Jenrick IT has experienced an increase in contractors queries regarding where to get the best tax advice, especially if they are operating under a PAYE or Umbrella scheme.

We have taken advice from a number of accountants and collated the best information we could source, three of which have been highlighted below from JK Tax Advisors, 1st Option Accountancy and ICS:

Julie Kingham – Managing Director, JK Tax Advisors

Congratulations, you are earning over £100,000 a year and as a reward your tax burden will increase from 6 April 2010.

Now the tax aware amongst you will be thinking that it is only taxpayers earning £150,000 or more who are going to be hit with the 50% super tax rate, but this is not the case.  For those with income over £100,000 your personal allowance will be restricted by £1 for every £2 over £100,000 – so your personal allowance will be £0 as soon as your income reaches £112,950. (The effective rate of tax on income up to £112,950 becomes 60%.)

So, how do you avoid the increase in tax?  Below are a few methods which are not classed as a tax avoidance schemes and are not open to attack from the Revenue:

1. Consider making any bonuses before 5 April 2010 – however, there is a cost to the company in bringing forward tax and national insurance contributions.
2. Bring forward the payment of dividends – as long as there are enough distributable reserves in the company.
3. Ensure that income is effectively spread between spouses to avoid one party being taxed at the higher rate of tax.  Beware though, as care is needed to ensure that HMRC do not try and apply the settlements legislation arising from “income shifting”.
4. After 6 April 2010 ensure that tax relief is achieved through gift aid payments and other tax relief’s fall into this tax year, (but be careful if using pension contributions).

As is always the way of things, tax should not be the overriding factor when considering a course of action.  Seek professional advice, and do the number crunching, before taking action!!

David Mount – Director, 1st Option Accountancy for Contractors

As part of Government’s strategy to reduce the national debt, a number of new taxes have been introduced, two of which directly affect the higher end freelance consultant sector.  The first will affect those consultants who bill between £400 and £500 per day; and the second will affect all consultants billing in excess of £600 per day.

Tax Effect 1
The personal allowance (currently £6,475 per person) will be removed for people earning over £100,000 pa.  This change is being introduced on the basis for each £2 earned over £100k, the personal allowance will be reduced by £1.  Therefore, once an individual earns over £112,950 the personal allowance will be completely eroded.

What this actually means is that on the £12,950 worth of earnings i.e. the amount over £100k in the above example, £7,770  in tax is payable – which is an equivalent tax rate of £60%!

This is calculated at £5,180 (being the 40% that you would be expecting - £12,950 x 40%), plus an additional sum of £2,590 (being the additional 40% now payable because the personal allowance has gone - £6,475 x 40%)

Tax Effect 2
The highest rate of tax is rising to 50% for earnings over £150,000 pa.

So, up to £150k you will continue to pay 40% tax.  For every £1 in excess of £150k you will be paying 50 pence in tax.

Combined Effect
UK earners now find themselves in the ludicrous position that the rates of UK tax actual rise, then fall, then rise again as earnings increase…..

• Earner at £99,950 – top tax rate = 40%
• Earner at £112,950 – top tax rate = 60%
• Earner at £149,950 – top tax rate = 45.2%*
• Earner at £151,000 – top tax rate = 50%

* Don’t forget that this tax rate is still higher than 40% because this earner has already lost the personal allowance referred to in ‘Tax Effect 1’ above.

What can I do?

There are a wide range of measures that consultants operating via their own limited company can do to mitigate these tax increases.  Some of these measures include:

1. Review company structure – consider income splitting with your spouse.
2. Review long-term savings strategy – during this period of excessive taxation some funds can be invested into mediums that avoid or defer tax, including pensions and company investments.
3. Reappraise the mid and long-term income strategy of your business.  This may be an ideal time to consider income deferral.  This could also tie in with plans to close the company and utilise Entrepreneurs relief.
4. Review overall company expenses policy.

This list is not exhaustive but should serve as a prompt with which professional freelancers can approach their technical advisors…or call us!

John Lyon - Managing Director of ICS

• There is an increasing trend for contractors to look at opportunities abroad, however it is difficult to be certain whether this is due to the imminent 50% tax or whether the impact of the recession has more generally led contractors to look further afield for opportunities.
• There remains a strong demand for UK contractors, particularly in areas where there is a severe skills shortage, as is the case in IT and engineering.
• Anecdotally in our dealings with IT and engineering contractors there has been an increase in enquiries about working abroad as a result of the 50% tax. This has been mirrored in other key industries, particularly banking, where a number of people are considering moving to Switzerland, where the tax burden is considerably lower for high earners.
• Moving abroad is not for everyone, not least because of family commitments.
• There are other, less drastic, ways to address the issue of 50% tax. The most obvious is through effective tax planning, which is a service ICS offers to clients on an individual basis.
• We have seen an increase in demand for our Limited Company Service, which is considered perhaps the most prudent choice for contractors outside of IR35, as well as being a popular choice for people within IR35. Working through our Limited Company Service means you can increase your net income through lower National Insurance, Flat Rate Vat, and the option to claim back tax on a broader range of business expenses.
• We have also seen a rise in enquiries about our Umbrella Service, which was created to meet the requirements of contractors that want to enjoy the freedom and financial benefits of working as a contractor without the hassle of dealing with endless paperwork.
• Independent Contractor Services Ltd (ICS) was established in 2002 to provide individual accountancy, tax advice and administrative services to professional contractors.
• Our guiding principles are ‘care and compliance.’ We aim to provide very high service levels coupled with full compliance with all applicable legislation, including IR35 and MSC.
• We avoid using industry jargon and aim to help provide contractors with relevant and useful information so they can make an informed decision.
• We are one of the leading contractor accountants and administration companies and have helped many hundreds of contractors working in dozens of industry sectors through our Limited Company, Umbrella Company and Sole Trader services.

Summary:

Thank you very much to all our expert contributors for adding to this topic, we hope that you have all found it useful and for more information on this subject or others related to Contractor Accountancy, please visit any of the links below:

• JK Tax Advisors
• 1st Option Accountancy for Contractors
• Independent Contractor Services Limited (ICS)

Philip Fanthom (Managing Director - Jenrick IT) commented ;

“We are  constantly updating our tax and legislative information on our website and blog to keep contractors informed. We did, in fact warn about the possibility of a HMRC clampdown on ‘off shoring’. Even still, there appears to be a  worrying agenda against  the freelance community by the government. “

(More details about the case is below - courtesy of Contracting Made Easy)

BN66 Case is Lost in High Court
Many Contractors who utilise offshore tax efficient remuneration strategies will be worried by the news that HM Revenue & Customs is poised to chase an  approximate £100m in income tax from users of an offshore tax avoidance scheme, following a recent High Court ruling.

IT contractor Robert Huitson has lost his court case in which he was trying to have the retrospective element of BN66 classed as unlawful. The argument that this type of retrospective action was against human rights fell on deaf ears.

Mr Justice Parker rejected claims on behalf of the taxpayer that the backdating of Section 55 of the Finance Act breached human rights. His court also refused an appeal, paving the way for HM Revenue & Customs to pursue the taxpayer, Robert Huitson, and thousands like him.

The ruling has set a dangerous precedent that could result in HMRC applying retrospective taxation to other groups of contractors, as well as other taxpayers,  who use tax mitigation schemes.

Much of this case rested on the seven year period of inaction by HMRC, however the judge appeared to be of the view that HMRC’s actions were proportionate  while taxpayers utilising a BN66 scheme knew the associated risks.

Chartered Institute of Taxation’s John Whiting, said:

“I think all tax practitioners will worry a bit about this judgement if it is seen as opening the door to retrospection. This judgement is of concern to all because tax systems should aim to give certainty. Retrospection is inherently unfair, creates uncertainty and risks damaging trust in the system.

However, if such tactical calculations were made, taxpayers simply ran the risk that at some point parliament might legislate to put the matter beyond doubt,  and might well do so…retrospectively”.

The landmark case was the very first time that a judge had backed the retrospective element of BN66 and has left a great many contractors disappointed, many  now face large retrospective tax bills. It’s almost certain that there will be more challenges to BN66 and the UK governments ability to penalise people under new tax legislation retrospectively.

Montpelier, the provider of the scheme which Huitson used, has vowed to appeal the decision, though such an appeal will take time before it is heard by a higher authority.

Before you read Marc’s full article, feel free to watch ther video below:

Unlike a PAYE employee, contractors that have set themselves up as limited company directors have a far greater flexibility in the way that they manage their income - in short they can benefit from their contracting revenue in a number of ways.

Over the long term a limited company will be tailored to a contractor’s individual circumstances keeping personal financial goals in mind. This might be as simple as making most of the income available as salary, investing for retirement or seeking to generate cash pot in the short term future.

Specifically contractors generate tax efficiencies from 5 main areas:

1. Expenses - compared to a PAYE employee, a far wider range of expenses can be claimed. These include purchasing capital equipment, claiming utility costs, business travel, training texts and courses, entertaining clients and others. The additional tax relief possible can create significant economies over the course of a year.
2. Bank Interest - since statutory liabilities are not paid over to HMRC at the time of earning but collected later in the financial year, a contractor is in a position to earn interest on funds up until the time when those payments become due.
3. VAT Flat Rate Scheme - The FRS is a government concession aimed at small businesses that seeks to simplify VAT collection in the UK. It permits a company to keep a small proportion of the VAT that it collects on its invoices which over a period of time can result in significant financial benefit.
4. IR35 status - This infamous tax tests whether revenue earned from contracting should be treated as employed or self employed income. If an assignment passes the tests, the contractor will be in a position to declare a lower salary and elect to receive a proportion of their income as a dividend, thereby reducing the level of National Insurance contributions
5. Income splitting - A contractor can share the income earned from assignment work with their spouse/partner and thereby benefit financially if the second person is subject to a lower rate of tax.

Despite these attractive possibilities, a limited company is not for everybody. Where contracting is expected to last for a very short period of time (for example as a “stop-gap” between permanent employments) or when the contracting rate is relatively low rate (and a contractor needs to receive all funds as salary) it may well be inappropriate to incorporate or at least provide no great economic benefit. In addition some contractors are simply not comfortable in becoming legally responsible for a company of their own. In these cases, joining an umbrella structure is likely to be a more sensible course of action

* By 2031 there will be 15 million pensioners even though the pension age will have increased to 66 for men and women after 2024. In comparison, the numbers of children will rise from 11.5 million to 13 million in 2031. Currently the average age of the population is 39.6 and this will reach 40.6 by 2016 and 42.6 by 2031 - (Source: Office of National Statistics)

The Equality and Human Rights Commission is today launching a set of proposals for fundamental changes to employment policies to open up more work opportunities for older Britons, addressing the challenges of an ageing workforce. Research from the National Institute of Economic and Social Research shows that extending working lives by 18 months would inject £15 billion into the British economy.

Baroness Margaret Prosser, Deputy Chair of the Equality and Human Rights Commission, said: “Britain has experienced a skills exodus during the recession and as the economy recovers we face a very real threat of not having enough workers - a problem that is further exacerbated by the skills lost by many older workers being forced to retire at 65.”

The proposals include abolishing the default retirement age, the extension of the right to request flexible working to all, overhauling employer recruitment practices to prevent discrimination and improved training and development. It comes as the Lords today have the opportunity to remove the default retirement age through the Equality Bill.

Article source: APSCo Newsletter 25 Jan

Details were posted in this weeks political monitor from APSCo….

Legislation to give parents more flexibility in how they use maternity and paternity leave will be introduced under new Government plans.

New fathers will be able to take advantage of additional paternity leave and pay during the second six months of the child’s life, if the mother wishes to return to work with maternity leave outstanding. The changes will be introduced for parents of children due on or after 3 April 2011.

Business Minister Pat McFadden said:

“The balance between work and family life has changed for the better in the past decade and these changes will give parents the chance to share their leave and will give families a useful element of flexibility and choice.

The move comes as the Government publishes its response to a consultation on the subject held at the end of 2009. The regulations will mean:

- Fathers will be entitled to up to six months extra leave, which can be taken once the mother has returned to work;

- This new provision will be available during the second six months of the child’s life, giving parents the option of dividing a period of paid leave entitlement between them

- Some of the leave may be paid if taken during the mother’s 39 week maternity pay period. This would be paid at the same rate as Statutory Maternity Pay (currently £123.06);

- Parents will be required to “self certify” by providing details of their eligibility to their employer. Employers and HMRC will both be able to carry out further checks of entitlement if necessary.

Theresa May, Conservative Shadow Minister for Women and Equality, said

“The truth is that this announcement is a pale imitation of our own proposals”.

She said she hoped that the Government has finally followed the Conservative lead on accepting the need for parents to have more flexibility in how they take their paid maternity leave, but expressed doubts about the pledge.

The Government has tabled the regulations for Parliament to consider as soon as possible.  They will be debated and approved by each House before they can be implemented. Subject to this, the Government intends that the law be in force by April 2010 and have effect for parents of children due on or after 3 April 2011.

Article source: APSCo Newsletter 25 Jan 2010

“Demand for IT experts is increasing. With more and more projects coming out of hibernation as company’s look to re-ignite their innovation strategy, contract requests have increased at a rate not seen by us for over 3 years.

In addition, we are seeing the emergence of permanent requests as these innovation strategies become more long term”

Jenrick IT’s experiences have been felt across industry with some sectors reporting that over 80% of employers across Europe will look to recruit this year.

Eight in 10 employers plan to hire in 2010

Monday 1st February 2010 | By Mike Jones

Some 82% of European companies are planning to hire employees to new positions in 2010, according to a new survey by leading global professional services company Towers Watson.

However, most of these companies expect hiring to remain at best sluggish - with 45% saying it will be below levels typical of past years.

Moreover, while most companies are hiring, 49% still expect to make workforce reductions in 2010 - 5% say these will be broad-based and 44% say they will be targeted. This compares with 12% who have made broad-based reductions and 55% who have made targeted reductions since the start of the financial crisis.

The Towers Watson survey, conducted in early January and based on responses from 131 mostly large employers across Europe and 459 employers globally, found that while the picture is slowly improving, Europe lags North America. For example, 92% of US companies indicated they would be hiring in 2010 and only 37% expected workforce reductions.

Not surprisingly, given employment patterns both pre- and post-crisis, 40% of the survey respondents in Europe agree that it’s easier to retain talent now than it was before the financial crisis.

However, 48% think that retention will be more difficult a year from now. Respondents also noted a rise in productivity over the past year, with over half (54%) agreeing that employee productivity had risen compared with pre-financial crisis levels, and more still (57%) expecting it will continue to rise by next year. Interestingly, the recession’s impact on employee engagement has also been mixed. While 23% report lower engagement today, 33% believe employee engagement has risen since before the financial crisis. For 2010, far more companies expect engagement to rise (41%) than decline (10%).

“Without question, the last 18 months have been challenging for employers and employees alike, and while there are signs of improvement, it’s clear we’re not going back to ‘business as usual’ anytime soon,” said Laura Sejen, global rewards practice leader at Towers Watson.

“While it’s heartening - and a testament to employer focus and employee commitment - that productivity has increased, that’s also part of the reason for slower hiring and more caution about increased investments in workforce programmes. As always, the question is how lean can companies run - especially as demand for products and services rises? Those slower to reinvest in their workforce could find themselves at a competitive disadvantage.”

Article Source: Recruitment Today

Philip Fanthom (Managing Director, Jenrick IT) commented;

“We are delighted that Marc agreed to work with us on these videos. It is great to have experts in our corner such as 1st Option. Personally, I have found them to be extremely knowledgeable with a very good customer ethic. Marc has the ability to cut threw the jargon normally associated with accountants and talk to me in plain English”

In this first video, Marc gives and overview on the benefits of being a limited company contractor:

A limited liability company is the most common kind of corporate structure used in the UK. It is commonly used by contractors who choose to work independently or in a freelance capacity and is the vehicle through which their affairs are generally managed and through which their income is channeled.

Its attractiveness stems first and foremost from the fact that personal assets are regarded as distinct from the company finances. Therefore if insolvency occurs it is the assets (shares of the company) that are at risk. Company directors are afforded “limited liability” and so they are not personally responsible for the liabilities.

There are other structural advantages too. For example, a UK Limited company only needs to have one director thereby making it very suitable for contractors.

In addition when it has a turnover of less than £5million, there is no requirement for the company to be audited and the company can be structured so that ownership of shares can be split between a contractor and his or her spouse (or other member of the family). Operationally some contractors prefer to trade using a limited company as it provides greater flexibility and control than using an Umbrella company since it can be tailored to suit an individual’s personal financial goals and tax planning.

Furthermore, monies earned through contracting are paid directly to the contractor’s business bank account and are not directed via the Umbrella Company first.

Setting up a limited company is also a lifestyle choice; you are completely in control of your own destiny. However you should also remember that as the director of the company you are legally responsible to ensure that you comply with all statutory obligations. Of course you are not on your own and by choosing a good accountant, specializing in this sector, you should find that you are guided through the key areas without any major issues.

Finally a contractor’s “market-ability” increases hugely when they are engaged through a limited company structure. Previously contractors had commonly declared themselves self employed (or as “sole traders”) without formally setting up a limited company. These days however, recruitment businesses are unlikely to deal with any contractor who chooses to operate as a sole trader as it not only contravenes the law but also the recruiter could be accountable for the contractor’s PAYE and NIC’s if there was a default on payments to HMRC.

The specialist IT recruitment company, Jenrick IT is very buoyant having already achieved above forecast numbers on both contract and permanent recruits for February 2010, pitching Q1 as the best quarter for over 18 months.

Philip Fanthom (Managing Director – Jenrick IT) commented:

“Our year has started tremendously well, even better that our ultra-optimistic hopes. The amazing thing is the pace in which clients are recruiting contractors. In addition, we have seen a welcome return of permanent recruitment demand, with IT firmly back on the strategic agenda for many of our clients as they look to gain innovative advantage over their competitors”

Jenrick IT’s start to the year has been reflected across the industry as demonstrated in a recent report in Recruitment Today:

CEOs optimistic for UK recruitment in 2010 - PwC | By Mike Jones

With 63% of UK CEOs believing recovery in the economy will occur in 2010 there are signs for cautious optimism according to the PricewaterhouseCoopers (PwC) 13th annual Global CEO survey, launched at the World Economic Forum in Davos.

This rising confidence appears to have been translated into a boost in employment with 42% of UK business leaders planning to increase their headcount in the next 12 months. This response, combined with recent ONS unemployment figures showing a slight improvement, suggests the UK job market outlook is more positive than it has been for some time.

UK business leaders are more upbeat than their European counterparts when it comes to recruitment. In the Netherlands only 34% of CEOs expect to increase headcount, followed by France (30%), Italy (29%), Germany (27%) and Spain (9%) but while the UK is leading the European pack, further afield Brazil (61%), India (59%) and China (53%) are showing an even quicker return to bolstering their workforces.

Despite the positive outlook for employment, three-quarters of UK CEOs expect consumers will spend less and save more and, as a consequence, 63% plan to make some change to their business and a further 13% plan to make a significant change as they manage the impact of shifting consumer behaviour.

Since last year, a more positive outlook has emerged for the mergers and acquisitions market with 14% of business leaders (compared with 7% in 2009) now saying it is a route to growing their business, although this is some way behind pre-recession levels.

Business growth looks set to remain home grown as only 14% of UK CEOs in 2010 see new geographic markets as an opportunity to grow their business, compared with 22% in 2009 and 28% in 2008.

Ian Powell, UK Chairman and Senior Partner, PricewaterhouseCoopers LLP, said: “It is encouraging to see that UK CEOs are beginning, if somewhat cautiously, to prepare for an upturn.”

But he added a note of caution: “The upturn in employment prospects will be widely welcomed but this news must be tempered given that the bounce-back may be a response to employment cuts made in the UK over the last 12 months.”

Article Source: Recruitment Today

Lamb warns that, under the legislation, as well as the right to annual leave and bonus schemes, agency staff will also have the right to take up to 26 weeks maternity leave without breaking their 12 weeks ’continuous service’ record. Lamb adds that employers that flout with the rules or who move staff around in very different roles every 11 weeks to avoid triggering their employees’ continuous service rights could face tribunal claims and fines.

Lamb explains: “Although the new rules don’t come into force until October 2011, employers will need to think about how they will budget for these new requirements now, and how they are going to place agency staff within their business in the future, to ensure they can still maintain a flexible workforce without breaking the rules.

“Obviously it is important that employees receive fair treatment within the workplace, whatever their employment status. However, the cost implications of these new rights could be quite significant for manufacturers in our region, in particular. Employers often rely on the flexibility offered by agency staff. They will be keeping a very close eye on their costs as we move out of recession and into recovery.”

But Ann Swain, chief executive of the Association of Professional Staffing Companies (APSCo), says recruiters could be left footing the bill for such costs.

“End users will be able to push the cost of complying onto recruiters by getting recruiters to indemnify them in respect of any claims made in connection with the Regulations. This will leave ‘vulnerable’ workers no better off and heap further costs on recruiters.

“The Regulations will give temporary workers who are pregnant or new mothers more rights than equivalent permanent employees. This will impose significant costs on staffing companies.”

The Regulations confirm that implementation will not begin until after 1 October 2011.

Following two consultations on the directive’s implementation, the government’s response to consultation confirms that:

* Agency workers placed with an end-user for 12 weeks or more will be entitled to the terms and conditions that would have applied if they been recruited as permanent employees. They will also be entitled to the same terms and conditions as comparable permanent employees.

* Eligible agency workers will be entitled to equal treatment in terms of “working time” provisions, such as holiday and rest breaks, as well as ‘pay’.

* ‘Pay’ now has a wider definition than proposed in the draft Regulations. While occupational benefits such as pension contributions, sick pay and maternity pay will not amount to pay, some bonuses that relate directly to the quality or quantity of work performed will need to be extended to agency workers.

* Breaks of less than six weeks between assignments will not reset the 12 week qualifying period. The Regulations also introduces a new anti-avoidance provision. If it appears that assignments have been structured in a particular way to try and stop an agency worker from acquiring rights under the Regulations, an award of up to £5,000 may be payable.

* Agencies will be liable for claims if an agency worker has not received equal treatment. However, liability could move to the end user if it has not supplied the agency information about the relevant working and employment conditions.

But Frances Lewis, consultant and head of Osborne Clarke’s recruitment sector, told Recruiter that its too early to begin planning for the legislation. “It is still early days. Quite a lot could happen between now and October 2011. There might be a new government.

“They are yet to publish the guidance that goes with the regulations so it is too early to start planning. We don’t know enough about how this is going to pan out. I am fairly confident there will be changes in the legislation or the guidance.

“There are a quite a number of changes from the intial draft that were not consulted upon. The anti-avoidance mechanism to make it more difficult for users and supppliers to get around the 12-week qualifying period are actually quite complicated. Guidance will have to be provided and there will be an opportunity for the industry to have input on the guidance.”