If you need advice on tax-related issues we recommend you speak to an accountant. There is advice available on the internet but it is always best to speak to an expert. Below are the bare bones of what you need to know.
Limited Company Tax
When considering limited company tax, we recommend you to think of the company as one entity and you an employee and director of the company, as a separate entity. It makes it a rather easier to understand.
All companies must pay corporations tax on their annual profits. Corporation Tax rates vary between 0% and 30%. Corporation tax is currently set for 20% (2015/16 tax year) for small businesses generate profit up to £300,000 annually. Each year you or your accountant should complete your Corporation Tax return (Form CT600) and submit it online.
If you fall inside the IR35, then you pay a ‘deemed salary’ of the company’s annual profits.
You must register for VAT if your annual turnover is £83,000 or more (2016/17 tax year). VAT is 20%. You charge this on your invoices and then give the money to the HM Revenue and Customs. VAT can be applied in 2 ways as the standard VAT scheme, or the Flat Rate scheme. The decision should be based on the expenses and if you don’t expect to reclaim large amounts of expenses, you are better off by registering to Flat Rate Scheme.
Contractors usually register for the Flat Rate VAT Scheme. This is where you charge 20% but then only repay at a lower rate. IT contractors usually use 14.5% (plus you get a first years discount of 1% so will just pay back at 13.5%), with this being paid on the total gross invoice value and you keeping the difference. Unfortunately, this is seen as the profit which means it is taxed along with your corporation tax.
Make sure you or your accountant submit your VAT return to the HMRC each quarter, together with an electronic payment.
Income Tax/ Self-Assessment
You need to make sure you are registered for self-assessment (self-assessment tax return (SATR) whether you are a company director or an umbrella contractor who has additional income to declare. You (not your account or umbrella company) have the ultimate responsibility of returning your tax return each year. HMRC will normally send a letter reminding your tax return and don’t assume that if you don’t get a reminder from HMRC that you are out of the scope.
The complexity comes when you are getting paid twice by your company: i.e. owners dividends and employee’s salary. Income tax is taken across the ‘Fiscal tax year’: 6th April to 5th April. It relates to your personal worldwide income. Any income taken as salary beyond your personal tax allowance (£10,000) is taxed at 20% and then after the higher rate threshold (£41,865) will be taxed at 40% and then 45% after £150,000.
If you are earning more than £100,000 annually, your personal allowance will be reduced at a rate of £1 for every £2 of income until it is reduced to zero. By the time you hit £120,000 your personal allowance will have disappeared, this effectively means that the £20,000 after £100k has been taxed at 60%.
Special note for dividends - Up to the higher rate threshold (£41,865), the dividends aren’t subject to PAYE Income Tax or National Insurance. Anything taken above this will be subject to 25% higher rate dividend tax on the net dividend drawn. You must submit your tax return by 31st January each year together with the payment. You may also have to make two payments on account (31st Jan and 31st July) towards the current year’s tax liability.
Employee's National Insurance Contribution
Firstly, there is no NI on dividends. You will just pay NI on salary which is 12% on anything you earn above £153 per week until you reach £805 per week and then you will pay just 2%. PAYE Income tax/NI, along with VAT, payable quarterly and your accountant will be able to advise you of these crucial dates.
Employer's National Insurance Contributions
Your Company will pay 13.8% on any salary you pay for yourself over the threshold of £153 per week. If you work through an umbrella company you will have to pay employee NI of 12% and employers NI of 13.8%, this means you have to pay 25.8% on your entire pay less expenses and threshold allowances.
Dividends are taxed at three rates during the 2015/16 tax year – 10%, 32.5% and 37.5% depending on the dividend you draw from the business.
IR35 is a tax law operational since 1999 and being reformed in April 2017. IR35 was introduced to tackle the problem of so-called ‘disguised employment’ (where companies use contractors through an agency, rather than a direct employment contract, so they become disguised employees.
IR35 presses a legitimate one person SME into an employee paying 25% more extra tax. There are numerous online independent IR35 tests to validate that you contract falls within IR35or not.
If you are a contractor you need to make sure that you are IR35 compliant. All of the information below can also be found on the UK Government Website along with links to get extra help and advice if you need to navigate these complex regulations. HMRC recently launched a Public Tool to determine the IR35 status of public sector contractors. In essence, there are few fundamental principles HMRC uses to determine the IR35 Status.
Ability to provide a substitute when required.
Who determine/ decide your day to day tasks.
When and where the services are provided from.
Is your business solely depending on one source of income?
Who provided the materials and machinery to perform your agreed tasks.
True nature of your business.
Who’s affected by the IR35
The IR35 is also known as ‘Intermediaries legislation’. It is a set of rules that affects your tax and National Insurance if you are contracted to work for a client through an intermediary. You may need to follow IR35 if you work for a client through an intermediary.
The intermediary can be,
Your own limited company.
A service or personal service company.
If the IR35 applies, then the intermediary has to operate PAYE and National Insurance contributions on any salary or wages it pays to you during the tax year. The rules are designed to make sure that the right rate of tax and National Insurance is paid for you.
The IR35 may also apply if you are working through an intermediary and you or your intermediary, or client are abroad work in the construction industry are an office-holder work with your partner or spouse are working, through an intermediary, for a charitable organisation.
The IR35 doesn’t apply if you work for a client through a Managed Service Company (MSC) or agency, for example, an employment agency. There are more detailed information about the IR35 conditions of liability in the Employment Status manual. Find out what you need to do if the IR35 applies to you and the penalties for not following IR35 rules.
The intermediary is always responsible for complying with IR35 legislation when it applies. If you are a director of your limited company or a member of your partnership, you must make sure all relevant legislation are followed and take responsibility for deciding if it applies for each of your engagements or not.
Working out the worker/ client relationship
When you are deciding if the IR35 is applying to a contract it is important to establish what is the underlying relationship (your employment status) between you (the worker) and the client for each contract or engagement. is
There is usually a contract between your intermediary and the client, either directly or through another party such as a staffing agency, a recruitment agency or an employment business.
You have to use the facts of each contract or engagement to decide if the IR35 applies, and not any label, description, or job title.
Work out your employment status for each contract by considering what that relationship would be if there wasn’t an intermediary involved.
Do this for each individual contract, and make sure you are considering them if they change. Remember that there can be more than one agency in the chain to supply your services to a client.
Find out what you need to do if you think that the IR35 applies to you if you use your own intermediary to provide a service. If you are engaged by a client through your own intermediary, it is the client’s responsibility to consider your employment status and make sure they meet their own tax and National Insurance liabilities.
If all of the followings apply then you need to follow IR35 legislation,
You work for a client as a self-employed contractor, sole trader, freelancer, or as a consultant.
You could be considered an employee if the intermediary didn’t exist.
You pay yourself through your own limited company or partnership (sometimes it is called an ‘intermediary’ or ‘personal service company’) or you have a material interest in that company.
There are some circumstances where the client may be responsible for operating your PAYE, such as if,
The contractor working arrangement shows that you are engaged directly by the client as an office-holder or employee, then the client will be responsible for operating PAYE for you.
A client contracts directly with you - the client will always be responsible for operating PAYE for you, even if the payment for your services is made to your intermediary.
There may be penalties if the client doesn’t operate PAYE where it is needed.
Using an agency or MSC to provide a service to a client
There’s different legislation to follow if you provide services to an ‘employer’ or end client through a third-party agency or MSC.
You have to comply with agency legislation rather than the IR35 if you provide services to an ‘employer’ through a third party agency but technically, you are not a direct employee of either.
If the agency is based outside the UK the client may be liable to operate PAYE and make the appropriate deduction, returns and payments of the tax and the National Insurance contributions instead.
You need to follow MSC legislation rather than IR35 if you provide your services to end clients through an intermediary company which is controlled and run by a third party service provider.
If you work in the construction industry
Both the IR35 legislation and the Construction Industry Scheme (CIS) can apply if you are a subcontractor working in the construction industry through a limited company or partnership.
For example, this can happen if you’d be considered as an employee of the client and if there wasn’t a limited company or partnership acting as an intermediary.
To stop tax and National Insurance contributions being paid twice on the same earnings within the CIS and IR35 schemes special rules have to be applied.
IR35 if you, the intermediary, or client is abroad
The limited company or partnership is incorporated or resident abroad under IR35, when a worker living in the UK does work for a client in the UK, the intermediary is treated as having a place of business in the UK, even if it is incorporated or resident outside the UK.
If an offshore intermediary fails to deduct and account for tax and the National Insurance due under the IR35 legislation, liability to pay this can be transferred to the,
Action to recover employer’s National Insurance contributions not paid by an offshore intermediary could also include action against any of its assets located in the UK.
HMRC has powers to obtain details of payments to offshore intermediaries from the records of clients and agencies.
If the client is non-UK resident
Deciding if IR35 applies depends on,
The tax residence status of the worker and client.
Where the duties of the contract are carried out.
If you are a foreign national who provides your services through an intermediary you may be affected by the IR35 legislation.
How to ensure that IR35 does not apply to you
Make sure you understand the IR35 legislation and apply the best practice to ensure it does not affect to you. You should not worry if you are a genuine contractor with a true nature of a business. Below are some the best practices,
Make sure you familiarise with the IR35 legislation.
Stop acting like an employee and make sure you run as a director managing and controlling your own limited company.
Review your business by a Tax Specialist.
Do you have the authority to determine day to day tasks of your work? Client can give the ultimate overall direction but you should have the day to day control of the tasks
Ability to provide a substitute when required. Make sure you have a contract clause about using somebody other than you to perform the task your company has been contracted to do. Can you or your agency send someone else to perform your work other than you?
Take arrangements to have your office space.
When and where the services are provided from.
Make sure you are responsible for the materials and machinery to perform your agreed tasks but your client (PCs, laptops, servers, printers etc)
Make sure you perform a true business owning a clear business Structure (website, business accounts, insurances, training etc).
Is your business solely depending on one source of income? Make sure your revenue is generated from more than one source in a given 12 month period.
Consider joining The Association of Independent Professionals and the Self Employed (IPSE) who offer IR35 contract templates and support in the event of an investigation.
Limited or Umbrella? Making the Right Choice.
Setting up and running a limited company, where you become a director and shareholder, is the most tax efficient way of working and has a number of advantages.
There are a number of advantages to setting up a limited company. For a start, you control your own finances. You can claim back a wider range of expenses, ie accountancy fees, equipment and software costs. The flat rate scheme allows you keep some of the VAT you receive, which is an important consideration. It is not difficult to run your own company as long as you have the services of a good accountant.
On the other hand, there are contractors who are put off by doing the necessary paperwork, beyond producing weekly or monthly timesheets. Others only intend to contract for short periods between longer phases of permanent employment.
This leads some contractors to use the services of umbrella companies. In this instance, they enter into a contract with the umbrella company whereby they become PAYE employees again. The umbrella company then deals with their customers and takes responsibility for invoicing, paperwork, the collection of money due and payments to each contractor, and it means less tax and National Insurance deductions of course.
The simplicity of this arrangement is offset by the fact that it offers little benefit for individual contractors in terms of reducing tax liabilities, and may actually increase their costs as service fees levied by umbrella companies may reach as much as 9% of the value of the contract. It is also worth noting that many umbrella companies insist on either a minimum level of charging or a minimum time for which you must pay for their services. By comparison, accountancy fees for running a limited company are around £1,200 per year, irrespective of turnover.
Before you turn to an umbrella company there are questions you should consider.
What exactly will they charge?
Is there a minimum charge?
What tax or accountancy qualifications does their form possess?
Forming a limited company is the best way to maximise your income, allowing you to take home more than you can when dealing with an umbrella company.
Why an Accountant?
We have discussed on this site the complexities of tax status here and abroad, becoming a limited company as opposed to being part of a PAYE umbrella company and other various potholes in the road to success that must be considered and manoeuvred around when becoming a contractor.
In any form of business, it is always important that accurate and detailed records are kept. This is especially true when having any dealings with the government – be it here in the UK or abroad. You could always keep track of your own finances by doing your own books but, if you are trading as a limited company, you will need the help of an accountant.
If you approach an accountant from the planning stages of your business, rather than only when you need help filling in your tax return, you will receive valuable advice on tax intricacies, trading and preparing to trade that can only be beneficial in the long run.
Options of Correcting
Onshore PAYE contractor umbrella companies who help you with your admin burden.
Off-shore tax avoidance schemes or "tax strategies", that offer 90% of your contract value (Options are limited to these types of schemes are HMRC are shutting down these)
Use an umbrella company. (Risk of IR35).
Contractor Loan Scheme (HMRC still can challenge the scheme and ensure users pay the correct amount of tax)
Corporation tax – payable in 9 months and 1 day after the year end.
VAT – payable quarterly.
PAYE/NI – payable quarterly.
Personal tax (self-assessment) – payable every 31st January, with potential payments on account in January and July (sorry even this sounds complicated).
Contract outside EU - Things to consider
Working overseas for a few months won’t affect your tax status, but, if you are moving abroad permanently, or for more than three years, you will not be a UK resident from the date of departure. Which means you will no longer have to pay UK tax.
If you are planning to return often then you could still be considered a resident unless your visits are less than 183 days in any tax year or an average of 91 days per tax year over a period of four years. HMRC will also take into account a number of other factors, ie whether you are a member of any UK clubs or societies, if you own a house in the UK or if you are the director of your limited company
When it comes to the 91-day residency test, qualitative evidence will also be looked at such as whether or not you have bought property abroad. If this is seen as insufficient to suggest you are no longer a UK resident, you will be seen as a resident for tax purposes for the first three years, after which the situation will be reviewed.
If you are only a UK resident for part of a tax year it is possible your tax may be adjusted, which means you only pay on income and capital gains for the part of the year that you are living in the UK. This is known as ‘split-year treatment’. This is especially relevant if you end up having to pay tax in the country you are currently living in. All nations around the world have their own laws on residency and tax, so it is always best to take advice from a specialist in such matters from that country.
Also, remember that if you are working outside the EU you will face visa issues. This comes into play when you stay longer than 90 days, this is the usual length of a tourist visa.
It is important to remember that if you are in another country fulfilling a contract then you will be able to claim expenses from your limited company. This does not apply if you are there on holiday and decide to do some work.
Moving abroad to work
Thanks to generous Corporation Tax rates in the UK, so it may be better to keep your company registered in the UK even if you are moving abroad. There are a few things to think about though. Tax laws around the world are different and some might not actually let you contract through your company. If you are in a country that does allow it, make sure you use the services of a tax expert from the country you are working in.
Other considerations include things like still being liable for corporation tax in the UK if you have a UK company. You will still be paying National Insurance contributions to remain eligible for a UK state pension. Some countries have strict rules on who can You may not be allowed by local law to open a bank account in the local currency, so how will your clients be paying you? What is the exchange rate between the UK and the country you will be working in?
To avoid many of these complications you could use your UK limited company but also find a locally managed umbrella company. An umbrella will help you arrange your visa, work out details of sponsorship, and determine the most favourable tax package. Unfortunately, this means that you essentially become a permanent employee of the umbrella company, doing so you will lose the tax benefits of being self-employed.
If you are considering working abroad for a prolonged period, you might consider setting up another limited company in your new country of residence. You will, of course, need the services of a local accountant to sort out your taxes and you will need to handle the administration for registering and maintaining the company.
Contracting in the EU – Things to Consider
The EU has been a popular choice for contractors looking to work abroad for many years. It should be remembered, though, on 23rd June 2016 the UK voted to leave the union. It will take two years to finally negotiate Britain’s exit from the complicated rules and regulations involved in membership once Article 50 is officially triggered and nobody yet knows what regulations will be in place once separation is complete. How this will affect contractors looking to work abroad, in terms of tax and work visas, is anybody’s guess. In the meantime here are some important points to note for the most popular choices courtesy of the blog crunch.co.uk:
Working in Belgium
Tax rates in Belgium are high and you will have to pay 50% on any earnings over €37,330. To set up a limited company in Belgium you must be a resident there and have between €6,000 and €12,000 in a Belgian bank. You must also have a university degree. For the self-employed, a social security tax is levied at a rate of 22% on net income up to €55,405.04 and at a rate of 14.16% on income between €55,405.04 and €81,649.49. Income in excess of €81,649.49 is not subject to social security contributions and the annual maximum contribution for self-employment activities is €16,100.56.
Working in Switzerland
Switzerland is a popular choice for contractors due to its notoriously generous tax system. However, Switzerland to not being in the EU, it can be harder to find work Despite not being part of the EU, Switzerland is still subject to the Schengen Treaty, which means as a UK citizen you will be able to travel there without a visa. You will, however, be required to apply for a work permit. EU citizens may reside in Switzerland for three months whilst looking for work Switzerland is unusual because it is split into very small and independent areas known as cantons. This makes the tax system very complex, as each canton has its own laws and rates. Therefore, consulting a Swiss tax expert is therefore highly recommended
Working in Germany
You will need to obtain a work permit, which generally requires sponsorship from a German company. This can make it difficult for contractors, as many employers do not want to sponsor temporary workers, and you will need sponsorship from every new employer Laws on self-employment in Germany are very strict and make the IR35 look like child’s play. Make sure you know the rules inside-out, or you could be subject to heavy fines If you thought the paperwork involved with being self-employed in the UK was a chore, then Germany is something else. Unless you are highly fluent in German, don’t even attempt to do it yourself
Working in France
As one of the champions of the EU, France is an extremely easy place for UK contractors to obtain work, and you will most likely not need any kind of permit Renowned for their love of leisure, most companies enforce a strict 35-hour working week. There is even a ban on out of office emails and phone calls It should be noted, however, that working in France and putting the money through a UK limited company is not compliant with French tax laws and you will be required to pay tax in France as well as in the UK
Working in the Netherlands
In order to obtain a work permit, it is a requirement to register for health insurance. This will come out of your pay as a percentage (around 17%) and will cost a maximum of €33,000 a year. One of the most attractive aspects of working in the Netherlands is an allowance in place for skilled workers coming to work in the Netherlands which allows you to take 30% of your gross salary tax-free. In order to obtain the 30% ruling, you must have the relevant experience in your field. A higher education qualification or professional certificates will also help your eligibility. The application for the 30% ruling should be made by your employer within four months after the start of employment and must be applied for with each subsequent employer.