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Many independent workers offer their personal services through their own companies for a variety of reasons. They don't want to be tied into one company as an employee, and using their own limited company allows them to have more control over the tax they pay. The final customer often prefers this arrangement, as they are not treated as the worker's employer, so don't have to be bothered with the various employment regulations.
So everyone is happy except the Tax Inspector who collects less tax and NI. The Inspector can question the relationship between the client and the worker, and if he decides that it is really one of employee and employer, in spite of all the various contracts, agency and service company in place, the extra tax due will fall on the worker's own company. This is collected through either the Personal Service Company rules (known as IR35) or the Managed Service Company regulations (MSC).
If this set-up is familiar to you, but you are feeling smug because you have an 'IR35 proof' contract, you may need to think again. The recent tax case Dragonfly Consulting Ltd demonstrated how the contract between the agency and the final client can knock for six any clever contract drawn up between the worker's company and the agency. HMRC have proved that the entire stream of contracts needs to be considered and compared to what actually happens on the ground.
The key legal point to prove is whether the worker is independent. If the worker can substitute another person to complete the tasks for the client, he is considered to be independent and IR35 will not normally apply. The agency may agree to include a substitution clause in the contract with the worker's company, but if this clause is not reflected in the contract with the final client it is ineffective. Even if a substitution clause does exist in the agency/client contract it will be ignored if the client tells HMRC or the tax tribunal that it would never actually accept a substitute for the worker.
To ensure your working arrangement with your client will stand up to challenge by HMRC you need to see all the contracts in the chain, and be sure your client would agree to accepting a substitute if asked to.
The Government undertook a huge overall of company law in 2006, and the result: the Companies Act 2006 (CA 2006) is designed to make the administration of the law easier for smaller companies and their directors. Not all the changes come in at once, as the regulation enactment dates of 6 April and 1 October are being used to gradually implement the changes between 2007 and 2009. This is a summary of the latest changes that will affect you.
Company Secretary: From 6 April 2008 the post of Company Secretary is optional for private companies. This means it now truly only takes one individual to own and run a private company. The person who holds the post of Company Secretary for your company may resign and need not be replaced, although all the Companies House documents they currently deal with still have to be completed and filed. However, there can be other practical and tax reasons why you should have a second person who can sign documents for the company, and who may have access to the bank account.
Company Directors: Previously directors had to retire from office at the age of 70, but this upper age requirement was abolished from 6 April 2007. However, from 1 October 2008 there is a minimum age of 16 for all company directors. This will prevent parents from making their children directors of their companies, possibly to avoid tax. All children under the age of 16 who still hold directorships on 1 October 2008 will automatically cease to be a director from that date. You need to check that this does not leave the company without a director, as from 1 October 2008 every company must have at least one real person in the post of director. A company cannot be the sole director of another company.
Privacy: Concerns for the privacy of officers and shareholders of private companies have been addressed. Annual returns made up for periods from 1 October 2008 do not include address details for the shareholders. From 1 October 2009 directors may provide a service address for the publicly available director's address details. This additional privacy applies to company secretaries from 6 April 2008. However, directors (not secretaries) must provide Companies House with their private residential address, which will be kept on a private secure register. Existing residential addresses for directors and secretaries will not be removed from public view, unless the individual resigns from their post or the address details are replaced.
Accounts Filing Deadlines: Private companies have 10 months from the end of their annual accounting period to file their accounts with Companies House. This period will reduce to nine months for accounting periods beginning on and after 6 April 2008. However, the filing period will run to the end of the corresponding month rather than to the corresponding day of the ninth month. So company accounts for the year to 30 April 2009 must be filed by 31 January 2010. Small and medium sized companies will still be able to file abbreviated accounts at Companies House.
Halloween is particularly scary this year as it brings a new Tax Return deadline. If you plan to complete your self-assessment tax return on paper, your signed tax form must be with HMRC by midnight on 31 October 2008. If you are going to complete the form online, or have asked us to submit it online for you, you (or we) have another three months to 31 January 2009 to do this.
What happens if you miss the 31 October deadline and submit your paper return after this date? If you pay all the tax you owe for 2007/08 by 31 January 2009, you will not have to pay a penalty. The HMRC computer system may issue a penalty, but this should be reduced to nil where you can show you have paid all your tax on time. If HMRC owe you a tax repayment for 2007/08, you cannot be fined for submitting a late tax return. Although of-course you won't get your tax repayment until you submit your tax return.
If you try to use the HMRC free software to complete your return online, but something goes wrong with the system so your return does not get through, you do have a reasonable excuse. In this case you have no choice but to submit a paper tax return instead. When the HMRC computer spews out a penalty you should appeal and enclose proof that you tried to submit online but the system failed.
To avoid this hassle, just deliver all your tax return details to us, and we will do battle with the HMRC computer system on your behalf. But we need to receive your tax records without delay to get the return done in time!
When you make changes to your company, such as its name, address, or contact details you need to tell Companies House and sometimes also HMRC. If you don't do this promptly vital forms may go missing and you could be fined for not completing those forms on time. You may have to inform HMRC multiple times as the departments that deal with the various different taxes do not share basic information very well.
For example...
If you let us know what changes have occurred we can take care of matters for you.
Q. My sales have fallen off drastically in the last few months and my customers are getting much more price sensitive. Can I deregister for VAT and so effectively drop my prices?
A. If your total sales for the last 12 months have been less than £65,000, and you expect them to stay below this threshold for the next 12 months you can ask HMRC to cancel your VAT registration. This is not an automatic process and the VAT office may not grant you permission to escape the VAT net. You need to complete form VAT 7, which can be downloaded from the HMRC website, and give some convincing reasons on that from why your turnover is unlikely to rise about the compulsory VAT registration limit (£67,000) in the foreseeable future.
Q. I'm about to buy a shop with a flat above. Will the value of the flat be covered by the Stamp Duty holiday, and so be free of duty?
A. Unfortunately not. The Stamp Duty Land Tax 'holiday' only applies to purely residential properties where the value of the sale is £175,000 or less, and the deal is completed between 3 September 2008 and 2 September 2009. Commercial properties, and properties where there is both a commercial and residential part, such as your combined flat and shop, are covered by the commercial rates of Stamp Duty Land Tax which start at £150,000. There is no 'holiday' for these commercial properties.
Q. I held shares in the company I worked for, which was taken over in February 2008. The amount I received for those shares was less than I paid for them. Can I get any benefit from that loss?
A. If the company was not quoted on a stock exchange you may be able to set the loss against your income for 2007/08 or 2006/07, but you must have bought the shares directly from the company, not from another person. The company must also meet a number of conditions regarding its size and trade. If the company was quoted or does not meet all the conditions, the only option for you is to claim the capital loss on the capital gains tax pages of your tax return. You can then set the loss against any taxable capital gains you make in the future.
1 - Due date for payment of Corporation Tax for the year ended 31 December 2007
5 - If a Tax Return has not been received, individuals and trustees must notify HMRC of new sources of income and chargeability in 2007/08
14 - Return and payment of CT61 tax due for quarter to 30 September 2008
19 - Tax and Class 1B national insurance due on PAYE settlements for 2007/08
19/22 - PAYE/NIC due for month to 5/10/2008 or quarter 2 of 2008/09 for small employers
31 - Deadline for 2007/08 self assessment paper returns to be filed for HMRC to do the tax calculation and/or if tax underpaid is to be collected by adjustment to your 2009/10 PAYE code (for underpayments of up to £2000 only)