e. notified to HMRC on an RTI submission on or before 23 September) and were made redundant or stopped working for them afterwards, they can also qualify for the extended CJRS scheme from 1st November 2020 if they are re-employed. Neither the employer nor the employee needs to have previously used the CJRS.

The scheme is also available for limited company directors who pay themselves a regular salary through payroll.

The government has also introduced other measures including: Deferring VAT payments due between 20th March and 30th June 2020, a new round of grants based on Business Rates relief, a three-month extension on filing Company Accounts, Business Interruption Loans, and Bounce Back Loans, as well as grant funding for many smaller businesses.

Employee

The government has published advice on staying at home and which workers should continue to travel for ‘essential’ roles. Enhanced Statutory Sick Pay has been announced for those who are ill or self-isolating. It’s hoped that the recently extended Coronavirus Job Retention Scheme – CJRS will mean that job losses are minimised as the government will cover a percentage of employees wages to preserve jobs.

The CJRS scheme is also available to limited company directors who are paid a PAYE salary through their limited company, though it does not cover any income from dividends. There has also been support announced for homeowners and renters.

The government is introducing changes to IR35 legislation in April 2021. What do contractors need to do to ensure their businesses are ready for the new rules?

What is IR35?

The IR35 legislation was introduced in 2000 to ensure that contractors working through an ‘intermediary’ pay broadly the same income tax and National Insurance Contributions (NIC) as an equivalent employee. HMRC believes that many contractors are in fact ‘disguised employees’ and are incorrectly describing their employment status as ‘self-employed’.

If the following apply to a contractor’s assignment, then IR35 legislation must be considered:

  • The contractor personally performs the work for a client
  • An ‘intermediary’ is used, such as a personal service company or recruitment agency, which means the worker is not contracted directly to the client
  • If the worker was contracted directly to the client, they would be regarded as an employee of the client for tax purposes.

Before April 2017, workers operating via a PSC were responsible for determining whether an assignment was inside or outside IR35 and for paying any employment taxes due. However, in 2017 these rules changed in the public sector, which meant organisations such as government departments, local authorities and NHS Hospitals, (and not PSCs) became responsible for assessing the employment status of their contractors and paying any employment taxes due.

What is changing from April 2021?

On 6th April 2021, the changes made in 2017 to the public sector will be extended to apply to the private sector. From that date, medium and large-sized private sector businesses will be responsible for determining the employment status of a contractor’s assignment, deducting any employment taxes due and paying any tax owed to HMRC.

Small business exemption to the new rules

There’s an exemption for end-clients who are ‘small businesses’ (as defined by the Companies Act 2006) which means meeting two or more of the following criteria:

  • Annual turnover is under £10.2 million
  • Balance sheet total is under £5.1 million
  • Under 50 employees.

Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of an assignment remains with the PSC and the changes do not apply.

Status Determination Statements (SDS)

One important requirement being brought in by the new rules is the end-client must confirm the IR35 status of an assignment by providing a ‘Status Determination Statement’ (SDS) to the PSC worker. If an agency is involved in the labour supply chain, the agency must also receive a copy of the relevant SDS.

Overseas clients

The new rules apply to all UK tax resident workers. If the end-client is an overseas business, it’s likely the new rules will still apply if the PSC (or worker) is based in the UK. This is a complex area and advice always should be taken from an accountant or tax expert based on an individual’s circumstances.

Why do contractors want to be outside of IR35?

There are a number of reasons why contractors wish to remain outside IR35. They may believe they’re truly self-employed and don’t want to receive the same benefits as an employee (such as paid annual leave and employer contributions to a pension). Individuals also seek the freedom to work with multiple clients and do not want to be tied to a single end-client for regular work.

Many self-employed people operate their own limited companies and enjoy the flexibility and lower taxes involved in taking income from their companies by paying a combination of a tax-efficient salary and dividends. Limited companies can also claim various expenses to reduce the amount of Corporation Tax payable and tax relief may be available when an individual decides to close their limited company.

In addition, being inside IR35 for an assignment may result in a reduction in take-home pay for many contractors if they cannot negotiate an increase in their day rate to accommodate the higher employment taxes paid when an assignment is inside IR35.

Key factors affecting your IR35 status

The best way to evidence your assignment is outside IR35 is to ensure your contract, and the working practices you follow with your clients, show you are an independent contractor and not a ‘disguised employee’. HMRC will ‘look beyond’ your contract towards your working practices if they query the IR35 status of an assignment.

There are three key principles that will determine your assignment’s IR35 status, as shown below.

Supervision, Direction and Control

This principle considers the degree of supervision, direction, and control your client has over what, how, when, and where you complete your day-to-day work. If your client tells you how to work, the hours you must work or where to perform your work then it’s likely your assignment is inside IR35.

You can evidence an assignment is outside of IR35 by agreeing on a clear set project deliverables with your client for the duration of the assignment. Do not take on other work for the client or let yourself be moved onto different projects that are out of the scope of the original contract terms. You should also ensure your contract clearly states the services your company (and not you personally) will provide.

Substitution

The second principle examines whether you are required to carry out the work yourself and whether you can send a substitute to perform your work.

Your contract with the client should be in the name of your limited company and should contain a clause allowing your company to send a substitute. However, the right to substitution must be genuine, and must not be so restrictive that your client could reject any substitute you provide. The client may, of course, satisfy themselves that any substitute is suitably skilled and qualified and passes any security clearance requirements they might have.

Mutuality of obligation

Finally, this third principle looks at whether your client is obliged to offer you work and whether you are obliged to accept any work offered to you.

Mutuality of obligation is often difficult to evidence one way or another. All assignments will have a minimum expectation of work to be completed and when it is due to be paid for by the client. A self-employed worker will not expect to be offered work beyond the contracted assignment and would not (contractually) be required to accept any work offered. You should not have a long notice period or any termination clause in your contract. Such clauses may indicate an obligation on the part of the client to provide you with work, and your part, to deliver that work.

Other factors affecting your IR35 status

There are a range of other indicators about the IR35 status of an assignment. The list is not exhaustive and constantly changes based on IR35 cases examined by HMRC. If you are self-employed you shouldn’t:

  • Be identified personally on the client’s organisation chart or internal list of employees
  • Wear an ID card with your name and the client’s name on it. You may have a pass or ID card but these will identify you as an independent contractor and your company, they won’t suggest you are an employee of your client
  • Need to attend meetings about HR matters internal to your client
  • Be required to take part in any appraisal or performance management process for you personally or any of your client’s employees.

You shouldn’t be entitled to time off for sickness absence or holidays or to share options or bonuses which are the same as your client’s employees. Your contract may, of course, have an incentive for effective completion, but that must be distinguishable from any arrangements your client has for direct employees.

Action you should take to prepare for the new IR35 rules

As a result of the impending changes, many medium or large-sized businesses have issued statements saying they will no longer work with PSCs. Others have said all assignments are ‘inside IR35’ and have directed workers towards Umbrella companies or even offered PAYE positions. It’s essential you understand the approach taken by your clients towards IR35. You may be able to work on a combination of assignments, with some being inside and some being outside IR35.

Your clients may accept evidence from you about your self-employed status and to inform the SDS they produce. Some good indicators you are not an employee include:

  • Having your company own website and business e-mail address
  • Holding appropriate small business insurance
  • Being VAT registered
  • Having business cards, marketing brochures, flyers, etc. for your business
  • Using your own equipment on projects
  • Having your own business address/office (even if it’s at your home).

You should also ensure your marketing materials promote your business and not you personally. It may be helpful if the name of your limited company does not include your own name, i.e. ‘Business solutions limited’ would be better rather than ‘Joe Bloggs solutions limited’.

It may also be helpful to make sure that any online CVs or personal profiles on social media represent you correctly as a contractor, with your own business rather than as an individual, which means:

  • Talk about your ‘professional experience’
  • Mention your status and company name and business e-mail address
  • Describe how you can deliver benefits to a client’s businesses
  • Have ‘recommendations’ about your business rather than personal ‘references’.

What if your client determines you are inside IR35?

When your client pays you after 6th April 2021, and you are inside IR35, the client will deduct the necessary income tax and NIC and pay this over to HMRC. Your Take-Home Pay will be reduced unless you have negotiated a higher contract rate.

It’s possible to continue working through a limited company even if your assignments are deemed to be inside IR35. It’s important to remember that IR35 status is based on each individual assignment. So, if you’re working on a number of assignments, some ‘inside IR35’ and some ‘outside IR35’, you need to make sure you have the right accounting processes in place.

What if you don’t agree with your client’s IR35 assessment?

It’s good practice to be involved in your client’s status determination process, but there is no statutory right for a contractor to be consulted.

Your client must establish a formal process to consider any disagreements. The client will receive your appeal and decide whether to uphold it or not. The whole process is ‘client-led’. Disputes must be responded to in writing by your client within 45 days of receiving notice that you disagree with an assessment.

Carrying out your own status assessment would be a good starting point before considering an appeal. The initial result is free and you can upgrade to a detailed report with an analysis of your areas of risk for IR35. The report should be useful if you need to dispute the status assessment made by your client.

What if your client ignores IR35 or won’t apply the rules?

If your client doesn’t apply the rules correctly, or fails to take reasonable care in preparing an SDS or doesn’t prepare one at all, HMRC might decide the assignment is inside IR35. This means the client must pay the relevant amount of income tax and NIC. Your client may also risk financial penalties or even the possibility of a criminal conviction for their failure to apply the rules correctly.

Don’t just take our word for it, look at what our customers are saying…  

Highly recommended. Excellent service!

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Craig Callum are not just an accountancy firm, they work with you to drive your business forward. They are always there to offer advice and solutions.

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Fantastic service with a wealth of knowledge. Craig Callum Associates have saved me a significant sum of money by rectifying a previous accountancy error. Highly recommended.

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