Chancellor Alistair Darling delivered his Pre-Budget Report 2009.
Thankfully,Professional Contractors and Freelancers with limited companies can breathe a sigh of relief! Past mutterings such as the income shifting legislation are still just that, there are no major changes to report.A consultation will get underway in the New Year between HMRC and the Department for Business to look at National Minimum Wage Regulations to tackle the problemof arrangement known as “Travel Schemes”. These schemes enable travel expenses to be paid under the travel rules to a temporary workplace and are free of Tax and NICS.
Where a worker is paid at or near to NMW rates, the workers entitlements to earnings related to social security benefits are impacted as earnings are reduced by the amount of travel expenses.
This consultation may have a future impact on agencies supplying workers on low wages.The highlight for Personal and Small Business implications are as follows:
· Small Business Corporation Tax Rate remains at 21%
· New increased rates for the VAT Flat Rate Scheme from 1st January 2010
· VAT Standard Rate returns to 17.5% on 1st January 2010
· VAT Cross-Border changes effective 1st January 2010
· The introduction of a 10% rate of Corporation Tax for company income derived from UK patents
· All National Insurance Contribution raise an additional 0.5% on the proposed 0.5% totalling a 1% increase effective April 2011. This will not apply to incomes of £20,000 and below.
· Stamp duty holiday expires 31st December 2009
· Working Tax Credits increase April 2010
· Child Benefit and Disability Benefit increase by 1.5% April 2010
· State Pension increase of 2.5% April 2010
· Introduction of 50p monthly tax on telephone landlines to finance broadband super infrastructure
· The £43,000 threshold for lower rate tax frozen for 2010
· Inheritance Tax threshold frozen at £325,000
· Fuel duty rates increase by 1p April 2010
· No increase in alcohol and tobacco duty
· And for Bingo players a 2% Tax cut!
Please download our Pre Budget Report 2009 for all the detail.
In an attempt to arrest the price slide in the housing market theChancellor announced measures on 2 September 2008 to ease the impact ofStamp Duty Land Tax. The details are:
. From 3 September 2008 stamp duty will not be charged onresidential house purchases of £175,000 or less. Prior to thisannouncement residential property sales up to £125,000 were exempt.
. If the sale proceeds exceed £175,000 the starting rate of stampduty land tax, 1%, will apply to the total consideration, not theexcess over £175,000.
The higher rates of stamp duty are unchanged. 3% for sales over £250,000 and 4% for sales over £500,000.
The special deal for no stamp duty comes to an end on 31st December2009, so make sure that you complete any purchases on property up to£175,000 in value before than date.
We publish regularly comments in forums, particularly on
ContractorUK and
Freelance Supermarket where Professional Contractors and Freelancers are aksing advice as to whether they should use an offshore tax scheme.
Contractors normally point out the attraction of "no IR35 worries" or even "85% return", and also all the "guarrantees" offerred by the various scheme providers.
On the whole we reply with the same advice:-
1. Whether the scheme works or not , the scheme provider will always take a fee.
2. If the scheme does not work, its your tax bill, and its you left dealing with the tax man.
3. In an HMRC investigation into the scheme, "the provider said" is no defence.
4. A Scheme Provider will always tell you not to worry and it they have taken good advice.
5. It is always your personal responsibility to pay all taxes and declare all income correctly.
So we always conclude - why run the risk of using one of these schemes ?
Accountants can also fall into the trap of promoting these schemes, recently there were several promoting a generally available scheme on the Contractor UK forums, but they went quickly quiet.
This week Mark Lee from Tax Advice Network wrote a great piece on this very subject. Mark illustrates exactly what can happen to accountants who promote such scehemes, and the impact this has on their clients.
If you are ever tempted by the "85% no worries" story , or have colleagues who tell you how great it is to be in one of these schemes, perhaps use this article as a good reminder why its much safe to steer clear.
The Government are always pushing for us to become 'greener' and have put some incentives in place to entice us to conform.
There are a number of formal "tax-free bike schemes" which have beendeveloped in response to the Government's "Green Transport Plan".
So if you fancy becoming 'greener' and fitter consider ditching the car and pedalling to work.
Basically your employer buys a bike and any equipment relating to itand hires it to you until you have paid back its full cost, usuallyover a year.
The tax break is facilitated because you pay for the bike byagreeing to reduce your monthly/weekly salary, before tax and NIC isdeducted under the 'salary sacrifice scheme'. Paying in this way youcan meet your repayments out of your pre-tax rather than post taxedincome.
This can translate to almost a 50% cash discount on the price of anew bike. Higher rate tax payers will benefit more from the scheme.
The scheme applies to employees only, with a contract of employment and earnings that are at or above the national minumum wage level once the salary sacrifice has been applied. Please see further details on the 'salary sacrifice scheme' on the HMRC website.
Professional Contractors and Freelancers have a few different waysthey can trade. This normally boils down to a decision between LimitedCompany and Umbrella Company, but the whole list of options availableis:-
- PAYE with an agency/direct client
- Sole Trader
- Limited Company
- Umbrella Company
- Partnership and Limited Liability Partnership
Now you can download a spreadsheet which does all the calculationsfor you ( and you do not need to give us any of your details todownload it !)
Our spreadsheet comparision tool will show you how much your netincome will be with each of these options, all you have to do is entera few basic details; please see our guidance and our quick video guide here .
Please remember it is not just a financial decision, consider if you really are committed to running your own business before you take the plunge.
HMRC publish advisory fuel ratesupdated biannually for changes in fuel costs. These rates are used forthe employer to reclaim VAT on mileage expenses paid to the employee.
The VAT reclaimed is the VAT on the advisory mileage rates which are:-
For periods where the VAT rate is 17.5% the VAT Fraction applied tothe rates above is 7/47 and for periods where the VAT rate is 15% thenthe VAT fraction applied is 3/23.
EG. Vehicle of 1399cc Petrol, the advisory fuel rate is 10p and the VAT at 3/23 is 1.304 p per mile.
From 1st July 2009 the new rates will be:-
| Engine size | Petrol | Diesel | LPG |
|---|
| 1400cc or less | 10p | 10p | 7p |
| 1401cc to 2000cc | 12p | 10p | 8p |
| Over 2000cc | 18p | 13p | 12p |
For further information on mileage payments please see our guidance - Mileage Payments.
Yesterday was Budget 2009 and for Professional Contractors and Freelancers there was good news in the form of no news.
So there was no mention of Umbrella Companies ( and StaffingCompanies ) use of Overarching Contracts of Employment, TemporaryWorkplace Rules or ESC 16.
Income Shifting was mentioned and although nothing has changed, it appears the issue has not been forgotten.
A.69 At the 2008 Pre-Budget Report action on income shifting was deferred and,
consequently, no legislation will be brought forward in the Finance Bill. The Government will
keep this issue under review. (w)
There were a few announcements of more ways HMRC will tackle taxavoidance, so anyone using any of the "offshore schemes" would beadvised to think again about running their own business in the UK as alegitimate Limited Company.
One thing that did catch my eye on page 111 of the Full Budget Report is certainly something that we will be keeping an eye on:-
5.114 The Government remains committed to addressing false self-employment in the construction industry. The Government will consult with a view to future legislation to ensure that construction workers and those they work for are taxed appropriately. The Government will work with the construction industry to ensure that any legislation is effectively targeted and the industry retains a flexible labour supply.
It was good to see that Professional Contractors and Freelancers inthe knowledge based sector were not targeted this year, but itcertainly seems that HMRC have their eyes out on other sectors and itsworth keeping an eye on what action HMRC take on this.
So here is a round up of the main points in yesterday's budget:-
Budget Report April 2009
PERSONAL TAX CHANGES
Personal Allowances 2009-10
These remain as announced in the Pre-Budget report November 2008 and are:
From the 6 April 2009 the income tax personal and age related allowances are increased to:
Age under 65 - £6,475
Age 65 to 74 - £9,490
Age 75 and over - £9,640
The income limit for aged related allowances (over 65's) is increased to £22,900.
Blind person's allowance increased to £1,890.
Personal Allowances 2010-11
The basic personal allowance will be reduced for taxpayers who earn more than £100,000 per annum.
Where an individual's income is above £100,000 the basic personalallowance will be reduced by £1 for every £2 their income exceeds£100,000.
Income Tax Rates 2009-10
Starting savings rate 10%* - £0 to £2,440
Basic rate 20% - £0 to £37,400
Higher rate 40% - Over £37,400
* There is a 10p starting rate for savings only. If an individual’s nonsavings taxable income exceeds the starting rate limit, the 10pstarting rate for savings will not be available for savings income.
New 50% Income Tax Rates from 2010-11
From 6 April 2010 a new income tax rate of 50% will be applied to taxable income in excess of £150,000.
Effective Tax Rates On Dividends from 6th April 2009
For Gross Dividends earned in the 20% tax bracket the effective rateis 10% ( nor futher tax to pay as the 10% tax credit is stillapplicable)
For Gross Dividends earned in the 40% tax bracket the effective rate is 32.5% of the Gross Dividend.
Effective Tax Rates On Dividends from 6th April 2010
For Gross Dividends earned in the new 50% tax bracket the effective rate is 42.5% of the Gross Dividend.
Capital Gains Tax 2009-10
The annual exempt amount for individuals is £10,100 (and for most trustees £5,050)
Inheritance Tax 2009-10
The individual IHT allowance is increased to £325,000.
Pensioners Taxback Campaign
From autumn 2009 HM Revenue & Customs will be targeting pensionerswho receive the Pension Credit to help them reclaim tax they may havepaid in error from bank or building society interest they have received.
ISA's
2009-10
The ISA limit is increased to £10,200 (up to £5,100 can be saved in cash) restricted to people aged 50 or over.
2010-11
The limit is increased to the same level for all age groups.
Pensions - limiting tax relief at higher rates
From 6 April 2011 the Government intends to restrict tax relief forindividuals with an annual income of £150,000 or more. Relief will bewithdrawn gradually so that taxpayers earning over £180,000 willeffectively achieve a 20% tax deduction, the same as a basic rate taxpayer.
From today, 22 April 2009, if the following conditions also apply:
1. Your income is over £150,000
2. You make additional contributions in excess of your existing ongoing contributions, and
3. Your total pension contributions in the year exceed £20,000 (including employer's contributions)
Then any higher rate tax advantage, on additional contributionsabove the £20,000 limit, will be subject to a special annual allowancetax charge that will recover tax relief given at above basic rate.
Excise Duty increases
Alcohol Duty
From midnight 22 April alcohol duty will rise by 2%, equivalent to:
1p on a pint of beer
13p on a 75cl bottle of spirits
4p on a 75cl bottle of wine
Tobacco Duty
After 6pm 22 April tobacco duty will rise by 2%, which will increase the cost of a packet of 20 cigarettes by 7p.
Fuel Increases
Duty increases will add 2 pence per litre to the cost of unleaded petrol and diesel from 1 September 2009.
Stamp Duty Land Tax
The present exemption from SDLT of residential properties up to£175,000 is to be extended to 31 December 2009. After this date theSDLT threshold will revert to £125,000 (£150,000 in disadvantagedareas).
BUSINESS TAX CHANGES
Furnished Holiday Lettings
Two radical changes to the taxation of income and gains arising on theletting of furnished holiday lets property have been published today.
1. Properties owned by UK tax payers situated in the EuropeanEconomic Area can now qualify. Previously only properties situated inthe UK qualified; and
2. From 6 April 2010 the Furnished Holiday Lettings rules are to be repealed!
Both of the changes have come about due to compliance issues with EEA legislation.
All client's who own and let properties within the EEA, includingthe UK, may benefit from a strategic review of their present propertytax planning due to these changes. It is vital that the narrow windowof opportunity occasioned by this change be fully exploited, and weonly have until 5 April 2010 to consider capital gains tax and incometax planning opportunities.
Business Payment Support Service (BPSS)
If you call the BPSS to ask for time to pay tax you may owe, pleasetake account of the following extension of the circumstances HMRC willnow consider.
If you are likely to make a trading loss in the current year, whenthese losses are determined you can generally claim for the loss to becarried back and set off against your previous year's profits.Obviously you would need to wait until the current years accounts arecompleted and a formal loss relief claim is made.
In recognition of this right to set off losses, BPSS advisers hownow been instructed to take reasonable estimates of these losses intoaccount when they agree to deferred payment of your previous year's tax.
If you need help estimating your tax losses in the current year we can help.
Further extension of carry back of loss relief
This further extension to loss relief's already available will enableboth incorporated and unincorporated to carry back current losses, thatwere previously restricted to set off against the preceding year'sprofits only, to the previous 3 years profits. The following bulletpoints summarise the main points:
- The relief is now available for two years. For limited companies,trading losses in an accounting period ending between 24 November 2008to 23 November 2010. For unincorporated business losses agreed for atrading period that forms the basis period for 2008-09 and 2009-10.
- HMRC will make repayments occasioned by claims for the new relief on or after Budget Day 2009.
- The amount of the loss that can be carried back one year is stillunlimited. Any carry back to the earlier two years will be limited to£50,000. The £50,000 limit is an annual limit.
- Losses will be applied to the latest of the three years first.
- As this is an extension to existing loss relief legislation, the current relief's are still available.
Corporation Tax Rates
The small companies rate from 1 April 2009 is unchanged at 21 %.
Temporary First Year Capital Allowances
Since 1 April 2008 (corporation tax) and 6 April 2008 (income tax)businesses that invest up to £50,000 on certain plant and equipment canwrite off the entire amount against their taxable profits.
Any excess expenditure, over the £50,000 limit, is added to the poolof unrelieved expenditure and has qualified for a writing downallowance of 20%.
Today the Chancellor has announced that to encourage investment hewill create a temporary first year allowance of 40% which will beapplied to the excess over the £50,000 limit.
The new 40% allowance will be available for just one year, from 1April 2009 (corporation tax) and 6 April 2009 (income tax) and willapply to assets which would be added to the main capital allowancespool except cars and assets used for leasing.
VAT Changes
As expected the standard rate of VAT will be increased to 17.5% on 1 January 2010.
With effect from 1st May 2009, the thresholds for registration andderegistration are increased to £68,000 and £66,000 respectively.
By Phil Richards
As a director of a Limited Company your most effective remuneration strategy will be a balance of salary and dividends.
The Blevins Franks Remuneration Strategy Tool enables a LimitedCompany Director to compare 2008/09 net income and taxation with2009/10, and also provdes a tool so that you can caluclate how much topay in dividends and how much in salary in order to maximise taxeffectiveness for your personal situation.
This easy to use spreadsheet tool is now available from our website when you login or register.
Just go to Business Library and the Tools and Documents Folder.
The Blevins Franks new spreadsheet comparison tool is now available for the 2009/10 tax year.
Professional Contractors and Freelancers already using either anUmbrella Company or running their own business as a Limited Company canuse this comparison spreadsheet to forecast their net income for the2009/10 tax year.
Using the spreadsheet is easy, you just enter the contract rate andthe forecasted travel and subsistence expenses and the comparisonspreadsheet calculates net income.
If you want to be a bit more advanced you can enter a companypension contribution, enter a second employee and their salary, andhave a second shareholder.
The compariosn results in a table that compares Limited CompanyInside IR35, Limited Company Outside IR35, Partnership Inside IR35,Partnership outside IR35, Umbrella Company, Paye with the Agency, andsole trader status.
It is a very comprehensive tool and available free when you login or register at on our website. Just go to Business Library and then the Tools and Documents folder.
You could also use the tool with the 2008/09 spreadsheet to see what effect the new tax allowances have on your income.
The 2008/9 tax year closes on 5th April 2009, and so now is the time
to start thinking of 2008/9 year end tax planning opportunities that
are available to you.
The following year end tax planning tips could help you save a
considerable amount of money, so it could be worth taking the time to
review your position.
Dividends
Check whether it's a good idea to raise a dividend before the end of
the tax year so that you utilise the full amount of the lower tax
threshold for all shareholders. Gross earnings above £40,835 will be
taxed at the Higher Rate.
This may also apply to your spouse / partner if they are share holders of the company.
Income Shifting Legislation
This proposed legislation has for the moment been shelved by the
government and so there are no changes to the existing legislation.
Personal Income
It is now the time to think about splitting Investment Income
(included letting income) with your spouse/civil partner, to make the
most use of both your 20% tax brackets.
If one spouse's earned income is only up to £6,035, it may be worth
having all investment income in their name to make use of the 10% tax
bracket available only for savings income.
You may be able to reduce your payments on account in 2009 if you
believe your Gross Income is going to be reduced in 2009-10 compared to
2008-09.
Directors Loan Accounts
Ensure that any Directors Loan Account balances over £5,000 are
cleared by way of dividend, salary payments or expenses reimbursement
by 31st March so that your accounts reflect a directors loan account
balance of less than £5,000 at the 2008/9 year end which will remove
any benefit in kind charge on an overdrawn loan account.
This will also avoid the section 419 tax which may be payable by the
company and is only refunded once the loan account has been repaid.
Sole Traders or Partners in a Partnership or LLP
Due to the current economic downturn you may recently have
experienced a drop in your profitability, indeed you may be trading at
a loss.
If this is the case please read the check list that follows. We can
only help you to achieve the very best tax result if we are made aware,
in good time, of your financial situation. Read the check list and call
for a pre year end review.
If you are trading at a loss you may be eligible to carry up to
£50,000 of the loss back for an extended period under new rules
applying to the current year only. To maximise the losses claimed it
may be beneficial to change your accounting date to 31 March 2009, if
it is not already this date.
Timing of capital purchases or disposals, either before or after the
end of the tax year, can be organised to maximise claims under the new
Annual Investment Allowance of £50,000.
If your profits have decreased this year, to 31 March 2009, compared
to the previous year (31 March 2008), this may reduce the tax payments
on account you offer in January and July 2009.
If you are forced to layoff staff and have some flexibility when you
make redundancy payments, is this best charged in this current year, or
the decision deferred to the next trading year?
What is your bad debt situation. Have you made adequate provision in
your accounts. Has any VAT on bad debts over 6 months old been claimed
back? Please note that if you use Cash Accounting for VAT you only pay
VAT added to your invoices when you are paid - so you don't need to
worry about claiming for bad debts.
If you have made a loss in this current year does this affect the
tax relief you may have received on pension contributions? Will the tax
have to be repaid or contributions recovered?
Pensions
Consider maximising contributions for the year. The amount that can
be contributed to a pension scheme is based on the salary earnings in a
fiscal tax year and once that year has ended any allowance that is not
used is lost. If you wish to utilise the allowances for the 2008/09
fiscal year you should take action quickly.
Non-tax payers can also contribute up to £3,600 per annum with no earnings. It might
be worth considering contributing this amount into your child’s pension or grandchild's pension scheme as well.
Consider whether you want to increase your personal pension contributions for the tax year 2009-10.
If you have Company Pension Contributions, these would save you 21%
in Corporation Tax up to for the 2008/9 tax year, but will save you 22%
in Corporation Tax for the 2009/10 tax year.
This means that £100 into a company pension would actually cost £79 in the 2008/9 tax year, and £78 in the 2009-10 tax year.
Investments
Maximising ISAs for younger savers: 16 and 17 year olds can invest
up to £3,600 for the tax year 2008-09 in a cash deposit within an ISA.
Maximising ISAs for other savers: the maximum allowed for the tax year 2008-09 is £7,200.
These limits cannot be carried forward so it is important to use the full allowance before the end of the tax year.
Utilisation of Child Trust Funds: all UK residents born after 31st
August 2002 are eligible for this fund and they (or their relatives)
may contribute up to £1,200 per annum with the income and gains arising
being tax free. The Treasury give you £250 when you open a trust fund
and £250 when your child is seven years old.
Enterprise Investment Schemes
You may want to consider investing in companies that qualify under
an EIS scheme, or a specialised EIS fund which invests in a portfolio
of companies.
A minimum of £500 needs to be invested in any one company in any tax
year, with a maximum of £500,000 available to be given relief at 20%.
Therefore an investment of £100,000 can secure a tax relief claim of
£20,000.
If you are making an investment before 6th October then half the
investment up to a maximum of £50,000 can be carried back to a previous
year. Invest before 5th April to get 20% tax relief on your investment
this tax year.
Specialist advice should be taken before making an investment of this kind.
Venture Capital Trusts
You can invest up to £200,000 in a VCT which attracts tax relief at 30%. Dividends from a VCT are not subject to income tax.
Specialist advice should be taken before making an investment of this kind.
Capital Gains Tax
Each taxpayer has a tax free capital gains allowance of £9,600 for
the 2008/9 tax year. This tax allowance cannot be carried forward so if
you may want to consider the timing of the sale of assets in order to
utilise this tax free allowance.
A self employed trading loss for the tax year 2008-09 can also be
set against Capital Gains Tax on a capital gain realised in 2008-09.
If you have capital gains in a share portfolio you could consider
arranging the sale of the shares and then the transfer of the proceeds
into an ISA.
You will need to take specialist advice if you are considering selling or buying shares.
IR35
Now is the time to ensure that if IR35 applies to your Limited
Company and the contract that you perform, you ensure that you have had
your contracts reviewed and you have made a decision for each contract
how the income should be accounted for. If any income from any
contracts fall within IR35 you will need to prepare for the calculation
of the Deemed Payment effective at the end of the fiscal year, and to
plan your actions accordingly.
There are four ways of reducing your IR35 Deemed Payment:-
1.Ensure that you maximise the legitimate expenses you have claimed in the year against the contract.
2. Ensure that you have claimed capital allowances on any equipment purchased to complete the contract.
3. Consider making company pension contributions.
4. Ensure that you have claimed all your professional subscriptions required to complete the contract.
Capital Assets
A company has an Annual Investment Allowance of £50,000 on which
capital allowances at 100% are allowed. If your company financial year
end is March 2009 or before you need to consider whether to invest in
assets in this tax year or next.
Inheritance Tax
A programme of lifetime gifts is still an effective way of reducing
your estates exposure to Inheritance Tax (IHT) . You may want to
consider making lifetime gifts in the 2008-09 tax year.
You could consider investing in shares in companies listed on the
Alternative Investment Market as many of these shares qualify as assets
under Business Property Relief which means these assets will not suffer
IHT. This is a very specialist area and advice from an Independent
Financial Adviser should be taken.
Charity Donations
Higher rate taxpayers get tax relief on donations to registered
charities, for example £300 relief on £1,200 of donations may make
quite a bit of difference to your generosity. The donations need to be
made before 5th April 2009 to count in the 2008-09 tax year.
It is important to sign the gift aid form which the charity should
provide you with. Please ask for it if they do not provide you with it.
Gifts
A taxpayer has an annual gift exemption of £3,000 in total. This
gift exemption can only be carried forward one tax year so it is best
to use this gift exemption before 5th April 2009.
Parents can also gift £5,000 if a child is getting married.
A second property - a new business
If you own a second home you may consider letting it as a Furnished
Holiday Let. FHLs qualify as a trade and so losses can be offset
against your income, unlike Buy To Let where losses can only be put
against other Buy To Let income.
Buy To Let - Energy Saving Allowance
Buy To Let investors can claim up to £1,500 against letting profits
for loft insulation; cavity wall insulation; draught proofing; solid
wall insulation and hot water insulation. Work needs to be completed
before 5th April 2009 to qualify for this tax year.
Conclusion
You need to take action now to gain many of these benefits which all have a deadline of 5th April 2009.
This article and these ideas are for general information and you
should always take professional advice before taking any action.
For Independent advice on pensions, investments and protection please contact Steve Carruthers.