‘Contractors better off’

Drop down the tax bands, though, to arrive at a sum that more contractors are likely to make, such as £42,475, and there is actually some good news.

By our initial calculations, contractors earning this threshold and even slightly above it could be £126 better off overall in 2012/13 and a further £15 better off in 2013/14 (once we have factored in the NI thresholds which we’re currently working on).

Pensioners hit

However aside from those earning over £150,000, the main ‘losers’ in yesterday’s Budget were 4.41m pensioners who will definitely be worse off.

These pensioners will feel the burden for years to come through the freezing of age-related allowances (ARAs). The ARA will be frozen at 2012/13 levels until they align with the personal allowance. This will generate £1.25bn for the government, which has now removed a previously promised allowance that will have a huge impact on many of today’s already hard-up retirees.

‘Well-off’ child benefit claimants hit

Under Budget 2012, child benefit will be phased out for households where someone has an income in excess of £50,000 a year and withdrawn entirely for households with an earner above £60,000.

For households where someone has an income between £50,000 and £60,000 child benefit will fall by 1% for every £100 earned over £50,000. Although this has removed the ‘cliff edge’ effect, discrepancies will arise when a household with two people earning £50,000 are better off than a household with a single earner of £100,000. As a result of these changed many middle income families, especially those with only one earner in the household, will now find themselves worse off.

Corporation tax rate

Much better news was reserved for UK corporations in a Budget hailed by its architect as “unashamedly” pro-business. In fact, from next month, the headline rate of corporation tax will be reduced by a full percentage more than was previously planned to 24%.

There will be further reductions to 23% in April 2013 and 22% in April 2014. This is not just accelerating a pre-planned decrease, but a further drop in the main corporation tax rate. We welcome these changes, believing they can only be good for business and encourage growth among Britain’s entrepreneurs.

Individual tax rates

In terms of the liabilities facing individuals, from April 2013, the personal allowance will rise by £1,100 taking it to £9,205 in total, the largest single increase for 30 years. For those in the higher rate tax brackets, the 50p tax rate will be scrapped in April 2013 and high earners will pay 45% tax on earnings above £150,000.

Overall, individuals earning below £100,000 will be better off in 2012-13 and in 2013-14 by approximately £200 each year. Despite the axing of the 50p tax rate, by 2013-14 those earning £150,000 will still find themselves taxed £380 more than today.

Tax & NI payable on earnings (Source: HMRC)

Low Tax Group’s calculations based on an individual aged under 65 paying employee NICs (not contracted out). Gross income refers to pay only (i.e. all gross income is subject to income tax and Class 1 NICs). Income tax calculations assume no other allowances or deductions. NICs calculations are on a weekly basis and then annualised. All figures are round to the nearest £10.

Contractors can bypass child benefit cuts

Contractors may be able to ensure that they don’t lose child allowance by paying a salary to their partner in return for being company secretary or doing the books. Contractors should consider holding income generating deposit accounts and investments in a partner’s name if they earn less than they do to make use of partner’s thresholds.

Overall, the news that child benefit will now only be restricted above £50,000 and won’t suddenly disappear because it will be withdrawn in stages up to the level of £60,000 a year is very welcome.

It would have been fairer to set the threshold higher still, but base the trigger point on total household income instead of the earnings of a single taxpayer yet, incredibly, HMRC systems are not sufficiently refined to marry up two sets of earnings in this way. Perhaps they need to hire some good IT contractors to sort this particular problem out!

Top rate contractors kept from windfall

It was disappointing that Mr Osborne used the small print of Budget 2012 to ensure the headline-grabbing hike in personal allowances won’t apply in full to higher rate taxpayers. Instead they will have the upper thresholds reduced so that they only benefit from a quarter of the increase.

‘As you were’ for on-contract pension savers

A huge sigh of relief came yesterday when personal pensions planning was left untouched by the chancellor. The abolition of higher rate tax relief, a further reduction in the cap on annual contributions and a threat to the tax free cash lump sum on retirement had all been talked about as possible targets. But the status quo is intact. Contractors can still continue to use their pension to great effect as a legitimate way to reduce the tax take on their contracts.

Property market glut

Government measures to kick-start house building under Budget 2012 still don’t address the fundamental issue in the market. In my talks at a high level with lenders, it is clear that banks and building societies are keen to lend because, post-credit crunch, there is less competition so they can ‘price for risk’ again and achieve decent margins.

However they are increasingly worried about the FSA, which is keen to be seen to be ‘flexing its muscles.’ So rather than attract unwanted attention from the regulator, the lenders demand ever-higher deposits; curtail interest only borrowing and restrict income multiples, all in the name of so-called ‘responsible lending.’ This effectively robs aspirational would-be homeowners of the opportunities that the market offered only four or five years ago.

Higher rates for company car owners

Employers should assess their company car strategy following the announcement in the Budget today.

From April 2013, the capital allowance relief on cars will be adjusted. This will mean that cars with a CO2 emission above 130 grams (currently 160grams) will get a 15% restriction which is likely to increase the cost of leasing cars.

For low emission cars, which attract 100% capital allowances, this relief will be extended for a further 2 years, but it will not be available to leasing companies. In addition, the taxable benefit on cars will increase by 1% from April 2014, which will add cost to employees with company cars emitting more than 75grams of CO2. There is also an increase announced in fuel scale charge from April 2012, with an increase in the car fuel benefit charge multiplier rising from £18,800 to £20,200.

Clearly, all these announcements call for employers to review their company car policy and create huge uncertainty over the future of company cars and the leasing industry as a whole. Employees most likely to be affected, are those who have taken low emission cars via a salary sacrifice car scheme and are, in addition to the taxable benefit, taking a salary reduction to cover the employer’s cost of leasing the car.

CSC is understood to have threatened legal action against HMG and is now thought to have agreed to continue with up to £900m of NHS work in return for dropping any legal action.

It will run computer systems for the NHS across the north, midlands and east of England under the deal which is expected to be agreed in the coming days.

The NHS database attracted widespread criticism following a series of damning official reports. Last year, the House of Commons Public Accounts committee described the programme as “unworkable”.

Last May, the National Audit Office criticised the project for being poor value for money, patchy and long overdue.

When he announced the “acceleration” of the dismantling of the system last year, the Health Secretary said: “Labour’s IT programme let down the NHS and wasted taxpayers’ money by imposing a top-down IT system on the local NHS, which didn’t fit their needs.

“We will be moving to an innovative new system driven by local decision-making. This is the only way to make sure we get value for money from IT systems that better meet the needs of a modernised NHS.”

CSC had previously largely written off the value of the NHS contract in its accounts, leading to a reduction in the company’s share price. Last May, David Cameron said the Government would not sign any new contracts with the firm until a review of its work on the NHS IT programme was complete.

However, the firm announced yesterday that it had entered into a non-binding letter of intent with the British Government. The letter “defines a way forward for CSC to deliver healthcare solutions and services.”

A recent consultation document on company law reforms said the UK will look to implement the changes “as soon as possible.”

When the EU directive is enacted in the UK, companies will be allowed to apply the simplified reporting regime if they stay below two of the following thresholds:

    balance sheet total of £292,000
    Net turnover of £584,000; and
    average of 10 employees during the financial year.

Our research suggests that those companies remaining below two of the three thresholds look likely to be required to produce:

    A simplified, cash-based trading statement to replace the profit and loss account;
    A statement of position; and
    A simplified annual return.

It is estimated that around 1.5m micro-enterprises will be able to take advantage of the changes, many of whom will be contractors or freelancers.

Reducing the regulatory burden on micro businesses is something we strongly support, especially as we hope common sense will prevail and these statements will be aligned to the tax rules already in place.

However it is necessary to temper this optimism. While those who are filing accounts on their own (without the assistance of an accountant) may find some benefit in the new process; such advantages are likely to be cancelled out by HMRC’s requirement for iXBRL coding.

With this in mind, the benefit of the new ‘simplified’ process is at best neutralised by HMRC’s increasing requirements and, many are saying, is almost irrelevant when considering the increased work iXBRL has generated. To a growing number of advisers, iXBRL is just another way of HMRC making freelance contractors use accountancy firms, as then tax inspectors will only receive ‘easy to read accounts’. In a way it is making us do HMRC’s job for them, while it is also taking the gloss off the promised simplification.

He was speaking in the wake of a Guardian story revealing that 25 senior members of staff at the Department of Health have had their salaries paid to limited companies. The practice is also understood to occur in primary care trusts.

The department has apologised after documents sent to the Guardian showed that contrary to assurances given to parliament, more than 25 senior staff employed by the department are paid salaries direct to limited companies, with the likely effect of reducing their tax bills. In some cases, the documents show the named individuals are being paid more than £250,000 a year, as well as additional expenses. The payments amount to almost £4.2m in one year.

Full article here

If you get it wrong

For most contractors, when considering the risks of a tax investigation there are four main tax areas that could be targeted by the HMRC; (a) PAYE, (b) VAT, (c) Company tax, (d) Personal tax. A compliance check may involve one, or several of these types of taxes.  If you are selected for a compliance visit, and are found to have made errors in your tax return(s) the HMRC will apply a tax-geared penalty where your actions have caused a loss of tax. The tax-geared penalty will be somewhere between 0% to 100% depending on whether the error was innocent (0%) to deliberately concealed (100%). A fixed sum penalty may also apply for various reasons. Further, if the HMRC believe the error was due to not taking ‘reasonable care’ they can go back and review your previous 6 years of returns (and if they think you have deliberately evaded tax, they can go back 20 years).

Avoiding a visit in the first place

While a minority of compliance visits are purely random, most are undertaken because the HMRC think there will be something to find. Greater analysis is now possible due to electronic filing of most tax returns, and because annual accounts are also filed in iXBRL. This format means accounts can be easily processed by the HMRC looking for unusual or irregular transactions. Here are my top tips to ensure you fly low across the HMRC radar;

1. File your returns on time. It might sound simple, but its very important. Ensure you know your VAT quarterly filing deadlines, your company tax filing deadline, the PAYE filing deadline (19^th May each year), and get your personal tax return filed each year by 31 January.
2. Pay your tax on time. Just as important as item (1) above, make sure the HMRC receive their money on time. Direct debits work great with VAT, and remember tax bills can be paid by credit card. Regardless of improvements in transaction speed between banks, always allow 3 working days for your tax payment to reach the HMRC;
3. Keep impeccable records – Excellent record keeping is imperative. It shows you are professional in your approach to running your business, and will help answer any queries the HMRC may have regarding any tax or accounting transactions. This includes keeping copies (hard copies or electronic are acceptable) of all your invoices, all your receipts, all your business bank account statements, and any other relevant company documents like share certificates, directors loan agreements, and dividend vouchers.
4. Take the time to review your accounts. Avoid the temptation to simply rubber stamp what your accountant has prepared for you. If a figure looks unusual contact your accountant and ask them to explain. At the end of the day it’s your company, your tax, and your responsibility. You should explain any large variations in the notes on the return.
5. Get specialist advice from the outset. I would never suggest a contractor meet the HMRC one-to-one – always have your accountant on hand, or if the compliance visit turns into an IR35 investigation, engage the services of an IR35 specialist;
6. Don’t cover your tracks. Never conceal anything from the HMRC, and don’t think you can tell half-truths.

Summary

In most cases if your business is selected for a compliance visit it will be because the HMRC suspect you may be doing things incorrectly. If you file your returns on time, pay your tax on time, and explain any large variations to current year figures compared to previous year figures, then you will be sending a strong message that you know what you are doing, that you understand your responsibilities, and that you are running your business in a compliant fashion.

More Information

• The new single compliance process
• HMRC Compliance Check factsheets

The mistake is believed to be thanks to tax officials neglecting to account for a four–fold rise in the number of second payments on account, normally payable by July 31st.

Although it said the majority went out on time, HMR&C conceded that some statements will be issued later – “soon,” though not before the relevant SA reminder letters, which some taxpayers are also yet to receive.

“No one needs to worry about this,” HMRC said of the delays online, before pointing out that taxpayers can check the amount they owe on its website, and settle up electronically.

Still addressing affected taxpayers, the Revenue said they would be afforded 30 days from receipt of their statement to pay, during which time no interest will follow.

It is a general principle of English law is that there is freedom of contract. There are some exceptions to that, particularly where one party is a consumer, but that is the general principle so whatever the parties agree, the court, if called upon to do so, will enforce it by requiring the party in breach to pay compensation to the other party. So it is important to get a solicitor or barrister to draft the contract – if you are in the fortunate position of being able to put forward your own contract wording – or to check the contract if, as often happens, the starting point is a draft contract put forward by the other side.

The form of the contract

The basic deal between the parties – how much one party will pay and what the other party will do in return – is negotiated in principle between the parties. After that, with legal advice, the parties negotiate the detailed terms which make up the contract, before it is signed by both parties and becomes legally binding.

Certain contracts, such as contracts for the sale of land, have to be in writing, signed by the parties, but it is possible (though often not desirable) for most other contracts, including commercial contracts, to be made by word of mouth or by email. If the intention is that there is to be a formal detailed contract signed by the parties, is important when negotiating the basic deal to make clear that it is not intended to be binding unless and until a formal contract is signed. Otherwise you may end up bound by an oral contract which does not contain all the detailed terms you  intended.

Names of Parties

The contract will commence by naming the parties: “This Agreement is made between…”. Particularly where the parties are limited companies, it is important to use the exactly correct legal name of each party. 

Recitals

Most commercial contracts do not have recitals but they can sometimes be useful to set out the circumstances in which the contract comes to be entered into, because, in case of dispute about the correct interpretation of the contract, its stated commercial context can help to clarify any possible ambiguity. If there is a recital it conventionally commences with the words Whereas…. and ends when the operative part of the agreement starts  with the words: It is Agreed as follows:

Definitions

The first numbered clause of a contract usually sets out definitions of key terms. For example the word Work might be defined as “the work to be carried out by the Contractor as set out in  detail in Schedule 1”. The word Work having been defined, it can then be used whenever required later in the contract and its specific meaning will be clear.

Main Commercial Obligations    

In the interests of clarity it is usual to then set out the main commercial obligations – what one party will do and what the other will pay – before setting out all the detailed clauses dealing with, for example,  what happens in exceptional circumstances.

Inability to meet main obligations

One of the main risks when entering into a contract for the provision of services is the possibility of the party providing the services being in breach of contract because of circumstances outside that party’s control such as accident or illness. One approach is specifically to provide that an inability to carry out work due certain specified causes is not a breach of contract. If this approach is taken it is usual to provide that, although there is no breach of contract, the other party can, if delay continues for a specified period, and if that party so wishes, terminate the contract. Unless the price is purely an hourly rate, it will also be necessary to provide for how the price is to be recalculated if the contract terminates early without breach.

An alternative approach is to make clear that the contractor is not obliged to provide the services only using specified individuals and can use any suitable individual. Such substitution clauses allowwork to continue even if a particular person is unwell.

Reducing Risk

A substitution clause reduces the risk of being in breach due to illness of the key individual but it creates another risk in that finding a suitable replacement at short notice may not be easy.

The usual approach when negotiating commercial contracts is for each party to seek to reduce its own risk and deflect risk onto the opposite party, the negotiations normally resulting in some compromise sharing risk. In some cases, however, the shadow of the notorious IR35 legislation causes negotiations to take a different path with the contractor almost welcoming risk as a means of demonstrating that the “hypothetical contract” would not be one of employment.  The possible damage to profits from IR35 is a legitimate concern but at the same time there is a balance to be struck: it may be unwise to seek a small reduction in the risk of IR35 applying at the cost of accepting a large contractual risk.

Limiting liability

Accepting some risk, whilst agreeing an upper limit on liability, is often the goal. Generally the parties can make a binding agreement to limit liability to each other though it is important that the precise terms are correctly stated. Often a party wishes to also limit the liability of its directors/employees to the other party for tortious acts. Since 1999 this has been possible under s.1(6) of the Contracts (Rights of Third Parties) Act 1999.

Ensuring that the contract is not construed as a contract of employment

Where the contractor is an individual person, contracts for services traditionally take some care, not only to state that they are contracts for services (and not contracts of service) but also – because the “label” may not be determinative in law – to set out “for the avoidance of doubt” specific terms consistent with a contract for services and inconsistent with a contract of service.  Where the contract is between two limited companies, the view was sometimes taken in the past that there was less need to do this because a contract between two companies cannot be a contract of service as only a human being can be an employee. However the introduction of the IR35 legislation, with the possibility of a company-to-company contract being used to build a hypothetical company-to-individual contract for tax purposes, means that the same approach should be considered in company-to-company contracts. This is not a matter of shouting from the rooftops that the contract is not one of employment but rather of carefully going through the relevant terms one by one and ensuring that they unequivocally follow the parties intention that this should be a business-to-business relationship. Since the contracting company itself is likely to have a relationship with the individual it uses to carry out the work which comes within worker protection legislation, such as legislation providing for minimum entitlement to paid holiday leave, some care is needed in distinguishing between the position vis-a-vis its own worker and the position vis-a-vis charging the other contracting party.

Entire Agreement Clause

Most formal written contracts have a clause stating that the agreement is the entire agreement between the parties. The effect of this is to make it difficult for either party to subsequently claim that there are additional terms agreed between the parties which are not in the written agreement. Thus is makes for certainty. Of course if such a clause is used it is important that all the agreed terms are contained in the agreement.

Restrictive Covenants

Where the contract is between a contractor and an agency, the agency may seek to include restrictive covenants in the agreement, to prevent the contractor seeking or accepting direct work from the end client for a period of time after the contract ends. The starting position of English law is that it is in favour of the free market and against covenants which limit competition. However the law will uphold some covenants if they are not too widely drawn. From the contractor’s point of view if a covenant is so widely drawn as to be certain to be invalid, and it cannot be removed entirely, it can sometimes be tactically wise to leave it in its invalid wide form, rather than seek to cut it down in which case it may become valid. As with all contractual terms the advice of a solicitor or barrister should be sought. Where the Conduct of Employment Agencies and Employment Businesses Regulations 2003 apply, without a valid opt-out, regulation 6 prevents most restrictive covenants being enforced.

Law and Jurisdiction

If the contracting parties are both English companies, the work is to be carried out in England, and there is no connection with anywhere other than England, the contract will undoubtedly be interpreted in accordance with English law and any dispute subject to the jurisdiction of the courts of England and Wales. However for the avoidance of any possible doubt, and in case the circumstances are not so straightforward, it is usual to have a clause expressly saying this.

Arbitration

It is possible to have a clause providing that any disputes will be referred to arbitration. Many people think that arbitration is an inexpensive and informal means of resolving disputes, compared to the courts, but often the reverse is the case. Arbitration is in fact often more expensive both because the arbitrator himself has to be paid as well as solicitors and barristers (whereas in the courts only solicitors and barristers and the court fee  have to be paid: the judge is paid for by the taxpayer)  and because the courts have a tiered system which limits costs for smaller value claims. Arbitration however does have the feature that it is confidential whereas court hearings are open to the public.