Making Tax Digital Delays for Contractors

Category: Company Tax

Making Tax Digital Delays for Contractors

A requirement for tiny companies to report tax online ‘at least quarterly’ as part of Making Tax Digital has been put back, in a surprise government announcement on Finance Bill 2017.

Speaking on Friday, the Treasury said that changes to tax legislation which were dropped from the bill will still go ahead, other than the 2018 start of MTD for micro-companies.

“Businesses will not be mandated to use the MTD system until April 2019 and then only to meet VAT obligations,” said the Treasury, describing the delay as a ‘policy change.’

“This will apply to businesses with turnover above the VAT threshold. Businesses with turnover below the VAT threshold will not be required to use the system but can choose to”.

In other words, only business owners with a turnover of more than £85,000 will need to keep digital records, and only for VAT, from 2019.

As to the Treasury’s line about choosing it, it likely means that traders will not be invited to jump to MTD and adopt quarterly tax reporting for other taxes until at least mid-2020.

The official statement confirms: “The government will not widen the scope of MTD beyond VAT before the system has been shown to work well, and not before April 2020”.

Tax advisory RSM welcomed the MTD’s new timetable, which it said was effectively replacing the previous “unrealistic” one (forcing all one-man bands to use it from 2018).

“In the end, HMRC had little choice to postpone… [partly due to] the genuine alarm being expressed by affected businesses,” it said. “The MTD initiative was simply one project too far.”

But that doesn’t mean that ‘at least’ quarterly tax reporting online is wrong in principle, according to RSM tax consultant Andrew Hubbard. “We remain of the view that the core philosophy underlying MTD is the right one to pursue, and that eventually taxpayers, agents and HMRC will see the benefit of digital interaction with the tax system. If the system is as effective as we all hope, individuals and businesses will not need compulsion but will want to adopt it.”

However, the Treasury’s decision to delay the MTD start date for small businesses gives the taxman some “much needed time to concentrate on building the system successfully.”

“And to make it so attractive that businesses will actively want to sign up,” Hubbard added. “For now though, businesses will have a choice as to the timing. As a result, there will be a lot of accountants and small business owners who will today be breathing a huge sigh of relief.”

The vast majority of contractors and agents promote the use of software providers (e.g. Freeagent and Xero) who are working towards integrating their current offering to the HMRC’s MTD platform which reinforces the need for such facilities going forward.  As part of our package Dynamo provides Freeagent however we also support other providers such as Xero depending on the preference of the client.

Reduced Dividend Allowance Makes a Return

One of the main discussion points from Budget 2017, the proposed cut contractors’ tax-free dividend allowance by £3,000 has been officially re-tabled by the government.

But unlike last week’s re-tabling of Making Tax Digital, where a delay has been put in place, the cut in the allowance will go ahead from April 2018, as planned.

The absence of a delay not only means — in officials’ words — that “those affected” by the cut “should continue to assume” that their dividend tax-mitigation strategies will still be needed.

It also means that there will be limited scope to debate or revise the proposal (due to raise £1billion extra by 2020), because the bill to pass it will come at a busy time, partly due to Brexit.

This will result in tax hits of £225, £975 or £1,143 for basic, higher and top rate tax payers.

Overall tax strategies will remain virtually the same but as with recent changes to the way dividends are taxed, increase the tax burden on small businesses.

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Entrepreneurs’ Relief – shares in trading companies

Capital Gains Tax (CGT) has a main rate of 20% (reduced from 28% in April 2016) other than for basic rate taxpayers who now have a rate of 10%. However, a higher rate of 28% continues for the disposal of residential properties.  Importantly, Entrepreneurs’ Relief (ER) can allow a tax rate of 10% to apply for ‘qualifying business disposals’ on the first £10 million of capital gains in an individual’s lifetime.  ER is an important relief; so how does it work for shares?

What is a ‘qualifying business disposal’?
In order to qualify for ER there must be a qualifying business disposal. The following are qualifying business disposals:

  • A material disposal of business assets
  • A disposal of trust business assets
  • A disposal associated with a relevant material disposal

What is a material disposal of business assets?

  • A disposal of the whole or part of a business – where the individual has owned the business for the year leading up to the date of disposal
  • A disposal of assets in use for the purposes of the business where the business ceases to be carried on – if the disposal is made within three years and the individual owned the business for the year preceding the cessation
  • A disposal of shares or securities of a company – if one of the following conditions is met:

Condition A – throughout the year preceding the disposal (ie 12 months):

  • The company is the individual’s ‘personal company’
  • The company is a trading company or holding company of a trading group, and
  • The individual is an officer or employee of the company or trading group.

Condition B – where the company has, within the three years preceding the disposal, ceased to be either a trading company or a member of a trading group, the terms of Condition A above must be satisfied throughout the year preceding the cessation.

For the purposes of ER, an individual’s personal company is one in which they hold at least 5% of the ordinary share capital of the company and have at least 5% of the voting rights in the company. These conditions are relaxed for members of qualifying share option schemes.

A trading company or trading group is defined as one which carries on trading activities and does not carry on other activities to a substantial extent. This is the same as the definition that applied for holdover relief and substantial shareholding exemption purposes.

What is a trading company?
HM Revenue & Customs’ (HMRC) must be satisfied that the strict “trading company” definitions are met. In the case of a single company, it must be “a company carrying on trading activities, whose activities do not include, to a substantial extent, activities other than trading activities”. In practice, HMRC applies a 20% benchmark to determine a substantial level of non-trading activities. HMRC will look at the factors affecting each case but, as an example, it may review contribution to profits, assets employed, expenses and management time (see HMRC manuals at CG64090). As this is a subjective area, it is necessary to consider each case on its own merits.

In terms of a trading group, the definition is much the same as a sole trading company. A trading group is a 51% group of companies where the activities of the group do not include any non-substantial, non-trading activities. Any intra-group transactions are ignored.

Can I get guidance as to the company’s trading status?
A non-statutory clearance can be requested from HMRC and guidance can be found in the HMRC manuals at CG64100 which states:

“The company itself may have genuine doubt or difficulty as to its trading status. There is no statutory clearance procedure under which companies can have their status confirmed. However, in such circumstances a company can seek from HMRC an opinion under the terms of the Other Non-Statutory Clearance service as to its trading status for the purpose of a shareholders Entrepreneurs’ Relief claim.”

Advisers may wish to consider obtaining a tax clearance if there is doubt about the trading status of the company to underpin a subsequent for ER on the disposal of shares.

As with all such tax situations, advice should also be sought before proceeding.  For further details contact us on 0113 2461007 or

P11D forms: What you need to know

The statutory P11D form is used by HMRC to ask UK employers to outline the cash equivalents of expenses, allowances and other benefits given over the tax year to directors and staff members or members of their family or household who earn over £8,500 per year.

Essentially, this form is all about reporting benefits in kind, from private healthcare to interest-free loans, season ticket loans or company cars, to name just a few.

Because these benefits, in effect, enhance your salary, National Insurance contributions may have to be paid on them (by the employer, not the individual staff member concerned).

Equally, the employer is responsible for filing this documentation.

P11D forms must be filed by the 6th July after the relevant tax year. So, for instance, you’d file the one for the 2016-2017 tax year on July 6 2017.

Make sure you include:

– Healthcare insurance

– Company cars

– Self-assessment fees a company has paid

– Non business-related travel and entertainment expenses

– Assets given to an employee which have significant personal use

– Any payments that would normally be paid by the employee but for which you have paid

Before April 2016, you could get dispensation from HMRC to omit expenses from P11D forms.

An exemption system is now in place under which most business expenses company staff members incur personally no longer have to be recorded.

These include:

– Travel (as well as subsistence costs incurred during business travel)
– Credit cards used for work purposes
– Business entertainment expenses
– Subscriptions and fees

HMRC imposes penalties for late filings and wrong filings. If the 6th July deadline is missed, there’s a two-week penalty-free window for filing, but after 19th July, a £100 monthly penalty applies per 50 employees.

You’ll receive a reminder and details of incurred penalties if you haven’t settled by November.

Making Tax Digital – On Hold

The forthcoming snap election has forced the government to drop its Making Tax Digital (MTD) plans from the Finance Bills due to lack of parliamentary time.

The MTD initiative attracted considerable criticism primarily due to the unrealistically short timescale and lack of clarity in regards to implementation.

However, while the news to drop MTD has been welcomed by many, this should be seen more as a delay than an abandoning of the proposed initiative. What is clear is that there is broad parliamentary support for a digital tax system in the near future and that at some point HMRC will no longer accept paper records. This will prove a challenge for those who have always kept their records manually and given them to their accountant once a year. In the future everyone will be required to use software of some sort and keep records in real time.


Whilst it is not yet compulsory to update your tax information electronically, getting into the habit of using the appropriate software now will save you considerable time and stress in the future.

We are already working with all our clients to put in place digital record-keeping systems through moving to a Cloud based system. As Freeagent Premium Partners, Certified Xero and Sage advisers we are in a strong position to offer topical and relevant advice to all our clients.

However, we will always advise on the best package for your business which is why we can also discuss the suitability of both all options.  We will work with you to ensure an efficient transition and provide ongoing advice and training.

In addition to facilitating the change to digital reporting, moving to the Cloud brings with it a number of additional benefits, saving time, unnecessary paperwork and increased efficiency.

For more details contact us on

NHS U-turns on blanket IR35 tax crackdown

Anything to do with mass contractor walkouts?

The NHS has repealed its blanket decision to shove contractors inside the IR35 tax clampdown by default.

Last month the government shifted responsibility for compliance with the IR35 legislation from the individual contractor to the public body or recruitment agency. The Treasury says it hopes to raise £185m for 2017/18 by bringing public sector contractors within the scope of the legislation.

In an update [PDF] NHS Improvement, which is responsible for overseeing foundation trusts, said it had previously “anticipated that providers would need to ensure that all locum, agency and bank staff were subject to PAYE and on payroll for the new financial year”.

However, it has admitted that blanket IR35 determinations were “not accurate” and now plans to carry out those decisions on “a case-by-case basis” rather than by a broader classification of roles.

In a letter sent to NHS providers in February, seen by The Register, NHS Improvement said: “There is still far too much use of Personal Service Companies (PSCs) to avoid tax. New HMRC rules coming into effect in April will have a material impact on this.

“HMRC will treat all public sector ‘self-employed’ contractors using a PSC as falling under IR35 and therefore treated for tax purposes as an employee. As a result of these new rules, we anticipate that providers will need to ensure all locum, agency and bank staff are subject to PAYE and on payroll from 1 April 2017.”

The final IR35 legislation clearly stated that ‘reasonable care’ had to be taken when making decisions over the IR35 status of public sector contractors. Put simply, this means that public sector employers and agencies should not make blanket determinations.

If public sector bodies fail to take take reasonable care over the rule changes, they will be responsible for deducting PAYE and National Insurance, and for paying Employer National Insurance rather than the contractor.

Earlier this year, Contractor UK reported that 30 contractors abandoned an overrun £16.5m health service IT project after an NHS trust said it would declare them all inside IR35 from 6 April.

Dave Chaplin, chief exec of ContractorCalculator, said that many public sector firms have discovered that blanket rules have had a hugely negative impact and highly skilled contractors have been leaving the public sector in droves.

“We have heard countless stories of private firms trying to lure locums to the private sector only for the NHS to increase the locum’s rates to counter the effects of blanket decisions. The IR35 reforms have been tantamount to a massive extra tax on the NHS and have led to utter chaos.”

An Introduction to Tax Planning

Tax planning is the legal process of arranging your affairs to minimise a tax liability. There is a wide range of reliefs and provisions that are available to legitimately reduce a tax liability without straying into the rather more challenging area known as tax avoidance.

Examples range from simply choosing a year-end date early in the tax year to maximise the period from earning profit to paying tax, to arrangements to shelter an appreciating asset from inheritance tax.

Tax evasion is different, it is illegally reducing your tax, such as falsifying figures or not disclosing income. This carries serious penalties which can include a criminal prosecution.

A problem arises when the law is unclear, so it is not obvious whether a tax planning scheme is within the law or not. For this reason, there have been several significant developments.

1. We have seen an ongoing approach to artificial tax avoidance which stands between avoidance and evasion. This was probably most accurately defined by one Paymaster General who said that: “Artificial avoidance schemes are those where they create economic distortions, provide commercial advantages over compliant taxpayers, redistribute tax revenues in an unfair or arbitrary manner, or represent an abuse that conflicts with or defeats the will of Parliament”.

These must be disclosed and are closely examined to see if they are legal. Even if they are, it is likely they will be closed in the next Finance Act, sometimes with retrospective effect.

2. A list of ‘hallmarks’ of tax avoidance schemes has been published. If any of the following are found in a scheme, it is likely to be challenged as artificial tax avoidance:

– It sounds too good to be true

– Artificial or contrived arrangements are involved

– It seems very complex for what you want to do

– There are guaranteed returns for apparently no risk

– There are secrecy or confidentiality agreements

– Upfront fees are payable or the arrangement is on a no win/no fee basis

– The scheme is said to be verified by a top lawyer or accountant but no details of their opinion(s) are provided

– The scheme is said to be approved by HMRC (it does not follow that this is true)

– Tax benefits are disproportionate to the commercial activity

– Offshore companies or trusts are involved for no sound commercial reason

– A tax haven or banking secrecy country is involved without any sound commercial reason

– Tax exempt entities, such as pension funds, are involved inappropriately

– It contains exit arrangements designed to sidestep tax consequences

– It involves money going in a circle back to where it started

– Low risk loans to be paid off by future earnings are involved

– The scheme promoter lends the funding needed.

Businesses promoting schemes with these “hallmarks” must notify HMRC about the scheme and register it, obtaining a “DOTAS” number for the scheme. They must then notify those who have used the scheme at their suggestion, who must then disclose this on their tax return. There are some very onerous obligations on promoters of tax avoidance schemes, including providing HMRC with a regular list of their clients and customers.

3. There is a General Anti Abuse Rule (GAAR)which enables HMRC to take action to counter any abusive avoidance activities without making specific legislation to close the schemes down individually. Where HMRC wish to challenge an arrangement under the GAAR, the detail will be considered by a GAAR panel of tax professionals to advise whether the arrangements are abusive or not.

4. Where a taxpayer has participated in a scheme which reduces or defers their tax liability, once HMRC are notified of the scheme they will issue an accelerated payment notice. Essentially this undoes the cash effect of the scheme until the case goes to court which may be many years later, so the benefit of using the scheme is significantly delayed.

Please ensure that you seek our advice with regard to all aspects of tax planning.

Termination Payments – New Rules

Following consultation, the government has published draft new rules on employee termination payments. As an employer, how and when might they affect you?

More tax please! The government has made no secret about needing to tighten its purse strings, but it’s more cagey about the other side of the coin: raising extra tax. It prefers to dress that up as simplifications or removing unfairness from the system. Such is its reasoning for the new rules for tax on lump sum payments to employees.

Current rules. To be fair, the current rules can be confusing, which is why many disputes with HMRC end up in court. So clarification is a good thing for employers. For example, one of the trickiest issues for employers is whether or not to tax a payment to a departing employee where it’s made for the period of notice they aren’t required to work: a payment in lieu of notice (PILON). What’s more, the treatment for NI purposes may differ.

New rules. While HMRC released details of the new legislation in August 2016, it isn’t scheduled to take effect until 6 April 2018, so you must continue to apply the existing rules until then.

What’s changing? When the new rules come in, the main changes you need to be aware of are that:-

– all PILONs will be subject to tax and NI (employers’ and employees’), in the same way as regular salary

– all other post-employment payments you make to an employee, which would have been treated as earnings if the employee had worked their notice period, will be liable to tax and Class 1 NI (employees’ and employers’); and

– payments relating directly to the termination of the employment will be tax and NI free up to £30,000 (as they are now), but any amount paid in excess will be liable to tax and employers’ NI, but you won’t have to deduct employees’ NI.

The new rules apply from 6 April 2018. Payments in lieu of notice and other earnings-related sums will be liable to tax and NI. The £30,000 exemption for sums directly linked to termination of employment will continue.

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