HMRC have a target number of 12,000 businesses to visit next year. If you are chosen for a Business Records Check (BRC) they will contact you and it is your own interest to co-operate, subject to negotiating a suitable time and date which suits you. The time it takes to carry out a BRC will depend on the volume and complexity of your records but generally it will last between two and three hours. HMRC will review a random sample of purchases, sales and expenses transactions. In theory you could be fined up to £3,000 for not keeping adequate records but this is extremely rare.

HMRC are generally more concerned about ensuring that records of all transactions exist, rather than worrying about their quality, on the basis that it will be possible to produce correct accounts and tax returns at any later time. There are separate rules for retaining records for VAT purposes but as a general rule you must have sales and purchase invoices to support your VAT Returns.

All this is potentially sound planning in principle but the problem standing in your way is invariably capital gains tax. When you give away a chargeable asset like property, the tax rules ensure that your gift is treated in exactly the same manner as if you had sold it at current market value. Consider two neighbours, Mrs A and Mrs B, each having an investment property which they have owned for many years. Each property is currently worth £300,000 and each was acquired for £50,000. Both find that their income is sufficient without receiving the rental income and each wishes to gift the property to their respective children.

Mrs A considers gifting the property to her children absolutely but learns that she faces a capital gains tax bill of up to £70,000. This imposition must draw on her vital cash savings which is not an attractive prospect. She procrastinates and eventually does nothing. Mrs A dies 10 years later and although property prices have remained flat, her estate suffers £120,000 inheritance tax on this property alone, leaving a mere £180,000 for the family who may be forced to consider a sale to fund the tax liability. Any growth in the value of the property would increase the tax payable of course and, in the meantime, she has suffered income tax on rentals she didn’t really require.

Mrs B is in exactly the same position and would not make the gift if it meant liquidating her other investments and suffering yet more capital gains tax on these disposals. Unlike Mrs A, she goes ahead but, after taking  advice, does not give the property directly to her children. She transfers it to a straightforward trust with her children as beneficiaries. Unlike the case with the absolute gift, capital gains tax holdover relief is available with the consequence that there is no tax at all to pay on the gift and the children, as beneficiaries of the trust, take over the property at its original base cost of £50,000. She dies 10 years later and the property suffers no inheritance tax charge as it is no longer in her estate.

Fortunately for Mrs B the value of her property is within her inheritance tax free ‘nil rate band’ of £325,000. Above this, and the transfer to the trust would encounter a lifetime inheritance tax charge at 20% on any excess. Another disincentive to action but one which is not necessarily a problem. If Mrs B has a husband that limit can potentially be doubled to £650,000 or even to £662,000 if this and last years annual exemptions are unused by both spouses.

That ceiling can be pushed as high as £1 million without a significant tax charge with properly considered planning and depending on Mrs B’s precise circumstances. Indeed, even if Mrs B had needed to retain access to the rental income then there is a perfectly legitimate way to achieve this without the property remaining in her estate for inheritance tax purposes.

Given that in practice property portfolio’s represent the most common asset class which is hammered by inheritance tax every year, an immediate charge to capital gains tax is very rarely an adequate reason for doing nothing when it can be deftly side-stepped by anyone in Mrs B’s position.

This article was written by Stephen Parnham.

You could create a job in your company for your spouse as the job could be something they do at home for activities such as sales calls, credit control and market research but if they don’t have much time to spare the amount you can legitimately pay them will be minimal. A possible solution is to invite them to join the board of directors in a non working (non-executive capacity). This means that their active role will be limited to attending board meetings and occasionally signing a documents. It seems a good strategy to divide Directors Remuneration between fees and salary. Have a consistent approach for all directors so that HMRC can’t argue that the arrangement to pay your spouse is just a sham to avoid tax. How much you pay is at your discretion but somewhere between £500 a month and £1,000 a month seems reasonable.

It’s not easy for HMRC to attack the level of director’s fees, like they can the rate of pay for a regular job. With the latter he can check the going rate with employment agencies to see if you’re paying over the odds but there is no such benchmark for director’s fees because they are not linked to the amount of work carried out,. Being a company director can be quite onerous and fees are intended to compensate directors for this burden as well as for managing the company.

For non professionals the way technology is harnessed has for some become inseparable from their sales proposition. This is a lesson professional firms must also learn if they are to survive and prosper. This will inevitably involve the cloud which presents a great opportunity to use a collaborative model to deliver a seamless level of service to clients. Services that are invisible will still be valued by clients as long as they address their “pain”. Identifying where their pain is is key as in the case of all personal service businesses.

The current generation will also expect professional firms to engage on-line. Effective use of social networking will enable firms to expend quickly, in conjunction with a complimentary face to face networking strategy. To say that networking is the new marketing may be a cliché but is undeniable for personal service propositions where the meet,like, know and trust model is the status quo. Linkedin replicates this model on-line and gives firm the opportunity to establish creditability by contributing to on-line conversations. To use another networking model think about it as visibility and creditability as a route to profitability.

The opportunities are out there to stand above the crowd. Competitors such as supermarkets and banks may try to enter the traditional markets of professionals but as long as professionals are competitive, proactive and focus on where the value is for them (and their clients) the future is not all doom and gloom.

Some have seized on these in business/financial risk factors referred to in these cases and determined that these are the most important. Whilst, it is important to demonstrate that one is operating in a business-like fashion and having a designated office space, office equipment, business insurances etc, are all relevant, yet no IR35 status case has ever been won on the basis of these factors alone. Greatest emphasis is still given to personal service, control, mutuality and substitution. These are the key issues on which tribunal cases are won.

It is interesting that in the first of the recent cases to be decided, MBF Design Services, it was determined that it was highly unlikely that Mark Fitzpatrick (the Worker) would have been able to send a substitute to work at Airbus (the Client), but the Judge Malachy Cornwall-Kelly noted two important points: firstly, the contract between Airbus and the agency did not require specific individuals but resources to undertake the work; secondly, that his inability to send a substitute was “not inconsistent with his having been engaged as a professional man whose personal expertise was valued as might be that of an architect or surgeon. Against the background of MBF’s well-established existence and its history of engagements with various end-users, Mr Fitzpatrick’s status as a freelance specialist in his area is entirely credible.”

In my experience it is not unusual for the provision of a substitute to be impractical so this will be of comfort to contractors. By their nature specialist skills will limit the practicability of substitution.

With regard to control HMRC often argue that being tied to the site and the client’s working hours is an indicator of control, as they did in the case of MBF: however the judge took issue:  “Mr Fitzpatrick’s design work had normally to be performed on site and with Airbus’s equipment because there was no other sensible way to do it, given the nature of the overall project of building an aircraft; there are many other examples of an independent contractor’s work being done on the client’s site and with the client’s equipment for the same sort of reasons: an electrician repairing a wiring circuit, a plumber adapting a drainage system, an engineer checking a safety installation of an oil rig and so on. In the context, we do not see on-site working as a conclusive indicator of employment.” In other words it appears that the client may have control over “when” and “where” the work is performed and presumably the client usually decides what is to be done: however it is “how” the work is done which determines where control lies.

Again this will resonate with contractors on long term assignments such as project managers who would be looking to defend themselves against IR35 despite being tied to locations and fixed working patterns.

With regard to mutuality of obligation HMRC consider that mutuality exists if work is provided and a fee received but this point which was completely refuted in the ECR Consulting case. When presented with the argument that this would be enough to ensure that the irreducible minimum of mutual obligation existed in the hypothetical contract, the judge said:

“We cannot accept that. As indicated earlier we believe that VDS (the Client) was unconcerned as to who the contractor should be, they were merely interested in obtaining a necessary skill for the shortest period of time as cheaply as possible. We do not accept that there was any mutuality of obligation.”

Related to this point, HMRC have argued that hourly rates were indicative of employment to which the judge in the Primary Path case took issue, believing that for someone of Phil Winfield’s (the Worker) skill and expertise a monthly salary in an employment contract would be more appropriate. He felt hourly rates were a feature of the charging structure of both professional firms and skilled tradesmen and if they pointed in any direction – it was away from employment. This is an interesting interpretation of hourly pay and will be reassuring to contractors who are engaged on an hourly or daily rate.

The recent cases are refining the guidance that was available from earlier IR35 cases such as Dragonfly Consulting. Non IR35 cases such as Autoclenz also help to provide general guidance regarding tax status which is useful to remember. In Autoclenz the Supreme Court outlined the key questions that a Tribunal must answer when assessing a disputed contract namely:  What are the ‘actual legal obligations’ of the parties? And what was the true agreement between the parties? This is re-enforcing the principle that was highlighted in the earlier Weightwatchers case that contractual terms must reflect reality. It impacts IR35 cases in so far as contractors need to think about how substitution and other key clauses could work in practice and start to reflect this is in their contracts rather than just using standard clauses. This will focus their mind on what is and isn’t possible so that contracts are in line with what happens in practice.

HMRC for their part are no doubt looking for “softer-targets” to challenge as far as employment tax status is concerned and they have stated that they will be looking at actors and potentially other professions working through service companies.  Such companies still provide the opportunity to make taxation and national insurance savings and as long as they do so will be a bone of contention for them.

Whilst the government did not want to lose face by abolishing IR35 it seems that they must also target other areas of “false” self employment to be sure of success.  Arguably sectors such as the construction industry could provide richer pickings. Definitely a case of watch this space for further developments in the strategy used by HMRC.

Accountants will be experiencing this with services such as payroll, whereas lawyers will be .looking at conveyancing, for example. Anything that can be reduced to a process will be commoditised in the natural course of business.  The trick as I see it is to recognise this and then embrace technology so as to be able to deliver it. This will enable you to retain clients and have a captive audience to sell more value added services which can command an hourly rate, as opposed to being a fixed price proposition. Hourly rates are clearly subject to market forces but give the opportunity to demonstrate benefits more easily that offerings that have been commoditised by the market.

For non professionals the way technology is harnessed has for some become inseparable from their sales proposition. This is a lesson professional firms must also learn if they are to survive and prosper. This will inevitably involve the cloud which presents a great opportunity to use a collaborative model to deliver a seamless level of service to clients. Services that are invisible will still be valued by clients as long as they address their “pain”. Identifying where their pain is is key as in the case of all personal service businesses.

The current generation will also expect professional firms to engage on-line. Effective use of social networking will enable firms to expend quickly, in conjunction with a complimentary face to face networking strategy. To say that networking is the new marketing may be a cliché but is undeniable for personal service propositions where the meet, like, know and trust model is the status quo. Linkedin replicates this model on-line and gives firm the opportunity to establish creditability by contributing to on-line conversations. To use another networking model think about it as visibility and creditability as a route to profitability, just remember the extra effort you need to make on-line to ensure that you engage potential customers.

The opportunities are out there to stand above the crowd. Competitors such as supermarkets and banks may try to enter the traditional markets of professionals but as long as professionals are competitive, proactive and focus on where the value is for them (and their clients) the future is not all doom and gloom.

There is a possible return to this push by accountants to incorporate their larger sole trade and partnership clients for a different reason, namely limited liability.

Many of these businesses are facing difficult timers due to the tough economic environment in which we find ourselves and limited liability is a valuable benefit to consider.

A company is a separate legal entity from its shareholders so it is generally the company, rather than its proprietors. which is liable to creditors. Therefore, with increased financial risks being faced, the limited liability afforded to shareholders of a company is becoming a major attraction. There may also be other commercial benefits such as the ability for employees to participate in share ownership and additional finance raising opportunities.

There are “cons” to consider as well as “pros” though. These include increased administration and disclosure requirements, higher insurance costs and, for a company having no history or credit rating, obtaining credit without directors giving personal guarantees can be difficult.

These are just a few examples which illustrate that the decision to incorporate is very rarely straightforward.  Generally though the changes announced in April 2011 have increased the savings associated with a limited company, compared to self employment or partnership. The corporation tax rate for companies with profits up to £300,000 fell by 1% to 20%, whilst for the self-employed National Insurance increased by 1% to 9% (and to 2% for profits over £42,475), in addition to income tax rates up to 50%.

The payment of corporation tax is still made in arrears as well, compared to the self employed and partnerships who are locked into the self assessment regime with payments on account due each January and July.

Using efficient profit extraction policies, incorporation can save thousands of pounds worth of tax. Greatest benefit is obtained if profits are being retained in the business for expansion or the repayment of loans.

If you are still a sole trader or partnership maybe now is the time to incorporate – its certainly worth giving it serious consideration.  If you are wondering about the merits of Limited Liability Partnerships this will be covered in a future blog posting so please return for more guidance on this.

Robert Bradley

Following recent tax changes the benefits of incorporation have been eroded. Ten points to consider when deciding whether or not to incorporate a business are considered below.

Administration

There is more administration involved in running a limited company, as compared to a sole trade or a partnership. For example the company will need to prepare accounts for the tax authorities and Companies House, as well as submitting an Annual Return. A PAYE scheme will also attract year end returns and a returns of director’s benefits in kind. The directors will also need to submit personal Self Assessment Tax Returns.

Legal

The Company Officers are responsible for their actions as officials of the Company. Under the provisions of the Companies Act 2006 there is no need to appoint a Company Secretary but if you do they will be have legal responsibilities in the same way as directors do.

Tax considerations

Will incorporating save you tax and National Insurance? This will normally only be achieved if you are a higher rates tax payer.

Remuneration

The normal practice for owner managed Companies is to take low level of Remuneration to save tax and national insurance, supplemented by dividends. Other factors should be borne in mind such as the need to maintain income for the purposes of obtaining personal finance or pension purposes.

Husband and wife

Is your wife going to be involved in the business?

Motor expenses

Unless only a small business mileage is being undertaken it is not generally tax efficient for owner managed companies to provide directors with company cars. It is generally more tax efficient to claim mileage expenses using the approved mileage rates.

Other expenses

Expenses such as office running and travelling costs are deductible against company profits using less stringent rules than is applicable to employees claiming expenses. Overhead costs such as telephone should paid using accounts be in the company’s name and not in the name of directors, thus avoiding problems with benefits in kind. A company credit card or debit card should be used for company expenses as the reimbursement of amounts paid on personal credit cards will lead to problems with benefits-in-kind.

Company vans

Company vans are now taxed at a higher rate than previously because directors and other employees who fall within the scope of benefits in kind are penalised where vans are provided for private use.

Property

It is not generally tax efficient to introduce properties into limited companies due to the fact that entrepreneurs relief is not available to them in the same way as it is to individuals.

IR35

Management Consultants and IT Contractors who incorporate should ensure that they are complying with the requirements of IR35. Contracts should be drawn up which provide for independent working patterns and the ability to provide a substitute. The practical reality should reflect the provisions of the contract.  In all cases travel from home to work and travel expenses incurred whilst working away from home will only be allowable for up to two years from the commencement of the contract.

Next step

For specific advice relating to your circumstances contact Robert on 01299 879140      .

Recent projects have included:

• Incorporation of sole trader with goodwill valuation
• Set up of trust as vehicle for for limited company investment property

For more information on how we can help you plan your tax strategies contact Robert Bradley.

Thing of cutting your staff costs in the recession?

One way businesses think they can reduce costs in a recession is to make some of their employees self employed. This can be very dangerous as borne out by the recent Autoclenz case.

This involved a group of 20 car valeters who had been engaged on a self employed basis by Autoclenz.  Their contracts clearly stated that they were self employed but this is not enough to establish that they are. The actual circumstances were not consistent with self employment and they were ruled to be employed. This was referred to in the earlier weightwatchers case and now has been codified in the precedent set by Autoclenz.

The Autoclenz valeters were able to establish employment rights including unpaid wages, holiday pay, or failure to be paid the national minimum wage. My expertise usually leads me to looking at situations where the taxpayer wishes to prove that he is self-employed to be able to save tax but the opposite applies and employees who have been “pushed” into false self employment by their former employers may well seek future recourse.

The tax liabilities arising from the reclassification of self employed contractors as employees can be significant – The well publicised Dragonfly IR35 case resulted in an assessment of £99,000 but this pales into insignificance when compared to the 24.5 million pound assessment levied on Weightwatchers that the US parent company had to fund.

It is worth looking at what went wrong at Weightwatchers to give rise to this.  The Employment Tribunal which initially heard the case held that there was a relationship of employer / employee based on the tests established in the well quoted in Ready Mixed Concrete case of 1968, namely

(i) The weightwatchers leaders only had contractual rights when they led meetings themselves and so by definition had to provide personal service

(ii) Weightwatchers had a high degree of control imposed by the contract the leaders signed which did not give them freedom to decide how where and when to run the meetings.

(iii) The level of control, together with the personal service element, was characteristic of a contract of service and other provisions were, in total, consistent with this.

The tax appeal tribunal that decided the case agreed. The point is that before employers think about reclassifying their employees as self employed contractors as a way of, perhaps, offsetting the increasingly onerous national Insurance costs they should think carefully about the tests which establish self employment not just contractually but also in practice.

My own feeling is that business tests, such as financial risk, should be the true test of whether or not an individual is employed or self employed but the HMRC Office of Tax Simplification proposals have not adopted this as a preferred test, instead preferring to rely on arguing the case on the other  badges of trade such as the provision of materials and equipment, personal service, control and mutuality of obligation. The first two of these formed the basis of the proposed tests which the labour government discussed before it lost office and would potentially have reclassified the majority of the labour only subcontractors in the construction industry as employed. The current government would no doubt like to adopt these proposals themselves, given the extra tax and national insurance it would raise.  The downside would, of course, be a boom in the cash economy which some say is already returning in the construction industry.

In the meantime we are left with grey areas about whether individuals and their businesses are caught by employment status issues, IR35, National Insurance regulations, the European “worker” definition or the construction industry rules.  Seems like it’s time for clear rules around what constitutes self-employment based on business tests.  Surely the government must seek to remove artificial barriers to entrepreneurial spirit in these difficult economic times.

We have all been there….. First day nerves, feeling worried about what     to expect from day one in your new company.

• Will everything be as promised at the interview?
• OMG can I do the job?
• Will they like me?
• What is the culture like?
• What will I be expected to do in my first week?

Research from Massachusetts Institute of Technology has shown that socialization techniques lead to positive outcomes for new employees such as higher job satisfaction, better job performance, commitment to the organisation and better retention.

This research has prompted some companies to recognise the benefits of implementing a formal on-boarding (Induction) programme to support new employees before they even start their new role.
The aim is to engage new recruits from the start, so why often does it go so badly wrong?

Remember counter offers do occur and this generally takes place ahead of your new recruit leaving their current organisation to join yours!

Sadly on-boarding is all too often overlooked; so please do remember new recruits are watching you very closely during this period, they are also assessing you it is of course a mutual thing! They’ll be challenging their decision making, did they make the right decision to join and also should they stay! Week one is the most important week, it simply boils down to “make or break”!

So how confident are you that recruitment and on-boarding processes are bringing about the benefits listed above?

Are you:-

• Confident that you are easing this transition for mutual gain?
• Making employment offers that are rejected?
• Facing counter offers by existing employers?

Clearly recruitment search and selection costs directly and indirectly, so you need your return on investment! Equipping new recruits post acceptance of employment will help engagement through understanding company values and priorities before they even walk through the door on the day one!

Why not take advantage of our free 90 minutes HR support, all you have to lose is 90 minutes! A fresh pair of eyes could add significant value to your recruitment search and selection practices so contact us! Alternatively see here for our handy hints and tips and the costs associated with getting it wrong!