Contractor – Account-ant – we're strong in numbers

Bob The Builder (A CIS Story)

Bob The Builder, can he fix it? Bob the Builder….. Yes he can.

Bob is a Sole trader builder based in Bradford. He mainly building houses and extensions, one house at a time for individuals. Sometimes he employs Wendy to do a spot of bricklaying, cash in hand…..

“Hold your horses there Bob my friend” says Rachel from Account-ant. You could be sailing right into a fine from HMRC.

You see, HMRC wanted to tighten up the controls over taxation in the Construction Industry because it has been notorious for tax dodging, cash in hand jobs, for many years. They wanted to reclaim that lost tax income… so made some changes!

In Summary the changes are to how Sub-Contractors are paid by main Contractors. How the VAT on subcontractors materials invoices is treated has also changed.

Bob’s heard the confusing term “reverse charge VAT” and doesn’t have a Scooby Doo what it means! “Well, Bob” says Rachel from Account-ant “from March 2021 Contractors must pay VAT over to HMRC on behalf of a VAT registered subbie”

Another change that HMRC made was that Contractors must pay 20% per month for registered subcontractors and 30% for non registered subcontractors straight to HMRC via their PAYE.

HMRC keep all these on record and then match them up to subcontractors returns when they submit their yearly tax return.

This is why it’s super important to keep all your records, as any discrepancies could be picked up and potentially lead to fines being levied against them.

From a Contractors point of view too, as paying HMRC the 20% / 30% you must fill in a return even if you’ve had no subcontractors. If you fail to do this then you’ll receive £100 fine for every month missed.

You can dispute the charges but let’s try to not even be in that situation in the first place eh?!

So in summary:-

Contractors deduct 20% or 30% from their subcontractors payments and pay it straight over to HMRC.

Contractors deduct VAT from subcontractor payments and pay it over to HMRC.

Subcontractor register with HMRC, you receive 20% less than you’d expect, but it reduces your overall tax bill to pay at the end of the year.

I hope this helps you all. If you need to have a chat and a piece of my bottomless cake, give me a call.

November 7, 2021 By Rachel

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Beware The Contractor Tax Pitfall!

WATCH OUT FOR THIS PITFALL!

Meet Joshua, he’s a joiner and works alone but he’s been offered a role in a manufacturing business. Currently, Joshua is self employed with his own Limited Company, so would much rather keep his own books, and wants to invoice the company instead. He’s done this before for many years.

“Hold on Josh, you might be about to fall into a Contractor Tax Pitfall!” – said Rachel

IR35 has been around for a long time but the rules have tightened up.

The basics of this change are that your contract is either IN or OUT of IR35 and the rules around who decides that and what they do have changed as of 6^th April 2021.

What’s the benefit of being a Contractor?

The benefits of being a contractor are retaining control of your contracts – you decide which ones to take and what your terms are.

You can also enjoy tax efficiencies in the long run. The benefit to the employer is no sick, holiday leave or NI Contributions to pay.

Why the change? It was working fine before!

HMRC were concerned about “disguised employees”. It is to ensure that a contractor and an employee pays broadly the same tax.

There’s been many high profile legal cases with regards the determination of “in” and “out” of this rule so HMRC are changing who decides the Status.

What factors determine “in” Status

Factors used to determine your IR35 status include:

Control
financial risk
substitution (i.e. if you were sick, you’d be able to send someone in your place to fulfil your contact)
provision of equipment (your own van, tools etc)
right of dismissal and employee benefits. (do you get any bonuses or perks that are the same as employees?)

If you have the same responsibilities, control and benefits as a permanent employee then you will more than likely be classed as inside IR35, and as such you should make sure you are paying the correct amount of tax.

Many of these factors will be detailed in your contract, which is why it is advisable to have an IR35 contract review and take advice from an IR35 expert before starting a new contract.

What are the 2021 changes?

Public Sector (i.e. government, NHS, Schools etc)

the hirer is responsible for working out whether the contractor falls inside or outside of IR35. If they fall inside, the hirer, agency or other third party who pays the contractor then needs to deduct tax and NICs and report them to HMRC

Private Sector (everyone else!)

When the client is a small business

Less than 50 employees
Turnover less than £10.2m
Balance Sheet of no more than £5.1m

A small business ticks at least two of the above boxes. In this case, the contractor is responsible for working out whether they fall inside or outside of IR35. If they’re inside, they need to pay the tax and NICs due

When the client is a medium or large client

Your client will need to determine whether you are in or out. If you are in, they will need to provide you with a Status Determination Statement and deduct tax and NI payable to HMRC out of your fees.

The client must prove that they have taken care when deciding the status otherwise this could land both client and contractor in problems with HMRC.

Should I be worried?

As the private sector holds the responsibility for contract status decisions, they may be more inclined to tick “in” as a precaution.

However, this is bad news for a contractor when their contract should be “out” because you’ll end up paying about 14% more tax!

So, when you get private sector jobs, make sure you check, or get someone to double check the status of your contracts to ensure you do not end up paying too much tax.

CEST tool

If in doubt, HMRC has a tool to determine on a contract by contract basis whether you are in IR35 or out.

https://www.gov.uk/guidance/check-employment-status-for-tax

Can I be both?

Yes, you can have some contracts that sit in IR35 and some that sit outside IR35 but it’s a good idea to ensure you keep a compliance document for each contract should HMRC query anything.

We hope this post has helped. If you need specialist tax advice, let us know and we’ll try our best to help you.

June 15, 2021 By Rachel