A Targeted Budget
Amid soaring inflation of 6.2% and forecasts of the sharpest fall in living standards since records began (according to the UK’s fiscal watchdog), Rishi Sunak presented a Budget which he argued would support the UK economy, businesses and families in both the short and the medium term. In contrast to the profligate Budgets of very recent times, which were arguably necessary to address a pandemic that affected all areas of the economy from all angles, this was a targeted Budget with a laser beam pointed at the erosion of disposable incomes that is likely to pursue at least in the short term.
The key measures were as follows:
Rishi Sunak saved the “crowd pleaser”, or “low-tax-Conservative-MPs-and-commentators pleaser” until the end – his virtual rabbit out of the hat, by promising to cut the basic rate of income tax to 19p in the pound in April 2024, conveniently a few weeks before many Tory MPs expect to face a general election. Rishi has kept what looks to be substantial powder for more election-fighting fireworks. Has he done enough for the poorest people in society? Having banked most of the fiscal good news he received – higher than expected growth and tax revenues this year – he could have gone further. He is building up a war chest for the autumn. Momentum politics.
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Under the Construction Industry Scheme (CIS), a contractor deducts money due to a subcontractor and instead pays it to HM Revenue and Customs (HMRC). This deduction counts as an advance payment towards the subcontractor’s tax. The amount deducted is a percentage of the labour services provided. The Domestic VAT Reverse Charge is in addition to but separate from CIS tax.
VAT – Domestic Reverse Charge
To ensure VAT is reported correctly by businesses in the construction sector, the domestic reverse charge has been added to the existing CIS since 1 March 2021. Prior to 1 March 2021 the supplier (subcontractor) would charge VAT to the customer (contractor), collect it and pay it to HMRC. The contractor would reclaim the VAT amount paid in their VAT return. From 1 March 2021, the subcontractor must not charge VAT but instead specify that the reverse charge applies. The subcontractor then accounts for the contractor’s output tax and reclaims the exact same amount as input tax on the VAT return. The subcontractor effectively accounts for the VAT directly to HMRC, as opposed to paying it over to the contractor.
The reverse charge must be used for most supplies of building and construction services. Normally if any of the services in a supply are subject to the reverse charge, all other services supplied will also be subject to it. The charge applies to standard VAT services for businesses who are registered for VAT in the UK and in the kinds of construction work listed here. Even if a customer enters into 2 separate labour and materials contracts with the same supplier for works within the scope of CIS and the works are to be provided at the same time on the same site, the reverse charge will apply to both contracts (subject to the 5% disregard) as they comprise a single supply for VAT purposes.
If you supply building and construction services as a sub-contractor
You must use the reverse charge from 1 March 2021, if you’re VAT registered in the UK, supply building and construction industry services and:
If the above applies, you will not charge VAT to your customer, and they will account for the VAT themselves. You should not charge VAT on the invoice but specify that the reverse charge rule applies. Page 8 of this guidance shows an invoice template.
If you buy building and construction services as a contractor
You must use the reverse charge from 1 March 2021 if you’re VAT registered in the UK, buy building and construction industry services and:
If the above applies, you must ensure that your supplier does not charge you VAT (and you do not pay VAT to your supplier), as you should instead account for VAT using the domestic reverse charge procedure.
Settling with HMRC
A contractor must register for the scheme. CIS deductions made will be added to PAYE liabilities.
A registered subcontractor will have 20% deducted from its payments, whereas an unregistered subcontractor will suffer a 30% deduction. A contractor and subcontractor must register as both. Each time tax is withheld from payment to a subcontractor, the subcontractor must be presented with a CIS Payment and Deduction Statement from the contractor. This is used to reclaim tax from HMRC.
A sole trader or partners subtract CIS deductions suffered against income tax and national insurance on the Self-Assessment Tax Return. A limited company subcontractor offsets CIS deductions suffered against PAYE payroll liability. Unrelieved CIS tax deductions at the end of the tax year can be refunded into a bank account or offset against other outstanding tax liabilities, in which case an online form needs to be submitted. A subcontractor who meets the revenue thresholds and has a record of timely tax payments can apply for gross payment status, meaning that they will be paid in full by contractors, without deductions.
Our tech-enabled CIS and payroll service will help:
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You may be all-too-familiar with the process and time spent dealing with payroll and HR: emails, telephone calls, attachments, more emails to employees, setting up bank payments…the list goes on. Large businesses will have segregated duties, with an HR lead responsible for managing joiners and leavers and holiday requests, an Operations Manager for coordinating and communicating shifts, a Payroll Manager and a Financial Controller. For small-to-medium sized businesses, the responsibility often lies with the managing director. In this regard, there are some fantastic tools to make managing your team more pleasant and more efficient, including the new way to automate salary payments.
Paying salaries
The latest integration to the cloud payroll ecosystem automates the payment of staff salaries. Currently, we prepare a BACS payment file which many employers upload to their online banking facility for processing onwards payments. The latest payments platform goes a significant step further and allows us as your accountants to make payroll payments, linked to your payroll information, shortly after the payroll is approved, saving you precious time, removing manual processes, and eliminating costly errors. The seamless workflow is protected by two factor authentication and payments are processed through a highly secure and compliant network. This solution benefits all employers with a high headcount and who pay their staff via bank transfer.
Employer and Employee Portal
By integrating with our payroll software in the cloud, we can streamline the way you communicate payroll information to us, including hours worked, holiday days taken, bonuses or new starters. A browser- or app-based Employer Portal allows you to enter relevant information, store and organise documentation (including payroll reports which we prepare) and make final approvals. We can email your employees their payslips directly, or even grant them access to the Employee Portal, where they can retrieve payslips (including past payslips), submit holiday requests, enter starter data…etc. This functionality benefits businesses in all sectors, as it is centred around improving the information flow between the employer, the employees and the accountant.
Rota Management
If your business requires organising shift patterns for your staff, we can help you implement software which helps you schedule rotas, optimise wage spend, record attendance and approve timesheets for payroll. Your employees would receive pop-up notifications and would log their check-in and check-out times in the app. The app can then produce weekly reports showing hours worked and wages due. There are also built in features such as overtime pay and GPS, which would ensure that employees can only log in when actually present. We have found this software to be particularly helpfuly for hospitality businesses and beauty salons.
How much does it all cost?
The payment integration and cloud hosting is priced based on the number of active employees, and the efficiency saving will tend to outweigh the fee for a payroll with at least 4 employees.
Our Information Sheet sets out a full list of our integrated Payroll and Pensions services.
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Facing an almost empty House of Commons yesterday lunch-time (television viewing numbers yet to be announced!), the Chancellor presented his long-awaited second full Budget.
The challenge the chancellor faced was double edged: begin to recoup the £407bn state bill for tackling the pandemic (comparable to the two world wars), without choking the economy just as the cogs might begin to turn.
The headline was the only apparent increase in tax rates, being the raise of the Corporation Tax rate from 19% to 25% for companies with profits over £250,000, with effect from 1 April 2023. The 19% rate is retained for trading and (most) property investment companies with profits up to £50,000 – but even for those companies, once profits exceed £50,000, a tapered rate will be introduced until profits reach the £250,000 limit. To avoid avoidance, profits between group companies under common control are proportionately reduced, akin to the mechanisms prior to Budget 2015.
The effect will mainly hit larger companies, but the change will also discourage the incorporation of profitable sole trades or partnerships. No reduction of the dividend tax rates to reflect the additional underlying Corporation Tax is afforded, meaning that the effective overall rate of tax on profits earned in a company and extracted by way of dividend could now be as high as 54.5% in some circumstances, though more commonly 49.4% (for a higher-rate taxpayer).
Other taxes were increased by stealth – that is to say, in an indirect manner. Allowances and tax bands have been increasing over the past several years to reflect inflation, however yesterday the Chancellor gleamed when he announced the removal of indexation and fixing of allowances, tax bands, or both for the next five years. This applies to the following, with the effect of dragging taxpayers to higher tax brackets as they get richer – more commonly known as “fiscal drag”:
Other rules did lend themselves to favouring trading businesses, be they companies or individuals:
The wider economy
Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter. Budget Highlights and tax data following Budget 2021 can be viewed on our website here.
As a hair salon or barber shop owner, you aim to run your business in a way that maximises revenue, reduces costs, and ensures a good working relationship with your staff and customers. It is important to choose the right model that suits your business needs from the outset. We discuss below three different models of business:
Full Operation
Full operation is the most involved and therefore carries the capacity for highest profits. This model also incurs the highest administrative costs, both in terms of money and time, including:
Self-employed basis
As senior manager, you could continue operating the business, whilst moving some of your staff to a self-employed basis. The benefit of transitioning could save money in the following ways:
Should you pursue this model, it would be worthwhile implementing a service contract with the freelancers, to ensure that both parties’ expectations are understood. Of course, the risk of a barber turning up late, taking a day off or poaching clients for their own business remains. You should take on full advice, including with respect to legislation around self-employment.
Internal Controls
If you are not present at the salons throughout the day, it would be worthwhile implementing Internal Controls. These should be considered especially if you will continue to operate the salons, or even if you plan to sub-let at a variable rate dependent on performance. Internal Controls for cash sales and collections include:
Internal Controls to accurately track employee time should be considered if you are paying your staff per hour, either as employees or subcontractors. To help you accurately monitor and control employee timesheets, we have helped our clients implement an app-based time management software which you or your management could use to organise rotas.
Chair rental
There are three models to renting out chairs:
With option 1, if there is a high volume of customers for a particular chair you will lose out on sales as the freelancer will take all of the earnings. Option 2 avoids this problem, however if the freelancer doesn’t turn up for work then you lose out on rental income compared to the first model. A combination of the two methods is arguably the best way forward, however it would require monitoring of sales figures. The incentive agreement should be set at a level where the freelancers have the potential to make more money than they currently do.
You would need to charge VAT on rental income should your turnover exceed £85,000. A non-VAT registered freelancer would then suffer the VAT. Of course, the barber may also seek VAT registration, depending on his or her particular circumstances.
Compared to the full operation model with staff there will be no wages, national insurance and pensions costs however sales will be limited as per your agreement with the freelancers. Should you pursue this model, it would be worthwhile:
An additional risk compared to an employee-based model is that freelance workers may come and go, thereby requiring more management time to maintain occupancy.
Shop rental
This option is the least involved. If you do not foresee a pick-up in footfall in your salon, you may consider subletting your salon and collecting the passive income. You should bear the following points in mind:
Summary
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Under the right circumstances, which can of course be shaped, intercompany loans are an effective means of funding further profit or not-for-profit motives. Consider Mr Trader, who is director and sole shareholder of Company T, a trading company. Company T has grown with accumulated profits in excess of £2m, matched by substantial cash balances. Mr Trader has decided to set up a not-for-profit organisation, ReMobly Ltd, aimed at rehabilitating injured athletes back into competitive sport. In addition to Mr Trader, two other directors will be appointed to the board of ReMobly Ltd and each of the three persons will own 33% of the ReMobly Ltd share capital.
ReMobly Ltd is seeking to raise capital to begin its operations and Mr Trader is considering the most apt means of lending money to the not-for-profit organisation. There are three issues which spring to mind…
Loans to participators
In view of the large cash balances that have accumulated in the company, Mr Trader considers lending money from Company T to ReMobly Ltd. CTA10/S455 applies to loans/advances made by a close company to its participator, or an associate of its participator. Broadly, where a close company makes any loan to an individual who is a participator (or an associate of a participator) in the close company, then the close company is due to pay tax under CTA10/S455. The not-for-profit is not classed as an associate of Mr Trader (so far as section 448 of Part 10 of the Corporation Tax Act 2010 is concerned), therefore the loan can be made by Company T without corporation tax implications under CTA10/S455.
It is also important to analyse CTA10/S459, which applies if there are arrangements made by a person whereby a close company makes a loan or advance that is not subject to tax under CTA10/S455, and another person makes a payment to a relevant person who is either a participator of the company or an associate of such a participator. In this case there is a proposed “loan or advance” from a close company. However, there is not then a payment by a person other than Company T to a relevant person who is a participator in Company T or is an associate of such a participator. Indeed ReMobly Ltd is not a relevant person who is an associate of Mr Trader, because a relevant person has to be an individual or a company acting in a fiduciary or representative capacity (CTA10/S455(6)). Therefore the loan can be made without corporation tax implications under CTA10/S459.
Loan write off
There is a possibility that the future activities of ReMobly Ltd will be inadequate to allow for the repayment of the loan made by Company T, under the terms of the loan agreement. If both parties are companies and both are found to be under the common control of another person, company or individual, at any time in the accounting period, then no bad debt relief will be available on the release of the loan, and no taxable credit will arise to the company whose indebtedness is forgiven. Company T and ReMobly Ltd are not under the common control of another person and are therefore not considered to be connected. The debit for the loan write off will be allowable for Company T (most likely as a non-trade loan relationship deficit). The corollary is that a taxable credit will arise to the not-for-profit.
Anti-avoidance
The main anti-avoidance rule will also need to be considered in FA 1996, Sch 9 para 13, the ‘unallowable purposes’ rule. This will deny relief for so much of a debit where the loan or part of the loan is attributable to an unallowable purpose. An unallowable purpose is any purpose which is not amongst the business or other commercial purposes of the company, Company T. If taken literally, this would seem to be cast fairly widely. In general however, if the loan relationship rules are seen to be fairly applied to both parties, HMRC seem content in leaving matters undisturbed.
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The following scenario often arises with our client Mr Investor, who is considering investing in an early-stage business. Wonderful Ltd is an established FinTech company which has developed a track record of an established user base, consistent revenue figures and other key performance indicators. Wonderful Ltd is now seeking to raise Series A funding of £1.5 million in order to further optimize its user base and product offerings. Mr Investor has received an Investment Memorandum for the funding round and is considering allocating a small proportion of his investment portfolio. Mr Investor has asked his accountant to run through the Investment Memorandum with him and has identified five reasons why he wishes to invest. Being an early-stage business, Mr Investor acknowledges that the investment is inherently high-risk, but he really believes in the founder Mrs Wonderful, who attended the same university. The generous Enterprise Investment Scheme (EIS) tax breaks “cushion” the risk element of the investment (see below) but nonetheless, the minimum investment of £75,000 is punchy for Mr Investor.
Mr Investor has an idea. Can he pool together capital from two other friends in order to meet the £75,000 minimum investment? Will each investor still be eligible for the EIS tax relief for joint investment?
Joint Investment – A Problem Shared is a Problem Halved
In short, there is a way to pool funds in order to meet one investment clip of £75k. EIS relief is available for an individual who makes the subscription on his or her own behalf, with two notable exceptions:
Mr Investor can therefore form a bare trust with his friends (as in point 2) in order to make a direct investment jointly. Where shares are issued to a bare trust on behalf of a number of beneficiaries, each beneficiary is treated as having subscribed, as an individual, for the total number of shares issued to the bare trustees divided by the number of beneficiaries. This creates an important limitation in that each of the three friends should invest an equal percentage in Wonderful Ltd.
Paperwork
Wonderful Ltd should provide each subscriber form EIS3 showing the total number of shares subscribed for on Page 1 of the form. Form EIS3 Page 3 should show the amount on which each owner is entitled to claim the tax relief for the shares, that is the fractional amount of the total subscribed.
Tax Relief?
Whilst joint investment does not preclude EIS tax relief, Mr Investor and his associates must of course check that all the other EIS eligibility criteria are met for EIS tax relief to apply. Mouktaris & Co can provide a checklist of questions to ask in order to determine whether tax relief under EIS is available to an investor in shares. The target company may produce an Advance Assurance document to potential investors demonstrating that HMRC accepts the investment under the scheme, however Advance Assurance will not tell you if an investor would meet the conditions of the scheme.
EIS Investment Funds
A different route (via point 1 above) would be for Mr Investor to invest via an EIS investment fund, which is structured as a nominee vehicle which invests funds in EIS-qualifying companies on behalf of investors. This vehicle would provide Mr Investor with a more diversified risk exposure to early-stage businesses, as his £25,000 investment would be spread across a number of target companies identified by the fund manager. Wonderful Ltd may seek to market its strengths to the EIS investment fund manager so as to be included in the fund’s equity holdings. So in fact Mr Investor could in the future invest in Wonderful Ltd through an EIS investment fund without necessarily being reliant on his friends’ capital.
EIS for Investors: Advantages
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In a partial repeat of the announcement made by the Chancellor on 5 November 2020, the government has announced extensions to the furlough scheme and three of its business loan schemes:
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Calls for a wealth tax have so far been made with little impact, amid fears that a levy on assets would not go down well with conservative – or even not-so-conservative voters, and could hurt people with valuable homes but little cash. However, the Wealth Tax Commission said the timing was ripe for radical change due to the devastating impact of Covid on the public finances and on inequality in Britain.
The Wealth Tax Commission was established in Spring 2020 to ‘provide in-depth analysis of proposals for a UK wealth tax’. It’s not a government body, but a ‘think-tank’ funded by the London School of Economics, Warwick University and the Economic and Research Council (itself a public body). The Commissioners comprise a senior academic from the LSE and Warwick university and a very well-known tax barrister.
Whilst conclusions published last week may therefore not directly reflect government policy, they do propose an academic and practical solution to shore up public finances in these times of crisis – and should be afforded some serious attention. Readers may consult the full 126-page report here. For those with less time, the key points are below.
The report does not argue for the idea of an annual wealth tax. However, it’s strongly in favour of the levying of a wealth tax on a one-off basis to deal with an exceptional need – being that of repairing the alarming hole in public finances caused by coronavirus. The basic premise is therefore based not on redistribution but pragmatism – and the best place to get the money is from people who have it.
Interestingly, that pragmatism contrasts with the reasons that people who support the idea of wealth tax give for doing so: ‘filling a hole in public finances’ comes in only at fourth place, after ‘the gap between rich and poor is too large’; ‘the rich have got richer in recent years’; and ‘better to tax wealth rather than income from work’.
The report leans on a simplified design and implementation to maximise the efficacy of the tax – with the scope to avoid the net limited to such matters as redistribution, relocation or releveraging – all within a potentially short period of time.
How do the Commissioners propose a Wealth Tax should work?
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It can be daunting going to work in a foreign country, or coming to work in the UK. Understanding how tax and social security are affected by making such a move can add to the list of complexities you have to deal with.
CONFIRMING UK TAX RESIDENCE
As a new UK resident, foreign tax authorities are often forthcoming with their requests for proof of UK tax residence. The tax authority in Greece for example may require a former resident of Greece to prove that he or she is now regarded by HMRC as a resident of the UK. Customers may also want HMRC to confirm that they are regarded as UK resident so that they can claim relief from foreign taxes which they might be entitled to under the domestic law of the foreign state rather than under the terms of the UK’s DTA with that other state.
Our personal tax desk at Mouktaris & Co is thoroughly versed in the process of obtaining proof of UK tax residence. As a first step, it’s important to distinguish what exactly is required.
LETTER OF CONFIRMATION OF RESIDENCE VS CERTIFICATE OF RESIDENCE (COR)
A Letter of Confirmation of Residence is confirmation that the taxpayer is regarded by HMRC as a resident of the UK for purposes other than claiming relief from foreign taxes under the terms of a Double Taxation Agreement (DTA).
The worked required to obtain a Certificate of Residence (CoR) on the other hand is more involved and will require the taxpayer to outline the following:
TAX RESIDENCE WHEN COMING TO THE UK, OR LEAVING THE UK
Having moved to the UK, an overseas assignment may turn out to be a permanent move; similarly a stint abroad may be intended for a finite length of time. In any case the length and timing of one’s time spent outside the UK, any return visits made to the UK and what personal ties are maintained with the UK are important. These factors will determine tax residence when coming to the UK in the year of arrival, or leaving the UK in the year of departure. The taxation of residents and non-residents is very different.
ADVISING ON TAX RESIDENCE IN THE YEAR OF ARRIVAL OR LEAVING
Based on the above and in order to advise properly, it’s important to:
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