A “mixed partnership” is a partnership or Limited Liability Partnership (LLP) that includes at least one non-individual. (more…)

IR35 Changes to legislation Effective from the 6th April 2017 for NHS Suppliers and Public Sector Workers

Government and HMRC have recently announced changes to the IR35 legislation that will affect the way people working for the NHS and other public bodies are taxed.

This will affect candidates working via PSCs (personal service company) / Limited companies.

Early indicators from clients suggest that most health and social work professionals working in the public sector will have tax and National Insurance deducted at source when they are paid.

This is a significant change for workers operating through a PSC / Ltd who currently manage their own tax and NI payments.

What is IR35 Legislation?

IR35 is the name given to a tax legislation in the UK that is designed to ensure workers supplying their services to clients via an intermediary, but who would be an employee if the intermediary was not used, are taxed in same way as a general employee roles that fall within IR35 are subject to PAYE income tax and National Insurance contributions. There are a few important things you should know about the coming changes:

For NHS Workers

The NHS trust will determine whether or not your role falls within IR35. Based on the guidance the Government and HMRC have made available, it appears that all medical professionals will fall within IR35. Medical professionals fall under the direction, supervision and control of the hirer, have no effective right of substitution, and fail a number of other main IR35 tests.

  • For roles falling within IR35, it will be necessary to deduct tax and NICs at source, prior to payment being made to your PSC (Similar to PAYE).
  • These changes will apply to all payments processed on or after the 6th April 2017, regardless of when the work took place.

Subject to each Trust’s agreement, you will still be able to be paid via a PSC (limited company), but most of the current tax benefits will be lost.

Firstly we want to reassure you that you don’t have to transfer to a trust or local authority’s payroll, bank or permanent staff and you can continue as a contractor or locum.

For Limited Companies

If you are working as a limited company, you can continue to do so; however the agencies will be deducting tax and NI from the payments before paying you. However additional information will be available in this budget on 8/3/17 of how those “deductions” will be treated as at the time of preparing your company’s tax return. Those deductions might get available to be offset against your corporation tax liability; however this cannot be confirmed yet.

  • You can continue to work in the private sector and be unaffected by the changes depending on the strategy adopted by your agency.
  • You can continue to operate via your PSC / Ltd; however your payments will have Tax and NI deductions made when you work in the NHS and public sector
  • You can transfer to a compliant umbrella company; however in that case you might have to pay the same tax and NI and additional admin charges on top of the payments. Therefore, you will have to carefully review status of Umbrella Company before choosing this route.

Private Sector working

If you are currently working on assignment at a Private Sector client i.e. a Private Hospital or Service Provider then these changes will not affect you and you may continue to be paid via your PSC and receive gross payments on which you are responsible for accounting for taxes to HMRC.

What comes next and processing of time-sheets closer to the new legislation

The new legislation comes into effect on the 6th April 2017. We strongly encourage you to submit your current outstanding timesheets as soon as possible. Any invoices processed and paid after this date, from the 6th April will be under the new IR35 rulings. (Regardless of when work was completed)

What is CWP doing?

We are awaiting final clarification on the new rules from the Government and HMRC. In the meantime, we are working hard to understand how this will impact you and what we can do to minimise that impact.

It is likely that, for many professionals, these changes will increase tax and National insurance liability and could therefore significantly impact their pay.

We expect that, in the current climate, many trusts will apply a blanket IR35 rule labelling all workers and some trusts may no longer be willing to accept candidates working as limited companies. Instead, they may only accept candidates they can guarantee will have tax and NI deducted at source. We will continue to monitor the situation and keep you updated.

Please be aware that this legislation will affect every NHS trust and every agency supplying staff to the NHS. If you have questions about your specific situation with relation to IR35, we recommend seeking a formal advice from our office.

 

Read more of our articles here.

 

What does the introduction of Value Added Tax mean for Dubai?

The introduction of a Value Added Tax (VAT) regime in Dubai (the UAE) marks the beginning of a new era in the history of the UAE economy where the general public will start sharing the burden of budgetary expenditure, starting January 1, 2018.

Treaty between UK & UAE

Those in the UK, who have invested in the commercial property in UAE, shall seek a bespoke tax advice in order to meet their online filing and payment requirements. The UK UAE tax treaty has effect for the 2017/18 tax year onwards. With respect to business profits (such as those of the LLP) it says that profits of an enterprise of a contracting state are taxable only in that state unless the enterprise has a permanent establishment (PE) in the other state, in which case the profits attributable to the overseas PE may be taxed in the other state (here the UAE).

 

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I am writing to make you aware of the new rules set out by HMRC which were announced by the Chancellor of the Exchequer on 23rd November 2016 regarding a new 16.5% VAT flat rate scheme for businesses with limited costs. This change will come into effect from 1st April 2017.

Background

The VAT Flat Rate Scheme (FRS) is a simplified accounting scheme for small businesses. Currently, businesses determine which flat rate percentage to use by reference to their trade sector. From 1 April 2017, FRS businesses must also determine whether they meet the definition of a limited cost trader, which will be included in new legislation. For some businesses – for example, those who purchase no goods, or who make significant purchases of goods – this will be obvious. Other businesses will need to complete a simple test, using information they already hold, to work out whether they should use the new 16.5% rate.

Businesses using the FRS will be expected to ensure that, for each accounting period, they use the appropriate flat rate percentage.

How does the VAT FRS work?

Under the FRS, an invoice for £2,000 would have 20% VAT added – £400. Under current rates, many contractors would then deduct VAT at 14.5% from the £2,400 received; meaning £348 is paid to HMRC.

With the new rate at 16.5%, a limited cost trader would pay £396 to the taxman, an almost identical fee to that charged to the client. “The key point is you are paying over the large majority of the VAT that you are collecting,”

“Most contractors will have made a subsidy out of the flat rate scheme, so they benefit from having simplicity and a surplus. But because 16.5% is so close to the amount of VAT you are collecting, contractors will definitely be worse off than they were under the old rules.”

What is a limited cost trader?

A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

  • Less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • Greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • Capital expenditure
  • Food or drink for consumption by the flat rate business or its employees
  • Vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

Examples

Goods must be used exclusively for the purpose of the business – this means that you must not include the cost of any goods that are used in full or in part for your own private use. For example, printer ink and stationery that are used for both your office and your home would not be included. It would also exclude goods acquired with the intention of giving them away or donating them to a third party.

Capital expenditure – is the cost of any goods which are bought to be used in the business over a period of time (for example, longer than a year). Examples include equipment such as a computer, mobile phone, office furniture, a tablet or a printer, even if they are not necessarily treated as capital assets for accounting purposes. The legislation that describes capital expenditure goods can be found in VAT Regulations 1995, 55A (1).

These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.

How contractors can plan for the VAT FRS changes

The most suitable approach will depend on your current spend on VAT-able goods.

However, making additional purchases simply to clear the 2% mark won’t necessarily benefit your business.

“If you already spend 1.9% of your turnover on stationary, for example, it would be worth spending a bit more – providing it’s genuine – to then make significant savings.

“It’s unlikely those very short of the 2% will find increasing their spend on goods to be worthwhile. Each cost has to be a genuine business expense, and what’s not yet clear is whether benefits in kind will count. HMRC is due to consult on the measures in before April 2017 where there will be some clarity.”

Anti-forestalling provisions

Paying or invoicing in advance to avoid an increase in tax is known as forestalling. Anti-forestalling legislation was published on 23 November 2016. It is designed to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017.

This will affect a business that supplies a service on or after 1 April 2017 but either issues an invoice or receives a payment for that supply before 1 April 2017.

When considering the limited cost trader definition, any such supply must be treated, for VAT purposes, as taking place on 1 April 2017. Any invoice or payment that covers continuous supplies of services that cross this date must be apportioned.

Example of affect after FRS scheme changes

How to respond to the VAT FRS changes

If your business generates less than £83,000 per year and you are voluntarily VAT registered, de-registering is a potential option, however, we advise communicating with your contracted agencies to ensure they are aware of your intentions and such decision complies with their contractual requirements with you. If you must remain VAT registered, after assessing the expenses which your company incurs, you do not expect to claim more than £226 in VAT then it will be advisable to remain in the flat rate scheme.

Alternatively, another option is to revert to the traditional method of calculating VAT, but recording VAT collected and paid out, then paying the difference on a quarterly basis on the assumption that the VAT to be claimed from your expenses exceed the flat rate saving of £226.

Effect on your business

We have analysed your income and expenditure information which we have on file from production of previous VAT returns and have reached the conclusion that the changes in rules relating to the flat rate scheme will affect your business and cause the VAT rate payable to HMRC each quarter to increase to 16.5%.

This is because, from the total annual expenses which you incur normally, your quarterly expenses which are exclusively for the purpose of your trade, is less than the required 2% of your VAT inclusive turnover.

This change will substantially reduce your flat rate scheme savings. If you have regular VAT inclusive expenditures that are paid each month or quarterly, then please provide us with this information to allow us to reassess your VAT position.

Following review of this letter, please can you provide us with your feedback regarding your choice of action following implementation of this new VAT rule.

Changes by HMRC in VAT Flat Rate Scheme

We are writing to make you aware of the new rules set out by HMRC which were announced by the Chancellor of the Exchequer on 23rd November 2016 regarding a new 16.5% VAT flat rate for businesses with limited costs. This change will come into effect from 1st April 2017.

Background

The VAT Flat Rate Scheme (FRS) is a simplified accounting scheme for small businesses. Currently businesses determine which flat rate percentage to use by reference to their trade sector. From 1 April 2017, FRS businesses must also determine whether they meet the definition of a limited cost trader, which will be included in new legislation. For some businesses – for example, those who purchase no goods, or who make significant purchases of goods – this will be obvious. Other businesses will need to complete a simple test, using information they already hold, to work out whether they should use the new 16.5% rate.

Businesses using the FRS will be expected to ensure that, for each accounting period, they use the appropriate flat rate percentage.

How does the VAT FRS work?

Under the FRS, an invoice for £2,000 would have 20% VAT added – £400. Under current rates, many contractors would then deduct VAT at 14.5% from the £2,400 received; meaning £348 is paid to HMRC.

With the new rate at 16.5%, a limited cost trader would pay £396 to the taxman, an almost identical fee to that charged to the client. “The key point is you are paying over the large majority of the VAT that you are collecting,”

“Most contractors will have made a subsidy out of the flat rate scheme, so they benefit from having simplicity and a surplus. But because 16.5% is so close to the amount of VAT you are collecting, contractors will definitely be worse off than they were under the old rules.”

What is a limited cost trader?

A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

  • Less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • Greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • Capital expenditure
  • Food or drink for consumption by the flat rate business or its employees
  • Vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

Examples

Goods must be used exclusively for the purpose of the business – this means that you must not include the cost of any goods that are used in full or in part for your own private use. For example, printer ink and stationery that are used for both your office and your home would not be included. It would also exclude goods acquired with the intention of giving them away or donating them to a third party.

Capital expenditure – is the cost of any goods which are bought to be used in the business over a period of time (for example, longer than a year). Examples include equipment such as a computer, mobile phone, office furniture, a tablet or a printer, even if they are not necessarily treated as capital assets for accounting purposes. The legislation that describes capital expenditure goods can be found in VAT Regulations 1995, 55A (1).

These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.

How contractors can plan for the VAT FRS changes

The most suitable approach will depend on your current spend on VAT-able goods.

However, making additional purchases simply to clear the 2% mark won’t necessarily benefit your business.

“If you already spend 1.9% of your turnover on stationary, for example, it would be worth spending a bit more – providing it’s genuine – to then make significant savings.

“It’s unlikely those very short of the 2% will find increasing their spend on goods to be worthwhile. Each cost has to be a genuine business expense, and what’s not yet clear is whether benefits in kind will count. HMRC is due to consult on the measures in before April 2017 where there will be some clarity.”

Anti-forestalling provisions

Paying or invoicing in advance to avoid an increase in tax is known as forestalling. Anti-forestalling legislation was published on 23 November 2016. It is designed to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017.

This will affect a business that supplies a service on or after 1 April 2017 but either issues an invoice or receives a payment for that supply before 1 April 2017.

When considering the limited cost trader definition, any such supply must be treated, for VAT purposes, as taking place on 1 April 2017. Any invoice or payment that covers continuous supplies of services that cross this date must be apportioned.

 

How to respond to the VAT FRS changes

If your business generates less than £83,000 per year and you are voluntarily VAT registered, de-registering is a potential option, however, we advise communicating with your contracted agencies to ensure they are aware of your intentions and such decision complies with their contractual requirements with you. If you must remain VAT registered, after assessing the expenses which your company incurs, you do not expect to claim more than £226 in VAT then it will be advisable to remain in the flat rate scheme.

Alternatively, another option is to revert to the traditional method of calculating VAT, but recording VAT collected and paid out, then paying the difference on a quarterly basis on the assumption that the VAT to be claimed from your expenses exceed the flat rate saving of £226.

Effect on your business

We have analysed your income and expenditure information which we have on file from production of previous VAT returns and have reached the conclusion that the changes in rules relating to the flat rate scheme will affect your business and cause the VAT rate payable to HMRC each quarter to increase to 16.5%.

This is because, from the total annual expenses which you incur normally, your quarterly expenses which are exclusively for the purpose of your trade, is less than the required 2% of your VAT inclusive turnover.

This change will substantially reduce your flat rate scheme savings. If you have regular VAT inclusive expenditures that are paid each month or quarterly, then please provide us with this information to allow us to carry on a free reassessment of your VAT position.

What are Mixed Partnership Rules?

A “mixed partnership” is a partnership or LLP that includes at least one non-individual. An excess profits allocation rule applies if a mixed partnership makes a taxable profit and either of the following conditions apply:

  • Condition X: the profits represent deferred profit of an individual member (A), or
  • Condition Y: an individual partner A meets the power to enjoy condition, in relation to any element of the profit share allocated to the non-individual partner, and
  • As a result, an individual member’s profit share and their relevant tax amount are lower than they would have been, had the profits been allocated to him or her, rather than the non-individual.
  • In respect of Conditions X and Y it must be “reasonable to assume” that:
    • A’s profit share is less than it would be in the absence of the profit deferral arrangements or the circumstances that lead to the power to enjoy condition being met, and
    • Less tax is paid as a result of the allocation of profits to the non-individual.

The intention of the legislation is to tax the individual:

  • On the profit shares that would have been allocated to him or her had the profit deferral arrangements not existed, or
  • That reflects a taxpayer’s power to enjoy the profits.

For non-deferred profit arrangements, the additional taxable profit is the non-individual’s “excess profit”, which is the appropriate notional profit of the non-individual less the profit allocated to that non-individual under the arrangement.

When the legislation applies

Condition X applies if an individual member’s deferred profits are included in the non-individual member’s profit share, and

Condition Y applies if:

  • A profit share is more than its appropriate notional profit
  • The individual member has the power to enjoy the profit share allocated to the non-individual member, and
  • It is reasonable to assume that the non-individual member’s profit share is (in part or in full) attributable to the individual’s power to enjoy it.

“Non-individual partner”

A non-individual partner is a partner of a general partnership or LLP that is anything, which is not a natural person and therefore includes:

  • Companies
  • Partnerships
  • LLPs, and
  • Individuals acting as trustees.

The term does not include an alternative investment fund manager, if that fund manager has elected to be treated as a partner itself.

“Appropriate notional profit”

This term has two aspects:

  1. The appropriate notional return on capital, which is the commercial rate of interest on the capital contributed; and, as such, is not a set rate, but merely reflects the level of risk involved, and
  2. The appropriate notional consideration for services, which is the arm’s length value of the services provided, less any amount received by the relevant individual for those services.

Read some of our other articles:

Changes to the VAT Flat Rate Scheme