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With a fourth specialist team tasked solely with tackling IR35 enquiries, we are expected to see an increase in enquiries over the coming years. With this in mind, it is important for contractors to ensure they fully understand the legislation and are taking every precaution to ensure they are not caught.

So what would happen if HMRC opened an enquiry into your limited company?

HMRC will send you a letter requesting the following information which should be supplied within 30 days:

• a breakdown of your company’s income for a specific accounting period
• copies of all contracts that relate to that income
• and evidence and information that supports your opinion of your status

HMRC still use tactics to ‘trip up’ contractors so remember these tips:

• avoid any employment terminology such as 'my manager', 'overtime', 'holiday', or 'job interview'
• get your client on side and understanding the consequences of employment terminology
• don’t agree to meetings or dealing with HMRC over the phone unless advised by or in the presence of a professional tax advisor. This goes for your client too. You are under no obligation to hold meetings or speak with HMRC over the phone and it often leads to more employment terminology being used and more information than legally required being given which can be very detrimental to your case.

So what do you need to provide the evidence and information in order to defend your status?

The first task is to complete the Business Entity Test by HMRC and collect the relevant supporting evidence.

If you fall into the low-risk category, then the results of your test and the supporting evidence will suffice. If HMRC deem the evidence as satisfactory then they will accept your score and close the enquiry immediately. They will also promise not to open another for at least three years.

Due to the nature of the test’s scoring however, most genuine contractors will fall into the medium to high risk category. In this case, you will need to compile more detailed evidence and be sure to explain its relevance to the IR35 legislation.

• Ensure your written contract is IR35 compliant and provide evidence of a review by a known provider.
• Ensure your real working practices are compliant and mirror your written contract. You can also have a review of these done by a provider.
• You may want to provide evidence that you have used a substitute for example or get a confirmation of arrangements form completed to confirm the nature of your work with your end client (you should do this whilst you are working for each client in the event of an HMRC enquiry into a previous contract).
• Remember the key factors of IR35 and ensure you provide evidence for them; Right of Substitution (you are able to provide a substitute to carry out the work and will only be declined on reasonable grounds such as skill or qualification and your company would be responsible for paying them), Control (you have autonomy over your method of work), Mutuality of Obligations (you are not obliged to take extra work and your client is not obliged to offer you any).

EasyLimited have teamed up with Qdos Contractor to provide everything you need in order to defend your status should the Revenue come knocking with the new IR35 Defence Pack plus a variety of other review options .

It is important to assess your working practices regularly as you can fall inside and outside IR35 during the same contract simply due to changes in your working practices. It is also important to remember that it is not ‘bad’ to be inside IR35 but simply less desirable, as long as you are paying the relevant tax and NIC for when you are working inside or outside the legislation.

You could also take out insurance whereby Qdos professional advisors will deal with your enquiry from day 1 when you receive a letter. You can take out cover which just covers the legal and representation in the event of any HMRC enquiry or full insurance which also covers the tax/NIC liabilities, penalties and interest should you be found caught by IR35.

From 7 January 2013 child benefit will be reduced for any family in which anyone earns more than £50k, depending on the earnings above that level. The benefit will disappear completely for any family in which anyone earns more than £60k.

Please note that ‘family’ and ‘anyone’ are underlined. Family, as the household is looked at as a whole. And anyone, as the relationship to the children or to the receiver of the benefit is irrelevant (it does not matter to whom the benefit is paid or who the higher earner is, whether they are married or whether they are the natural parent of the children) - if any person in the household earns more than £50k the whole family is affected.

Affected parties can choose to either give up receiving the benefit completely or to repay some or all of it through a self assessment tax return.

If you don’t want to pay the HICBC you need to take action before 7 January 2013. Please note that the claim to opt out can only be made by the person who is paid the child benefit, even though the person who is charged might be someone else. Please follow this link to stop your Child Benefit payments:
http://www.hmrc.gov.uk/childbenefitcharge/stopchbpayments.htm

How is the charge calculated?

You’ll have to pay back 1% of the child benefit received for the year for every £100 of extra income over £50k. So for every £100 you earn over £50k you’ll have to pay back £10.56 for the first child and £6.97 per additional child; calculated as follows:
Eldest or only child: 20.30 CB x 52 weeks x 1% = £10.56
Additional children - per child: £13.40 CB x 52 weeks x 1% = £6.97

Example:
For a higher earner in a household with two children the charge per £100 of extra income over £50k will be £17.52 (£10.56 + £6.97). If the higher earner’s annual income is £55k the charge will be £876, calculated as follows: (£55k - £50k)/100 x £17.52

Please note that ‘income’ includes all sources of taxable income, not just earnings. Please follow this link to work out what your income is: https://www.gov.uk/child-benefit-tax-calculator

The good news

If you’re a director of your own limited company you can control your personal earnings. Please talk to one of our accountants for more information. If you are a salaried employee you have fewer options, the most common being to reduce your income by making payments into a pension fund.

Any person looking at investing in a small business in 2012 should take serious note of the new Seed Enterprise Investment Scheme launched on the 06 of April 2012.

The seed enterprise investment scheme (SEIS) will allow individuals who invest up to £100,000 per year in a new start-up business (up to a maximum cumulative investment in one firm of £150,000) to claim back income tax relief equal to 50% of the amount invested.

You’re eligible for the 50% tax break regardless of the marginal rate at which you pay income tax. Further to the income tax relief an investors can also avoid paying capital gains tax (CGT) on any asset sold during the financial year 2012-2013 as long as they reinvest the proceeds in a SEIS eligible start-up in the same year.

Let’s look at a couple of examples (as per HMRC):

Jenny invests £20,000 in the tax year 2012-13 (6 April 2012 to 5 April 2013) in SEIS qualifying shares. The SEIS relief available is £10,000 (£20,000 at 50%). Her tax liability for the year (before SEIS relief) is £15,000 which she can reduce to £5,000 as a result of her investment.

James invests £20,000 in the tax year 2012-13 in SEIS qualifying shares. The relief available is £10,000, as above. His tax liability for the year (before SEIS relief) is £7,500. James can reduce his tax bill to zero as a result of his SEIS investment, but loses the rest of the relief available.

There is a 'carry-back' facility which allows all or part of the cost of shares acquired in one tax year to be treated as though the shares had been acquired in the preceding tax year. The SEIS rate for that earlier year is then applied to the shares, and relief given for the earlier year. This is subject to the overriding limit for relief each year. Please note that there is no SEIS rate for a year earlier than 2012-13, so there is no scope for carrying relief back before that year.

For more information see HMRC's website.

If you are a Director or a Contractor with a Ltd Company with a pension scheme you have two options on how to make your pension contribution, as a personal or company contribution.

Personal contributions are simple to do, and will come naturally to anyone who has previously worked for a company as an employee. However, there is a problem. You will pay tax and National Insurance on drawing the income and then when you make the pension contribution you will just get the tax relief back, not the National Insurance cost.

When you make a company contribution you can offset the contribution as a cost to the company. The contribution is made directly to the pension so there is no tax and no National Insurance for the company or you personally. It is therefore more efficient.

You need to take care to not exceed the annual allowance of £50,000 and you also need to make sure the contribution is to reward activities that are wholly and exclusively for the benefit of the company, but your accountant can help you confirm this. - Mike Lawrence

Mike Lawrence is the Managing Director of Guardstone Financial Planning Ltd, a fee based firm of Financial Advisers www.guardstonefp.com

HM Revenue & Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

We are always told we should save for our retirement, and the last year has been a good reminder that we cannot simply rely on the State, as it may not always be able to afford to maintain pensions and other forms of welfare. One way that we can use to save for retirement is of course pensions, and they come in many different forms. From company pension schemes to personal pensions they all help us save for retirement through tax relief.

It always amazes me that not everyone is claiming their higher rate tax relief on pension contributions. Everyone gets basic rate tax relief when making contributions. If you see £80 coming out of your bank account you will get £100 invested in the pension. That is to take account of the 20% basic rate tax.

If you are a higher rate tax payer, however, you can get a further 20% back by submitting your tax return or amending your tax code. Speak to your accountant if you are not sure whether you are claiming this relief, but if you are not then that is money you are losing out on. You could be paying too much tax.

If you are a higher rate tax payer chances are you should be submitting a tax return, even if HMRC have not sent you the form. If you are making pension contributions you should definitely do a return each year to claim your higher rate relief. - Mike Lawrence

Mike Lawrence is the Managing Director of Guardstone Financial Planning Ltd, a fee based firm of Financial Advisers www.guardstonefp.com

HM Revenue & Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Advantages:

1. More tax efficient:

In almost all cases, working through a limited company is more tax efficient than any other employment type. Exactly how much more efficient will depend on your individual circumstances. You can use our online tax percentage tool for a quick and easy way to compare the tax percentage you’ll pay for the different employment options.

2. More control over your personal income:

When you're permanently employed, your tax gets deducted at source. You have no control over when you get paid or how your salary gets structured. With a limited company you’re in control of your personal income. You can decide how much you get paid from your limited company. You can also decide when you get paid. This can have a significant impact on the amount of tax you pay.

3. You can claim valid business expenses:

A limited company can claim valid business expenses. Expenses lower the profit of the limited company, thus decreasing the tax it has to pay. This is a huge benefit for contractors because you can now claim expenses that you would not have been able to claim as a permanent employee.

4. Flat Rate VAT option:

The Flat Rate VAT scheme was introduced by HMRC to simplify VAT returns for small businesses and contractors with their own limited companies in the UK. Under the flat rate vat scheme you pay VAT over to HMRC at a rate specific to your industry, but you still charge VAT at the normal rate (20%). The rate you pay to HMRC is always lower than the current VAT rate. For example, contractors in the Financial Services industry will pay VAT over to HMRC at 13.5%, and charge VAT at 20%. The result is a Flat Rate VAT profit. Please see our Contractors Guide to Flat Rate VAT for more information.

5. National Insurance Uplift:

Most recruitment agencies will offer you a National Insurance (NI) uplift if you decide to contract through a limited company. If the recruitment agency pays you like a normal employee (PAYE) they will deduct Employer National Insurance tax at 12.8% of your gross salary. This is a cost to them, not to you.

When you are a contractor you get paid for your services rendered, you do not get paid a gross salary which means no Employer National Insurance tax is payable by the recruitment agency. So in effect they save 12.8% tax. This is why the contractor’s rate is normally higher by 12.8% than the gross salary rate the recruitment agency will offer you.

Disadvantages:

1. If you don’t work, you don’t get paid:

As a permanent employee you usually get permanent employee benefits like annual leave and sick leave. As a contractor you won’t have these benefits. You only get paid for the hours you work. Usually the higher rate of a contractor will make up for this, in other words you should still be better off contracting through a limited company even though you do not get permanent benefits.

2. Accounting costs:

Few contractors have the time or specialised knowledge to manage their own limited companies. So the best course of action is to hire an accounting company to help take care of the administrative and statutory filing obligations associated with a Limited company. This will off course be an expense to your limited company. As mentioned above though, if you manage your company properly then your tax savings and higher rate could easily absorb these costs so you’ll still be much better off contracting through a limited company.

3. Company administrative hassle:

Even with an accounting company managing your limited company, you’ll still have some basic responsibilities as the director of a limited company. Responsibilities include the raising of invoices and payment of taxes at specific times during the year. Once you’ve got the hang of it, the tax saving of contracting through a limited company will be well worth the extra administrative tasks.

Let EasyLimited help you turn the disadvantages into advantages by:

Helping you manage when you get paid and how you get paid, thus ensuring you get the best of both worlds.

Our competitive accounting costs are easily absorbed by the various methods we employ to maximise your personal income.

We take care of as much of your company administration tasks as possible, and we make sure that you know exactly when and how to take care of the rest.

Contractors with a yearly turnover of less than £150 000 can register for the Flat Rate VAT Scheme. This scheme was introduced by HMRC to simplify VAT returns for small businesses and contractors with their own limited companies.

Under the flat rate vat scheme you pay VAT over to HMRC at a rate specific to your industry, but you still charge VAT at the normal rate (20%). The rate you pay to HMRC is always lower than the current VAT rate.

Let’s use an example. Lets say you're a contractor turning over less than £150000 per year. You register for the Flat Rate VAT Scheme for your industry group, in this example Financial Services, with a flat rate VAT percentage of 13.5%.

Once you're VAT registered you need to add VAT on your invoice, so in effect you charge 20% more for your service. You agency won't mind this because they're VAT registered so they will simply claim back the VAT you charge them.

Your normal invoice amount per week was £1000. Now that you're flat rate vat registered you will add VAT on you invoice, so your new invoice amount is £1200.

At the end of the first VAT quarter HMRC advises you that it’s time to submit your first VAT return. You received a total amount of £15 600 for the quarter. Under the flat rate VAT scheme you have to pay over VAT to HMRC at 13.5%. But because you're in the first year of your VAT registration you only need to pay VAT over at 12.5% because under the flat rate scheme you get a 1% discount for the first year you’re VAT registered

So you make the calculation, £15600 * 12.5%. That is a total of £1950 you have to pay over to HMRC. But you received more VAT than that. You received £2600 VAT from your clients. So in effect you made a £650 flat rate VAT ‘profit’ in the quarter. The official term at HMRC for this ‘profit’ is ‘flat rate allowance’.

The easiest way to calculate how beneficial the flat rate VAT scheme could be to you is to use our online tax percentage tool. Enter your income details and click the radio button to confirm that you can register for VAT. Select your industry and the calculator will do the rest. The Flat Rate profit will be displayed when you click on the 'Recommended - Why' link.

If you want to have a look at the flat rate VAT percentages for the different industry groups, have a look at our Flat Rate VAT Percentages blog post.

Contractors with a yearly turnover of less than £150 000 can register for the Flat Rate VAT Scheme. This scheme was introduced by HMRC to simplify VAT returns for small businesses and contractors with their own limited companies.

Under the flat rate vat scheme you pay VAT over to HMRC at a rate specific to your industry, but you still charge VAT at the normal rate (20%). The rate you pay to HMRC is always lower than the current VAT rate. Please see our Contractors Guide to Flat Rate VAT for a more information.

Below is a table with all the industry groups and Flat Rate VAT percentages linked to the groups.