Page 9 - index

The contract ‘passes’ if the owner/partner would have been classified as self-employed; it fails if the owner/partner would have been classified as an employee. If the contract ‘fails’,
the business is required to account for PAYE and NICs on the ‘deemed’ employment income from the contract at the end of the tax year. This is done using specific rules. We can advise you about these, so please contact us for further information.
The position for individuals working through their own company in the public sector changed from April 2017. This is known
as ‘off-payrolling’. The public sector employer, agency, or
third party that pays the worker’s intermediary now has to decide if the off-payrolling rules apply to a contract, and if so, account for and pay the relevant tax and NICs. The government extended the off-payrolling rules to larger businesses in
the private sector from April 2021. The new tax rules apply
to individuals who provide their personal services via an ‘intermediary’ to a medium or large business. The rules apply
to payments made for services provided on or after 6 April 2021.
Whose risk?
If the question is whether an individual is an employee or self-employed, the risk lies with the ‘engager’ or payer – with a potential liability for the PAYE which should have been paid over without right of recourse to the ‘employee’. If the question is whether or not IR35 applies, the question (and any liability due) is for the individual and his/her company (the payee) (unless the company is engaged in the public sector or by a medium or large business as explained above).
Unpaid bills and unbilled work
As explained in this guide, small businesses may opt into the cash basis and calculate their profits on the basis of the cash passing through the business. However, it is a feature of the tax system that other businesses (including all corporates) must include in their turnover for the year the value of incomplete work, of unpaid bills (debtors) and of work completed but not yet billed, all as at the end of the year.
We will need to discuss with you exactly what needs to be identified and the basis of valuation. Keeping an eye on debtors and unbilled work is very important to your cash flow.
Forming a limited company
Forming a limited company may be a consideration if the limitation of liability is important, but it should be noted that banks and other creditors often require personal guarantees from directors for company borrowings.
Trading through a limited company can be an effective way of sheltering profits. Profits paid out in the form of salaries, bonuses or dividends may be liable to top tax rates, whereas profits retained in the company will be taxed at 19%.
Funds retained by the company can be used to buy equipment or to provide for pensions – both of which can be eligible for tax relief. They could be used to fund dividends when profits are scarce (spreading income into years when you might be liable to a lower rate of income tax) or capitalised and potentially taxed at 10% and/or 20% on a liquidation or sale.
Increasing your net income as an owner-director
As an example, consider how much you might save if, as an owner-director, you wanted to extract £10,000 profit (pre-tax) from your company in 2021/22 by way of a dividend rather than a bonus. We have assumed in this scenario that the director has already taken salary in excess of the upper earnings limit for NICs, is a 40% taxpayer, and the £2,000 dividend tax allowance has already been utilised.
Case Study
As you can see in this case study, the net income is increased by 7% by opting to declare a dividend. Be sure to discuss this with us, as this is a complex area of tax law.
Bonus Dividend ££
Profit to extract
Employers’ NICs (13.8% on gross bonus)
Gross bonus
Corporation tax (19% - dividend is not deductible for corporation tax)
Dividend
Employees’ NICs (2% on gross bonus)
Income tax (40% on gross bonus)
Income tax on dividend (32.5%)
Net amount extracted
10,000
-1,213
8,787
-176
-3,515
5,096
10,000
-1,900
8,100
-2,633
5,467
For Scottish taxpayers paying the Scottish Higher Rate of 41%, the net amount extracted on the bonus would be reduced to £5,008 (£8,787 less tax @ 41% and NICs of £176). The tax payable on dividends is the same wherever you are in the UK so the net income would be increased by 9%.
Remember that dividends are usually payable to all shareholders and are not earnings for pension contributions and certain other purposes. It is possible to waive dividends, although this can result in tax complications. Finally, you need to consider with
us the effect of regular dividend payments on the valuation of shares in your company.
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