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0 In Stories from an Accountant

Beware The Contractor Tax Pitfall!

Account-ant Blog - Beware The Contractor Tax 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 6th 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.

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.

0 In Stories from an Accountant

Becky was Stung!

Account-ant Becky was Stung!

Say hello to Becky, Becky is a self employed seamstress by night and Admin Assistant by day.  She completed her first self assessment last year.

At some point during the year, she received a PAYE coding notice and just chucked it in the bin.

She’s just started to notice her pay from her day job is different….why would that be?

“Did you tick “update my PAYE code”? on your assessment” asks Rachel (Account-ant)

YES says Becky

Well, what that means is that your “self employed tax” is being deducted from your Admin Assistant wage via an adjusted code.

Most (more than 80%) of her income comes from her “day job” so she IS allowed to pay per self assessment tax separately, rather than through her tax code.

When Becky got to the bit in her self assessment which said “if you have not paid enough tax” the following two questions would have been asked: –

“If you are submitting by 30 December, owe tax for 6 April 2019 to 5 April 2020 and have a PAYE tax code, do you want us to try to collect the tax and Class 4 NICs due (if below £3,000) through your tax code for 6 April 2021 to 5 April 2022?

You either answer “yes” or “no” to this but what it is asking is, shall HMRC adjust your tax code and take what you owe out of your wage.

The second question it asks is;

If you are likely to owe tax for the current tax year (ended 5 April 2021) on income other than employed earnings/pensions e.g. savings or the High Income Child Benefit Charge, do you want us to use your 6 April 2020 to 5 April 2021 PAYE tax code to collect that tax during the year?

Again, you can answer “yes” or “no”

What does it mean, huh?!

NEXT YEAR’S tax estimate will be taken out of your “employed” salary THIS YEAR and THIS YEAR’S tax will come out the following year.  Confusing right?!

There’s potentially two issues with this –

  • If you submitted your self assessment in December 2021 and asked for your PAYE code to be updated, HMRC may try to catch up the tax year therefore you would pay 12 month’s estimated tax in 4 months. Or, you’ll get to the point where you’ve submitted your next self assessment and still have tax to pay.
  • You do not know at this point in time what your “self employed” income may be next year so you may end up over paying your tax. You won’t be eligible for a tax refund until after 6th April if this is the case.

If you suspect your Tax code is incorrect, you can get a breakdown from the HMRC website.  If it doesn’t make sense or you want another pair of eyes on it, contact your Tax Advisor or Accountant.

What can I do?

You can contact HMRC and ask for your PAYE code to be adjusted back to what it was and you pay your “self employed” tax in January (if your tax is LESS than £1,000) or in two instalments.

At the moment, HMRC are really struggling with workload and calls so this might be tricky.

What would an Account-ant do in Becky’s shoes?

I was a side hustler too, once upon a time!  I personally didn’t like my tax code being faffed with so I set aside an estimated tax bill each month to pay in January, I worked out income, less expenses roughly and then times by 20%.  If you put it in a savings account, you may even earn a little bit of interest on that money.  Either way it’s likely you’ll have at least enough for a posh coffee (which to me is any shop bought coffee 😀) left over!

How can I prevent this palaver in the future?

Please, please, please check your coding notices when they arrive.

If you’ve opted to pay your tax in January, you might not realise you have an issue on your tax code until the end of the year (good or bad!)

If you have an accountant / tax advisor you should send them a copy of the full breakdown or ask them to look at it via their agent’s gateway – we can see them on the gateway but we don’t get notified of new codes being issued so if in doubt please draw our attention to it!

Main information to check:

Name and address
Employer / pension provider’s details
Correct split in codes for expected income from each employer / pension provider
Correct personal allowance (Standard is £12,570 2021/22)
Tax relief for employment expenses / marriage allowance etc.
Deductions for state benefits / tax debts etc. (i.e. if you have an attachment of earnings due to none payment of council tax)

Once you’ve checked the numbers (i.e. 1257L),  also check the letter applied to your code (i.e. 1257L).  There’s a full list on HMRC which tells you what each letter means (i.e. L is Standard Personal Allowance)

If in doubt, ask your advisor or give me a call and we’ll talk it through.

Other considerations

When you do get to the end of your self assessment and it tells you what your tax liability is, it will also have a “payment on account” which again is an estimate of your next year’s tax liability.

In the below example I would need to be able to pay £1948.20 in January 2022 and then £649.40 in July 2022 which would pay my tax for next year too.  Essentially that means you are paying next year’s tax early.  It could be earning you interest rather than being sat in an HMRC account.

Total amount for 2020-21 £1,298.80
First payment on account for 2021-22 £649.40
Total to be added to Self Assessment account due by 31 January 2022 £1,948.20
Second payment on account for 2021-22 will be due by 31 July 2022   £649.40

If you earn more than 80% of your income from “employment” you CAN request the payment on account be taken off.  BUT only if your tax is less than £1,000 so, I would need to pay in two instalments.

PLEASE only do this if you are going to set up a Direct Debit for the payment on 31st January so you won’t forget to pay your tax and risk a fine!

FREEBIE Announcement 😀

For all you lovely self employed people out there who are trying to complete their self assessment alone this year, I have put together a little spreadsheet that should help you keep an eye on where your tax bill is likely to cost at any point in the year.  Then you can plan for the outlay rather than worry about it in January!

Drop me a line and I will send it over to you.

****Correct at the time of publication, ALWAYS check current rules and regs with your Accountant!****