Financial Monitor (October 2006)
The use of freelance workers
The Revenue are constantly seeking to reclassify self-employed individuals used regularly by a business as employees in order to generate additional tax and national insurance contributions. If they are successful it is the “employer” who is responsible for the tax and national insurance contributions which are due.
It is necessary to ensure, therefore, that both the documentation and the facts support the view that the freelancer is an independent contractor. In particular, any contract must not give the impression that the freelancer is under the control of the “employer” nor that there is certainty of continuing work. No right to holiday or sick pay, pension or other benefits should be given. If possible, a substitution clause should be included in the contract which gives the freelancer the right to send an alternate if he is ill or otherwise absent.
The contract should confirm that both parties consider it to be one “for services” and not “of service” and the freelancer should, if practical, be allowed to carry out duties if he wishes at home.
Pool cars – recovery of VAT
In a recent VAT case it was accepted that input tax could be reclaimed on a genuine pool car. This has overturned previous decisions. In the particular circumstances of this case:
- The car was available for any member of staff who required it for business purposes;
- All staff members were advised that the car could not be used for private purposes;
- It would have been beneficial (although not decisive) if the car had been insured for business travel only;
- The car was kept at the office premises during the day and in a secure car park at night. It was not kept at the home of an employee, except in exceptional circumstances;
- Usage of the car was logged to show that it was not used by a particular member of staff only.
If you acquire vehicles which are used as indicated above then it should be possible to recover the input tax thereon.
The case concerned a car acquired by a limited company and it is debatable whether it would apply to a car provided by a sole trader/partnership because of the inability of the owner(s) to legally prevent themselves from using the vehicle privately.
H M Revenue & Customs – Interventions!
The Revenue have been sending out letters on a trial basis to taxpayers, primarily small businesses and sole traders. In addition, they may contact such taxpayers directly by telephone to arrange a visit. The purpose of this contact or ‘intervention’ is to ask questions regarding the business without opening a formal enquiry. Currently participation of the taxpayer is purely voluntary and if you receive such contact from the Revenue please contact ourselves to discuss the matter.
There is currently a statutory framework for an enquiry into a taxpayer’s affairs which defines the Revenue’s powers and gives clear and enforceable safeguards for the taxpayer. There is no such statutory framework for such interventions and it may be that a taxpayer could be disadvantaged by taking part. In particular, those of you who have fee protection insurance to cover the cost of professional fees in case of a dispute with H M Revenue and Customs could find that they were not covered for an enquiry resulting from participation in this trial.
The ideal tenant for commercial property
Those individuals who own commercial property or a share in such property may be aware that in certain circumstances 75% of any gain resulting from the sale of such property can be tax free. The first requirement is that the property must be owned for two years (although 50% of any gain would be tax free after one year) and the second requirement is that the status of the tenant qualifies. To qualify the tenant must be:
- trading – lettings to charities or investment companies for example, would probably not qualify;
- a sole trader, partnership or an unquoted company – letting to a company quoted on the Stock Exchange will not qualify.
If there is a mix of tenants, some qualifying and some not then an apportionment will need to take place. A lower rate of capital gains tax exemption applies to non-qualifying tenants.
If you are able to select your tenants then ‘qualifying’ tenants, all other things being equal, will be more desirable.
This generous relief has not always applied in these circumstances and if you held the commercial property before 2004 then your eligibility for the 75% tax free gain referred to above will be reduced.
Student loan repayments
The Revenue have not dealt with repayments of student loans in the tax year 2004/05 correctly for some students. Consequently statements have not been issued for that year and as a result incorrect statements have been issued for 2005/06. The matter is being dealt with by the Revenue who confidently expect to have resolved the matter by next Easter!! If you have any students on your payroll who do not receive a correct 2004/05 statement by May 2007, they should contact the Revenue.
Payment of voluntary national insurance contributions
Currently in order to qualify for a full state pension men require 44 years national insurance contributions/credits and women between 39 and 44 qualifying years depending on date of birth. Those who do not have the required number of years’ contributions can make Class III voluntary contributions, which are currently £7.55 per week to acquire additional qualifying years.
The Department for Works and Pensions is proposing that people who reach state pension age on or after 6 April 2010 should qualify for a full basic retirement pension providing they have been paid (or credited) with contributions for at least 30 years.
Those who reach pension age prior to 6 April 2010 should request a Pension Forecast (we can assist) so that they can decide whether paying Class III contributions is worthwhile. Those who reach pension age after 6 April 2010 should delay payment of any Class III contributions pending confirmation of the rule changes.
Voluntary national insurance contributions for non-residents
People paying voluntary national insurance contributions to obtain additional state pension entitlement usually pay Class III contributions. However, those who go to work outside the European Community, the European Economic Area and the Isle of Man can instead pay Class II contributions. To qualify he or she must have been employed or self-employed in the United Kingdom immediately before going abroad and have paid Class I or Class II contributions for at least three years. In addition, they must be employed abroad.
The advantage of paying Class II contributions is that currently these are only £2.10 per week, a saving of £5.45 per week compared with Class III contributions.
Executive Pension Schemes – tax free cash
All clients with an Executive Pension Scheme need to take advice from a suitable independent financial adviser to establish whether they should continue to fund such arrangements or take alternative action in order to maximise tax free cash. One alternative could be to make the plan paid up, funding future pensions via a personal pension arrangement. If you do not have an independent adviser please contact us so that we can put you in touch with one who can give appropriate advice.
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