Whilst the Limited Company only pays Corporation Tax, the Director’s salary and shareholder’s dividends are subject to Income Tax and National Insurance contributions. However, if the salary is within the ‘Personal Tax Allowance’, the Income Tax will not have to be paid27.
“Tax is a complex area with individual circ*mstances greatly affecting the structuring and planning required for the most efficient outcome. Family setup, level of income and stage of career are all important considerations”.
Keith Smith, GHLD Chartered Accountants
Implications of IR35
IR35 stands for ‘Inland Revenue, 35th news release of the government budget’. It was introduced in April 2000 as a measure to combat tax-avoidance by businesses. Inland Revenue has since been modified to HMRC (Her Majesty’s Revenue & Customs) but the legislation objective remains the same; an anti-tax avoidance rule, set by law.
IR35 aims to make sure that self-employed workers, particularly those who are a Limited Company, pay the same taxes as an employee of a business that does the same job and virtually the same days/hours of duty. For example, if a self-employed optician is providing the same services as the employed optician, but in the capacity of a contractor, they are essentially an employee of the business that they are serving. By contracting through a Limited Company, the self-employed person is paying fewer taxes than their employed counterpart. The HMRC will be on the lookout for this type of ‘disguised employee’28.
From April 2021, revised legislation for ‘Off-Payroll Working rules (IR35)’ will come into effect. This means that the tax status of the self-employed person will be assessed by the business that hires the contractor. Should IR35 rules apply to the self-employed person, they will have to pay the correct taxes, and the employer may be responsible for these deductions29. As an optician, if your employer provides your testing equipment, you are likely to be within IR35.
Ultimately, the people affected by IR35 are the contractors, any agencies and the end client business. The end-client must assess whether the contractor’s employment type is that of a ‘disguised employee’. Traditionally, the employment status would be declared to the HMRC by the self-employed person, but from April 2021, the employer will determine the employment status30. A critique of IR35 is that it dismisses the fact that the freelancer works on short-term contracts and does not have a steady income.
Current Affairs – The Impact of Coronavirus
Due to the novel coronavirus pandemic, the UK Government, along with all heads of nations, have had to introduce measures to help mitigate the economic downfall caused by the large-scale closures of businesses. To stop the spread of the virus, businesses had to close their doors or work under severely controlled measures. As a consequence, many companies and self-employed traders found themselves out of work and with zero earnings.
The UK Government implemented various relief measures to help businesses. Some of the relief efforts include grants offered to self-employed individuals and loan schemes for larger businesses that have to protect their staff as well as goods.
This pandemic has highlighted how important Government funding is during periods of emergency support. Whilst some people continuously find faults with fiscal policies, we shouldn’t dismiss that the emergency funds, community aid, hospital care and covid vaccinations were all founded under extreme pressure during one of history’s most uncertain times.
Get advice from an Accountant
Tracking income and expenses for a business can be a time-consuming and demanding task. To ensure compliance with financial authorities, it may be best to employ the services of an accountant. The accountant is the money-expert. Their main purpose is to ensure that all matters pertaining to tax and profit, are accounted for legitimately.
The accountant will charge a fee for their services. However, this fee is offset by the benefits that they offer the business. An accountant has the most comprehensive knowledge regarding accounts and thus maximising profit, reducing the deficit and freeing up the business owners valuable time. As a business grows, money management should be designated to the most qualified person to do so; the accountant.
“We at GHLD are happy to offer an initial no-obligation meeting and discussion of your current and future position to see how we may assist you”.
Keith Smith, GHLD Chartered Accountants
Tax Evasion is a Criminal Offence
Tax evasion is the deliberate action to avoid paying owed taxes, to the HMRC, by individuals, businesses and trusts. Tax evasion is a legal offence that can result in financial penalties, criminal charges and imprisonment31.
Keith Smith is a Chartered Accountant and a valued member of our panel of Oodo Experts. Click here to learn more about Keith and what he can do for your business.
