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New IR35 tax changes came in to force on the 6th of April 2021, which will see thousands of private-sector contractors pay more tax.

 

IR35 or "Off-Payroll Working" is a term given to someone either in the public or private sector, sometimes known as a Contractor, who provides services through their own Ltd Company, Partnership, Personal Service Company or provides services as an individual.

 

The rules apply to those, who would otherwise be considered as employed by the person or company they provide services to.

IR35 ensures that the income received is treated as though it was earned as an employee, and is charged broadly the same Tax and National Insurance contributions on their earnings as someone who is employed.

Up until 6th April 2021, the End Client, or engager in the public sector was in charge of assessing whether someone is classed as an off-payroll worker, and for the private sector, most contractors would self certify their status. However now the same certification rules apply to those in the private sector also for those providing services to medium or large private sector clients. However, if you provide services to a small client, you remain in charge of certifying your IR35 status.

 

Who is affected?

Any worker who provides their services either through an intermediary, a client who receives services through an intermediary or an agency who provide workers services through their own intermediary.

 

How to check if I fall under IR35?

There's a few tests that will establish your IR35 status but the main ones are:

  • Who has control over the work that's completed?

If the company you provide services to can dictate the hours you work or the location you work at that's a good indication IR35 applies.

  • Mutuality of Obligations

In other words, once your work is completed, are they required to find more work for you.

  • Could someone else take your place?

If for whatever reason you were unable to attend work, could you, and would you be allowed to appoint a replacement worker.

 

Even if you believe you meet the above tests to fall outside of IR35, in most cases it will be up to the end client to determine your status, and if they consider you to be an off-payroll worker, there's very little you can do about it.

There is a possibility that some companies will cease to take on any new contractors as a result, in some small cases, the companies may decide to employ the contractor instead.

 

Why would an end client be reluctant to continue accepting services from a contractor?

Well simply put, if they get it wrong, there could be heavy penalties. The end client would be responsible for not only deducting tax and national insurance but would also have to pay Employers national insurance contributions as well.

 

Why will the contractor pay more tax?

Working through your own Ltd Company, you have the flexibility to reduce the tax you pay on your income, for example, you may decide to pay a minimal salary, which would be tax-free, and take the rest as dividends which attract a lower rate of tax compared to income tax.

IR35 ensures that all income is taxed in the same way as if you were employed while also ensuring that Employers National Insurance contributions are also paid. Therefore any tax savings you made previously will be wiped out under the new rules.

 

Can I challenge an IR35 determination?

You can, but there's very little you can do if the determination is upheld. What you can do, is determine your status yourself, provide the information to the end client, and try to convince them that their determination is wrong. In some cases, they may agree.

You can also try providing evidence from an independent expert, this would hold more weight than determining the status yourself.

 

Is there a way to avoid IR35?

In some cases you could work via an umbrella company, these companies don't apply to IR35, but they can come with heavy fees, so you will need to consider them very carefully.

 

If you currently operate a Ltd Company or provide services as an individual, and have been caught by Off-Payroll Working, you will most likely need to consider closing your company or ceasing to trade as Self Employed, there are steps involved to close your business such as preparing final accounts and submitting applications to strike the company off the register.

If you are unsure how to do this, and require help, why not contact us today.

 

 

 

From 1st March 2021 the Domestic Reverse Charge (DRC) came in to effect for Building and Construction services.

This had been set to come in to effect back in 2019 and 2020 but was delayed each time for various reasons.

 

The basic principle of the Domestic Reverse Charge is to ensure a reduction in VAT fraud by "missing traders". Missing traders are the names given to companies that exist, purely to charge and receive VAT, but without any intention to pay it over to HMRC.

 

Who's affected by the Domestic Reverse Charge

The DRC applies to the Construction Industry Scheme (CIS) and VAT registered Contractors and Sub-Contractors who either buy or sell building and construction services. the DRC does not apply to any customer who is NOT VAT registered in the UK.

  • The supply of services must be those that carry the standard or reduced rate of VAT (20% or 5%) the DRC does not apply to any exempt supplies.
  • The DRC does not apply to End Users and Intermediary supplier businesses. For what is classed as an End User or Intermediary, you can view the gov.uk website
  • The DRC does not apply to any employment businesses supplying staff or workers or both.

 

How does the Domestic Reverse Charge work

Under the DRC rules, the Sub-Contractor who is operating under CIS will no longer charge VAT on the sale of their construction services to the Contractor. This means that a Sub-Contractor under CIS will not charge either 20% or 5% VAT on top of their costs.

Instead, the Contractor will retain the VAT the Sub-Contractor would have charged and instead make an adjustment to their own VAT Return to pay the VAT over to HMRC.

 

What you must do to ensure you follow the rules

Firstly the Contractor MUST review all their Sub-Contractors to determine whether their supply of services falls within the new rules. Once they have established that they do, they must give written confirmation that you are supplying services that fall within the DRC rules and that the Contractor is not an End User or Intermediary.

If you are a Sub-Contractor who also employs other Sub-Contractors, you will also need to follow the same rules as above.

 

The Sub-Contractor must state on all invoices that fall within the DRC, that the Domestic Reverse Charge has been applied to the invoice, state the VAT rate to which they would have charged, and instruct the Contractor to account for the VAT Themselves. 

 

Pro's and Con's of the Domestic Reverse Charge

The pros are of course the reduction in fraud, but there can also be an upside to Contractors due to the increase in cash flow.

The cons are obviously the reverse for Sub-Contractors however, the silver lining is that most will likely end up reclaiming VAT instead of paying any over to HMRC.

 

Sub-Contractors who operate a Flat Rate Scheme VAT will need to establish whether it is cost beneficial to remain on the scheme. If the majority of your sales fall within DRC, you will not benefit from remaining within the FRS because you are unable to reclaim the VAT paid on purchases. It is advised in this situation that you deregister from FRS.

 

What you need to do now

If you are already using bookkeeping software to record your VAT you must ensure that it is capable of adjusting your VAT returns to account for the Domestic Reverse Charge.

If you are unable to operate bookkeeping software or do not wish to, we can help.

We can provide a fully cloud-based bookkeeping package that will accurately calculate the DRC VAT at a very reasonable monthly cost. Please contact us today if you wish to know more.

 

 

The Chancellor Rishi Sunak has increased the third SEISS (Self Employed Income Support Scheme) to 80%.

 

Previously the Chancellor had announced that the third support payment for the Self Employed, would be capped at 20% of their average net profit over the last three years. However due to mounting pressure after The Prime Minister announced that local areas could now face 3 different lockdown measures, Mr Sunak changed his stance and increased the payment to 80%.

 

As noted on the HMRC website, "The UK Government recognises the continued impact that coronavirus (COVID-19) has had on the self-employed and has taken action to provide support.

 

The Self-Employment Income Support Scheme Grant Extension provides critical support to the self-employed in the form of two grants, each available for three month periods covering November 2020 to January 2021 and February 2021 to April 2021."

Starting from 1st November, those who are eligible will be able to claim the third income support payment, and then again in January, a 4th claim will also be available. Its unclear at the moment how much the 4th payment will be.

 

Who Can Claim.

HMRC sets out the eligibility criteria as follows:

To be eligible for the Grant Extension self-employed individuals, including members of partnerships, must:

  • have been previously eligible for the Self-Employment Income Support Scheme first and second grant (although they do not have to have claimed the previous grants)
  • declare that they intend to continue to trade and either:
    • are currently actively trading but are impacted by reduced demand due to coronavirus
    • were previously trading but are temporarily unable to do so due to coronavirus

What the Grant Covers

The extension will last for six months, from November 2020 to April 2021. Grants will be paid in two lump sum instalments each covering a three-month period.

 

The first grant will cover a three-month period from 1 November 2020 until 31 January 2021. The Government will provide a taxable grant covering 80% of average monthly trading profits, paid out in a single instalment covering 3 months’ worth of profits, and capped at £7,500 in total.

 

The Government are providing broadly the same level of support for the self-employed as is being provided for employees through the Job Support scheme.

 

The second grant will cover a three-month period from 1 February 2021 until 30 April 2021. The Government will review the level of the second grant and set this in due course.

 

The grants are taxable income and also subject to National Insurance contributions.

 

How to Claim

The details regarding how to claim have not yet been published, but we believe it will be pretty similar to the first two grants, you can find out more information by reading our guide here.