Minimise your Luna cryptocurrency losses by claiming tax reliefs now.
The cryptocurrency market can be a volatile space, with the value of various cryptocurrencies changing rapidly. Recently, one such cryptocurrency, Luna, has seen its value drop from £66.80 to £0.000176 in a matter of days. While we cannot increase the value of a cryptocurrency, we can offer ways in which you can minimise losses with tax reliefs.
Disposal of cryptocurrency assets
By disposing of an asset, you can record a profit or a loss on it. “Disposing” of an asset means that it is no longer in your possession. There are multiple ways to dispose an asset, such as selling, trading, or in the case of theft and loss, receiving compensation such as an insurance payout. Before you can decalre losses on your cryptocurrency, first you must dispose of it.
Declaring losses on your cyrptocurrency
When decalring losses on your cryptocurrency, there are expenses which you can claim tax relief on. Firstly, the inital sum paid for the cryptocurrency and any transaction fees before its posting onto the blockchain. Also, any expenses to exchange a cryptocurrency for a different one and advertising fees incurred is claimable. Finally, any costs relating to the valuation of a cryptocurrency, including any software subscriptions, and professional expenses for either the purchase or selling of a cryptocurrency is eligible for tax relief.
Negligible value claim on cryptocurrency
Additionally, for cryptocurrencies with little to value, a negligible value claim can be made. A negligble value claim can be made on any assets that have become next to worthless. Doing so treats the assets as disposed of and realises a loss, even though you continue to be the owner. To do this, the cryptocurrency must be near worthless, and acquired prior to it losing its value. Additionally, you must own the assets when making the claim.
To make a negligible value claim, you will need to provide evidence that the cryptocurrency was owned by you at the time of making the claim. You will also need to show that it had lost value, no longer than 2 previous tax years before the tax year the cryptocurrency was bought (Note, a tax year starts April 6th and ends April 5th the following year).
To make a negligible value claim, you will need to submit a self-assessment with supplementary pages SA108. Enter the amount lost in box 19, and the code “NVC” in box 20.
You can backdate a negligible value claim if you owned the crytocurrency and its value was lost. This can come in handy if you made profit on Capital Gains Tax the last 2 tax years, but not this tax year.
If you have cryptocurrency that you need to declare on your self-assessment, CIGMA Accounting is here to help. As tax accountants based in Wimbledon, we help customers who trade assets to make sure that your self-assessments are completed in the most tax efficient way. We also offer consultation calls to make sure you are making the most out of your assets.
You might be eligible to delay payment of Capital Gains Tax if you transfer your business to a limited company by using incporation relief. In return, you gain shares.
Incorporation Relief allows you to not pay any tax until you have sold or disposed of the shares that you have gained from becoming a limited company.
Capital Gains Tax is the tax that is added to the profit you make when you sell an asset that has increased in value. E.g. if you previously bought a machine for $500 and at a later date sold it for £2500. The gains is £2000 (£2500 – £500) and that value will be what Capital Gains Tax is applied to.
To learn more about Capital Gains Tax click this link.
Eligibility of Incorporation Relief
To be eligible for Incorporation Relief:
You must be a sole trader or be in a business partnership
You must transfer your business and all its assets to a limited company for shares in the company.
How do you claim Incorporation Relief?
If you are eligible for incorporation relief then you will automatically receive it. You are not required to take any action to receive incorporation relief.
How to calculate incorporation relief – shares.
In order to calculate the value you need to pay Capital Gains Tax on, you must deduct the gain you received when selling your business from value of the shares that you received.
A business transfers to a company, in return they gain £200,000 worth of shares. The company gains a profit of £120,000. The company then sells the shares at a later date. The cost for their Capital Gains Tax calculations is £80,000 as it is the (the market value of the shares – gain)/ (£200,000 – £120,000).
How to calculate incorporation relief – shares and cash.
You may also be given cash as well as shares when you transfer your business to a company. You will only be eligible for Incorporation Relief on the percentage you exchanged for shares.
A business transfers to a company, which is valued at £200,000. You receive 80% in shares and 20% in cash, this is valued at £160,000 in shares and £40,000 in cash. The company gains a profit of £100,000. The company is able to postpone paying Capital Gains tax on the 80% until the shares are sold. However, the company still needs to pay Capital Gains Tax on the 20% cash in the upcoming tax return.
INcorporating a property rental business
If you own a property rental business and want to incorporate that business you will face some up-front costs.
One cost is that you have to pay SDLT (Stamp duty land tax) again. The SDLT is based on the current market value of the property when it is transferred. If you would like to learn more about SDLT please click this link.
If you do not currently have a limited company and you wish to start a property rental business, you will need to set up a limited company first. After setting up the company, the company will purchase the rental properties. Once the properties are purchased, then the SDLT are required to be paid.
Companies do not have a personal allowance unlike individuals do which is currently £12,570. The amount that falls within personal allowance is taxable at a 0% rate. Therefore, corporation tax is taxable at the first £1 profit that is made.
On the 1st of April 2023, companies that make more than a £50,000 profit will be subject to increased corporation tax rates. However, these rates will remain lower than income tax rates so it may still be more beneficial to incorporate your business.
When having property within a corporate business you can be entitled to lower corporation tax rates and be able to repay debt more quickly. The income that is made can be accumulated within the company and can be distributed after retirement to avoid the higher tax rates.
Currently the Corporation Tax main rate is 19% as of 2021, while income tax rates are at 20%, 40% or 45%. Out of all of the income that is generated, if the shareholders do not require all of it then it can be used to pay off debts faster and be used for future investments. This can help the business to grow and flourish faster than it usually would.
In addition, the first £2,000 of dividends that are to be distributed to each individual will be taxable at 0%. This means that the more individuals that are entitled to dividends, the more tax you will be saving on.
When figuring out your taxable profits, you can take into consideration expenses that have been incurred for the sole purpose of your property business.
Costs of being unincorporated
Landlords that are running an unincorporated property business have been subject to reduced tax reliefs over the past few years. When working out their taxable profits, they are no longer able to take into consideration finance costs such as mortgage interest. In return, they are able to receive tax relief at a 20% reduction of the finance costs. This is regardless of the rate at which you pay taxes.
In contrary to landlords that are running an unincorporated property business. When working out taxable rental profits, an incorporated property company is able to deduct allowable financial costs in full.
Disposal of property
If and when a limited company decides to dispose of their property, the company will pay corporation tax on the chargeable gains. However, if you dispose of a property personally and the income gains are above the basic rate limit of £37,700 (as of 2021/22) then you will need to pay capital gains tax.
You will pay capital gains tax at 28% for the disposal of residential property and 20% for the disposal of commercial property. In spite of that, if your income gains are below the basic rate limit then you will only have to pay 18% for residential property and 10% for commercial property.
When it comes to investment opportunity, new companies are always a risk. In the UK only 40% of start-ups survive the first 3 years of business. This alarming statistic tends to put investors off from putting money into these younger companies. However, this is where the Government has provided Venture Capital schemes to entice investors to invest in new businesses. These schemes offer ample tax relief to investors which in return, encourages them to invest.
What are the schemes?
There are 4 main venture capital schemes which can help to raise money for the progression of your company. There is the enterprise investment scheme (EIS), Seed enterprise investment scheme (SEIS), Social investment tax relief (SITR) and Venture capital trust (VCT). These schemes are created to encourage small or medium sized companies to grow by appealing to investors.
The schemes offer tax relief for individuals who purchase and hold shares, bonds or assets for a set period of time.
The Enterprise investment scheme (EIS)
EIS is a scheme designed so companies can raise money to grow their business. It offers tax relief to individual investors who buy new shares in the company.
How can you qualify for EIS?
A company can qualify for EIS if it has no more than £15million in gross assets, less than 250 employees and it has been more than 7 years since its first sale.
You can raise up to £5 million each year in the EIS scheme, with a maximum of £12 million in the company lifetime. However, the company must receive investment under a venture capital scheme within 7 years of its first sale.
What money raised can be used for
The money gained from the issue of a new share must qualify as one of the following business activities:
a qualifying trade
preparing to carry out a qualifying trade (which must start within 2 years of the investment)
research and development that’s expected to lead to a qualifying trade
The money raised by the new share issue must:
be spent within 2 years of the investment, or the date you started trading
not be used to buy all or part of another business
pose a risk of loss to capital for the investor
How much tax relief you will receive
With the EIS scheme, you can get relief at the rate of 30% on the aggregate of the amounts claimed for shares issued to you in tax year 2020 to 2021.
However, you cannot get relief on more than £2 million, any amount in excess of £1 million can only be for investments in KIC (Knowledge and Innovation committee). If your tax liability is not high enough to absorb all the relief, you have to forgo the excess. In either of these cases, you can opt for the relief to be attributed to certain shares, or to be attributed proportionately to all the shares.
For example, if you have placed £250,000 for shares in each of 4 companies, but you’re limited to claiming relief on £500,000. You could opt for relief to be given at 30% on the subscriptions for all the shares in 2 of those companies, or you could opt for relief to be given at 15% on all the shares in the 4 companies.
When you issue the shares, you must pay them up in cash and in the full amount. Your company should have a way to accept the payment before the shares are issued.
Seed enterprise investment scheme (SEIS)
SEIS is like EIS as it is also a scheme that encourages investors to put money into your company by rewarding them with tax reliefs when they buy new shares in your company.
Howcan you qualify for SEIS?
A company can qualify for SEIS if it is less than 2 years old, has no more than £200,000 in gross assets, less than 25 employees and have not previously carried out a different trade.
In the SEIS scheme the maximum investment you can receive is £150,000 which includes any other de minimis state aid received in 3 years up to and including the date of the investment. Any investment will also count towards the limits for later investments through other venture capital schemes.
How much tax relief you will receive
You can get relief of 50% on the amounts claimed for shares issued to you in the tax year 2020 to 2021.
However, you cannot get relief on more than £100,000 and if your tax liability is not high enough to absorb all the relief, you have to forgo the excess. In either of these cases, you can opt for the relief to be attributed to certain shares, or to be attributed proportionally to all the shares.
For example, if you have placed £50,000 for shares in each of 4 companies, but you’re limited to claiming relief on only £100,000. You could opt for relief to be given at 50% on the subscriptions for all the shares in 2 of those companies, or you could opt for relief to be given at 25% on all the shares in the 4 companies.
If you’ve received investment from EIS or a venture capital trust then you cannot use SEIS.
Social investment tax relief (SITR)
SITR is a state aid that is designed to financially support your trade. The scheme is in the interest of community companies, community benefit society with an asset lock and charities. SITR offers tax relief on shares they buy and money that they lend to your enterprise.
How can you qualify for SITR?
Your company cannot have more than £15 million in gross assets before investment, have more than 250 employees, be controlled by another company or have more than £16 million in gross assets immediately after the investment is made.
For 3 years after the investment, you cannot be controlled by another company, be quoted on a recognised stock exchange, be in partnership or control another company that is not a qualifying subsidiary.
The maximum amount of investment you can receive over the lifetime of your enterprise is £1.5 million. Any investments under SITR will also count towards any limits for later investments through any of the other venture capital schemes.
Venture capital trust (VCT)
Venture Capital Trusts are companies that have been approve by HMRC and which lends money to smaller companies for in return they receive tax reliefs. The scheme is built to encourage investment into smaller companies.
The VCT invests in a variety of spread smaller companies which allows investors to spread their risk just as they would from holding shares in a normal investment trust company.
Benefits of VCT
VCT is exempt from corporation tax on chargeable gains. Individual investors can claim income tax relief on subscriptions up to £200,000. Futhermore, Individual investors are exempt from income tax on dividends in respects of ordinary shares acquired within the £200,000 maximum. Individual investors are exempt from capital gains tax on the disposal of ordinary shares acquired within the £200,000 maximum.
Front end income tax relief
Exemption from income tax on dividends
Exemption from capital gains tax on disposals
There are many different venture capital schemes which will help you to progress your company and raise money. Each varies differently from each other which is why it is important to know the difference and pick which scheme is optimal for your business.
Cigma Accounting has expert advice and experience in this matter which can help you to pick the correct scheme to fit your company’s needs.
If you require assistance to do so, please do not hesitate to get in touch.
By utilising various methods to save tax, it is possible to receive up to £41,370 while at the same time, pay zero tax on it.
Here are the secrets to earn as much as possible while paying as little tax as possible.
Initial earnings of up to £12,570 in the 2021-22 and 2022-23 tax year will not receive any taxation. It is possible to transfer assets that are producing income to your spouse or civil partner. This is useful if your spouse or civil partner cannot maximise this personal allowance. The income tax charged will be either at a lower rate or zero.
So long as you are not on an emergency tax code, you will automatically receive the personal allowance. Starting July 6, the National Insurance threshold will have risen to £12,570 from the previous amount of £9,568 as well. This means that you will not pay National Insurance until you earn above £12,570.
Interest savings Allowance
For people earning under £17,570 per year, you will not pay any tax on interest from savings up to £5,000. You are only able to claim the full tax free amount if you are earning under £12,570. For every £1 that you earn above £12,570, the allowance will reduce by the same amount.
Those which are in retirement or do not work and also have a large pool of savings, commonly use this allowance.
PAY ZERO TAX with Personal savings Allowance
Those who earn above £17,570 may be eliglble for personal savings allowance.
For someone earning between £12,571 and £50,270, basic rate tax payers can claim up to £1,000 as a personal savings allowance on top of the starting rate for savings. Any amount above this will be taxed at 20%.
People earning above £50,270, also known as higher-rate tax payers, will receive a reduced personal savings allowance of £500. 40% taxation will apply to any amount going above the £500 personal savings allowance.
Those with earnings above £150,000 per year (additional-rate taxpayers) do not get a personal savings allowance.
Pay Zero tax on Dividends
The first £2,000 of dividends from investments excluding ISAs are exempt from paying any tax. They are also taxed at a special rate outside of the initial £2,000. The dividends tax rates are 8.75%, 33.75% and 39.35% for basic-rate taxpayers, higher-rate taxpayers and additional-rate taxpayers respectively. Savings in an ISA up to £20,000 per year and any dividends paid on said investments are free from tax, so using the allowance beforehand is a clear choice.
Pay zero tax on Capital Gains
The first £12,300 of profit received from capital gains is exempt from tax. Some examples of capital gains includes the selling of shares, properties outside of your main home (which is exempt), and high-value art. This exemption cannot be carried forward. Selling assets over the course of multiple tax years will let you make the most of this exemption.
For assets in possession of multiple people, via marriage for example, each person can use their allowance. Selling a second house owned by two people means that £24,600 of profit will be exempt from tax. Giving your spouse assets is another way to make the most of the relief, as the transfer between spouses will not have Capital Gains Tax deducted.
PAY ZERO INCOME FROM YOUR INDEPENDENT WORK
If you have trading income from any independent work, such as babysitting or selling handmade products online, the first £1,000 per tax year is free from tax. However, this allowance is in lieu of claiming any business expenses. If your expenses go above £1,000, then deducting them from your trading income is more tax-efficient.
The rent-a-room scheme implemented by the government lets you rent out one or more rooms in your home and receive up to £7,500 of tax free income per year. The rooms must meet a standard of quality and be part of the home that you live in.
If you earn above £7,500 from rental income, a tax return will need to be completed and submitted to HMRC, and tax will need to be paid on either all of the profit after utility and maintenance costs are deducted, or on any income exceeding £7,500.
If you wish to claim expenses against your rental income, for any work done to your house which does not increase its value, you cannot take part in the rent-a-room scheme at the same time. Whether it is more tax efficient to claim tax releif on expenses or take part in the rent-a-room scheme is up to the individual and whether the expense relief exceeds £7,500.
Property income exemptions
Any property income, ranging from land, buildings to even mobile homes such as caravans, the first £1,000 is tax free. Again, it may be more tax efficient to claim your expenses than to take the allowance depending on the individual. This cannot be taken in conjunction with the rent-a-room scheme.
So, how does this all add up to £41,370? Firstly, the first £12,570 of earnings is tax free. Adding the personal allowance of £5,000 plus the additional £1,000 totals £18,570. £2,000 on dividends increases this value to £20,570. You can receive £12,300 on capital gains, £32,870. Trading allowance of £1,000 is £33,870, and including the rent-a-room scheme of £7,500 gives us a grand total of £41,370.
While you might not be able to claim every tax relief on this list, hopefully there are one or two items on this list you didn’t know about.
GET AN Accountant, or go solo?
It is a common occurance that people pay more tax than they should due to not knowing about the allowances listed above.
At CIGMA Accounting Ltd, we go through great efforts to save you time and taxes. Allowing CIGMA Accounting Ltd to prepare your tax return also reduces the risk of filing an erroneous tax return.
If you have tax returns that need submitting, speak to one of our members today to receive a quote free of charge.
VAT stands for Value Added Tax. VAT is added to most goods and services that you purchase. The standard VAT rate is currently 20% which has been increased from 17.5% on 4th January 2011.
When you view prices of items in shops in the UK, you see the inclusive price where VAT has already been added.
% of VAT
What the rate applies to
Majority of goods and services.
Certain goods and serices, e.g. children’s car seats and home energy.
Zero-rated goods and services, e.g. most food and children’s clothing.
How does VAT affect businesses?
They may have to add VAT to the prices of their products
They must send that extra VAT to HMRC
As a business you can claim back any VAT on supplies that the business uses.
How does VAT work in practice?
Here is an example of how VAT works in real life. This example highlights how VAT is structured to be paid by the customer in the end, rather than the retailer itself.
In this example, glasses are created at the production cost of £40. The rate of VAT is 20% which totals the cost of the glasses to £48. The £8 (20%) VAT goes to HMRC. This is the cost that the retailer pays to production for the glasses.
The retailer then marks up the price to £100 to make a profit on the glasses. The rate of VAT is again 20% which totals the cost of the glasses to £120. The customer pays the total cost of £120 to the retailer for the glasses.
When the retailer is filing taxes to the government, they can claim back the £8 that they previously paid to production. This means that the retailer only pays £12 which is £20 – £8 = £12. From this you can see that the end VAT of £12 is laid out to be paid by the customer rather than the retailer.
How does import VAT work?
When you import goods from outside of the UK you most likely have to pay import VAT. The import VAT price is usually added when you pay customs. When submitting your VAT return you can typically claim it back.
Click here to learn more about import VAT directly from gov.uk.
How does export VAT work?
When sending, selling or transferring goods outside of the EU you usually will have to add export VAT. The rate of VAT will be dependent on what goods or services you are selling and to whom you are selling.
Click here to learn more about export VAT directly from gov.uk.
Company Accounts, Corporation tax facts you NEED to know
Q: Which companies are required to submit their accounts, tax return and confirmation statement (CS01)?
A: Every limited company registered on Companies House must submit annual accounts and confirmation statement to Companies House. The company will also submit a Corporation Tax return to HMRC. The amount of money the company made or lost is irrelevant. Dormant companies must also submit these documents. However, instead of annual accounts a dormant company will need to submit dormant accounts.
Q: How long does it take for the accounts to show on Companies House?
A: For online submissions, it usually takes up to 24 hours for the accounts to appear on Companies House. Submissions made by post can take much longer.
Q: Will a company which has submitted its accounts late as a result of Covid-19 be exempt from penalties?
A: No, Companies house will fine the company for failing to submit its accounts online, regardless of any reason provided. However, a company can apply for a 3-month filing extension due to Covid-19.
Q: When do I need to submit my company accounts and corporation tax return by?
A: A company must submit its accounts within 9 months after the company’s accounting period ends. Furthermore, a company must pay any corporation tax due within 9 months 1 day after the same date. You can check when your accounts and corporation tax are due by checking the company’s profile on Companies House. Also, you can find other information such as the company’s accounting period, as well as the due dates relating to confirmation statements (CS01).
Q: What happens if a company submits its accounts late?
A: Fail to submit your company’s account on time and the company will receive late filing penalties. The length of the delay will determine the severity of the penalty (see the table below).
Length of delay starting from the accounts due date
Private company/LLP penalty
Public company penalty
Less than 1 month
After a month but before 3 months
After 3 months but before 6 months
Greater than 6 months
Your company will receive a penalty of double the regular amount if it does npt sibmit it acconunts for two years consecutively. Additionally, any company which fails to submit its company accounts and/or confirmation statements will be at risk of having their company de-registered.
Q: What happens if a company submits its corporation tax return(s) late?
A company will receive penalties depending on how much time has passed from the deadline to submission:
1 day after the deadline
3 months after the deadline
An additional £100
6 months after the deadline
HM Revenues and Customs (HMRC) will calculate an estimate of the corporation tax owed and penalise the company of 10% of calculated amount
12 months after the deadline
An additional 10% of all unpaid tax
Failing to submit a Company Tax return on time for three years in a row will increase the £100 penalties to £500.
If the tax return becomes overdue by 6 months or more, the company will be required to pay an amount of corporation tax that HMRC has estimated. This is called a ‘tax determination’ and cannot be appealed.
You must pay the determined amount and file the tax return. Once the company has paid the estimated amount, HMRC will calculate the interest and penalties due again.
If you believe your company is at risk of submitting its tax return on time, CIGMA ACCOUNTING LTD is more than happy to assist you. Call us on 02045518463 and speak to one of our members of staff today.
Confirmation Statement (CS01) facts you NEED to know
Q: What is a confirmation statement?
A: A confirmation statement, also referred to as a CS01, is a document a company submits to Companies House at least once a year. Companies also submit a confirmation statement when there is a change in company structure.
Q: What qualifies as a change in company structure?
Any changes to directors and secretaries, people with significant control (PSC) and the company’s registered office address all qualify as a change in company structure. Furthermore, changes to Standard Industrial Classification (SIC) codes, statement of capital, trading status of shares, exemption from keeping a PSC register and shareholder information are all changes in company structure. Companies must notify these changes to Companies House by sending a confirmation statement.
Q: What is the deadline to submit a confirmation statement?
A: A company must file a comfirmation statement within two weeks of the statement date. You can check your company’s statement date and due date on Companies House. Submitting a confirmation statement early will reset the 12 month review period.
Q: How much does it cost to file a confirmation statement?
A: Your company must pay to submit its first confirmation statement within the payment period every 12 months. For newer companies this is every 12 months after your company was incorporated. Older companies must pay the fee 12 months after the previous payment.
It costs £13 to file the first confirmation statement online every 12 months. A company can submit a confirmation statement by post, however it costs £40. Additionally, online forms have checks, data that has been entered automatically, and are processed in a much shorter time compared to filing via post.
Q: What happens if I file a confirmation statement late?
A: Failing to submit a confirmation statement on time will not result in an immediate penalty. However, the company will recive a warning letter from Companies House, which if the company ignores can lead to sanctions for the company officers.
Q: What happens if I don’t submit a confirmation statement?
A: A company’s officers will be liable for a fine of up to £500, as well as a daily default fine of up to £250 if a company continues to fail to submit. Officers may also be disqualified from becoming a company officer for some years, and the company will also be at risk of being struck from the register.
Q: What do I do if the information provided is incorrect?
A: A company can resubmit an amended confirmation statement with the correct information.
If you require assistance to submit your confirmation statement on time, CIGMA ACCOUNTING LTD is here to help. Give us a call on 02045518463 and speak to one of our members of staff today.
Off payroll working usually applies to workers that are providing services through a company. These workers are usually called contractors. The IR35 rules ensure that they pay the same Income Tax and National Insurance contributions as normal employees would.
Who does IR35 apply to
These IR35 rules apply to; workers who provide services through a mediator, a client who receives services from a worker through a mediator, an agency which provides workers’ services through their own mediator.
The off payroll working rules apply on a case-by-case basis. A worker may have multiple contracts but some of which do not apply to the off payroll working rules and some that do apply.
If your contract is “inside IR35“, HMRC will recognise you as an employee and you will receive income tax and national insurance contributions just like other employees would.
However, if your contract is “outside IR35”, HMRC will recognise you as self-employed and you will be relieved of tax burdens as other self-employed individuals.
To be classed as “outside IR35” the contract you sign with your client should include details of the services you’ll be providing, where and when you’ll be working for them. The contract should not include demands from the client which could include things such as performance monitoring. The key to being classified as “outside IR35” is to offer someone a service rather than a contract for a service. In this situation, it can be interpreted that you could just send someone else to do your work in place of you.
Who works out if its inside IR35 or outside IR35
The rules for who works out if its inside or outside IR35 has changed since 6th April 2021.
All public authorities, medium and large sized clients who are not in the public sector, are responsible for deciding whether the rules apply or not. If the worker provides services to a small client which is not in the public sector, the worker’s intermediary is then responsible for deciding whether the rules apply.
Common Misconceptions about IR35
A common misconception about IR35 is that if you are working the same contract for a prolonged period then you are guaranteed to be classified as “inside IR35”. However, this is not the case as there is no formal line that guarantees you to be inside or outside of IR35. This is judged on a case-by-case basis. The longer your contract runs for, the more risk there is that you are going to be classified as an employee.
Another mistake is assuming that just because your contract says that you are not an employee then you are automatically “outside IR35”. The way you conduct your work as a contractor is more dominant than what is stated in your contract when figuring out if you are inside or outside of IR35. If the way you conduct your work is like an employee, then you will be more likely to be classified as “inside IR35”.
Here are some scenarios that will help you to differentiate Inside IR35 and Outside IR35.
The main thought process is that if your contract fulfils the job of an employee, then you are classified as an employee. This will classify you as “inside IR35”.
If you are still unsure about whether you are inside or outside IR35 and are a contractor, please have a look at this link which is directly provided by HMRC.
If you are an organisation, please have a look at this link.
These flowcharts will help you in the thought process on figuring out if you are inside or outside of IR35.
Still confused? Don’t be afraid to call us on +44 2045 518463 and get an expert opinion from one of our experienced professionals here at CIGMA Accounting. If you would like to know more, feel free to get in touch.
There are many factors to consider when making the decision between working as a PAYE employee (Pay as you earn) or self-employment. Here at CIGMA Accounting, we have an extensive amount of experience with clients seeking advice around this topic.
When deciding which choice is best for you, you should consider aspects such as tax efficiency, benefits and personal non-financial factors. CIGMA Accounting offers analysis and expert knowledge to help you make an educated decision.
An individual is classified as self-employed when they are working for themselves. Self-employed individuals run a business for themselves and take responsibility for its successes or failures. They can keep all business profits after tax is paid.
An individual is classed as an employee when they have entered a contract of employment. To gain employment status, the contract will state that the employee will do work or services for a personal reward. This reward can be money or a sort of benefit. An example would be the promise of a contract or future work.
Different Approaches to Tax
A crucial difference between self-employment and being on a company’s payroll is the way in which the taxes are paid. When an individual is self-employed, income tax is paid once work-related expenses have been deducted. Depending on each individual case, class 2 and 4 National Insurance contributions may need to be made. Majority of self-employed individuals are required to complete a Self-Assessment tax return annually.
Conversely, employees are taxed automatically through the PAYE system and make class 1 National Insurance contributions. An employed individual will usually not be required to complete a Self-Assessment but if certain conditions are met, they may be required to complete a Self-Assessment. If an employee on a PAYE job earns over £100,000 or earn additional untaxed income, they must complete a Self-Assessment. A common example of this is income from rental properties. You must pay tax on the profits.
As employees’ tax is paid automatically through the PAYE system it reduces human error and requires less manual effort of the employee. In comparison, self-employed individuals will have to complete a Self-Assessment to pay their tax liability. At an expense, sole traders will often hire professionals to complete the self-assessment as it is time consuming, meticulous to complete and you must have a vast amount of knowledge to be the most tax efficient.
A self-employed individual can claim expenses for certain items if it relates to their business. These include laptops, phones and vehicle-related costs. For this claim to be accepted and treated appropriately, the expense should strictly be for business use. However, employees will usually only be allowed to claim expenses when they have purchased something that was necessary for their work and was not reimbursed by their employer. All expenses that are claimed must have a receipt.
To read more on expenses, please see our blog on “What is an allowable expense?”.
Employment Benefits and Rights Compared to Self Employed
All employees of a company are entitled to rights which include national minimum wage, paid holiday, statutory sick pay, protection against unlawful discrimination, workplace pension, social security, workers compensation and job security. However, being an employee means that you are required to work regularly, do a minimum number of hours and you are not able to send someone else to do your work.
Self-employed individuals tend to have more independence, freedom, work-life balance and additional tax deductions. Although sole traders have more independence, the lifestyle comes with the cost of having more responsibilities regarding the business. They are responsible for finishing any work in their own time, being personally liable and have tax planning limitations.
Employees often tend to have a more predictable income in comparison to sole traders. Employees must sign a contract with the employer which states that the employer must pay their staff an agreed amount of money. On the other hand, self-employed individuals will have a more unpredictable income as it depends on the current state of the market and consumers. These changes can influence the income of the sole trader positively or negatively.
Non-Financial Incentives for Self Employed and Employee
In order to determine whether being self-employed or an employee is more beneficial, you should consider all factors. Non-financial incentives can help to determine which choice suits you best. We have laid out the main non-financial incentives for both career paths.
Independence: When you are your own boss you get to decide what work you take on, how you present it and who you want to work with. How you spend your time is up to you.
Follow your passion and interest: You get to pursue what interests you and do what you love. The amount of work you put in and the success that is produced is entirely up to you.
Maximise potential and skills: Being able to work at your own pace allows you to maximise your potential and skills to improve how you complete your work.
Flexible lifestyle: Life outside of work is something that is usually something that is neglected and put as a second priority. When you can control your work hours, you can weave in your personal life as you see fit which gives you more freedom to do the things you want to.
Office interference: Work life in the office can be stressful when you have co-workers who bring their complications to the workplace. Working alone eliminates the stress of dealing with that and allows for you to fully focus on the task at hand.
A clear career path: A clear career path can give you a sense of accomplishment and a goal to strive for. These incentives can help you to aim higher and push further for the next achievement.
Rewards and recognition: Being recognised and rewarded by your peers for your achievements is a reward which is exceptionally gratifying.
Job security: One of the main benefits of being an employee is that you have a bigger safety net than someone who is self-employed. When you sign a contract with your employer it will outline your responsibilities and rights which will make it clear on what you should do to maintain your job.
Co-workers: Being able to socialise and talk to people allows for the opportunity to make friends and network with those you work with.
Our CIGMA Accounting Suggestion
Deciding the choice between an employee or being self-employed is complex and will be dependent on each individual case. Ask yourself, are you looking for a clear-cut proven career path? Do you want to beat the ‘Tax-Man’ and claim back expenses? Do you enjoy socialising with co-workers, or would you prefer independence? Thus, it’s important to consider all factors and the results it entails. We here at Cigma Accounting can provide you with advice and inform you of ways to save money.
If you require assistance to do so, please do not hesitate to get in touch.
If you are self-employed, you can deduct some of your business expenses to work out your taxable profit. These expenses must be “allowable expenses” as laid out by HMRC.
HMRC allows you to deduct the costs of certain purchases that are necessary to run your business. These costs are allowable expenses, they can be deducted fully from your profit. Allowable expenses are essential business costs that are NOT taxable.
✓ refresher courses, any education expenses related to maintaining or improving skills for your existing business,
✘ cost of classes to prepare for new business.
If the purchase is a capital asset e.g., computer or machinery, they are claimed under different rules called capital allowances. You can claim capital allowances, when you buy assets that you keep using in your business for a prolonged period – plant and machinery
✓ items that you keep using in your business e.g., computers, software, cars,
✓ costs of demolishing plant and machinery,
✓ parts of building considered integral, known as ‘integral features’ ,
✓ fixtures e.g. fitted kitchens or bathroom suites,
✓ alternation to a building to install other plant and machinery (does not include repairs),
✓ start-up costs,
✓ renovating business premises in disadvantaged areas of the UK,
✘ things you lease – you must own them,
✘ buildings, including doors, gates, shutters, main water, and gas systems,
✘ land and structures,
✘ items used for business entertainment.
If you use something for both personal and business reasons, you can only claim the business part of the expense.
Mobile phone bill
If your bill is £100/month and you used 30% for business calls and messages and the other 70% for personal use, you can only claim £30 as a deduction.
Working from home
Only for areas of your home you use for business.
Working from home
Expenses you can claim when you work from home:
Mortgage interest or rent,
Internet and telephone use.
You will not be able to write off all your bills, only the proportion which is used for business.
E.g., If your property is 200sq m and you use 40sq m (which is 20% of all the area) for 5 days a week out of 7 (71% of the week) and your heating bill is £100. You can claim £14.2 tax relief on your heating bill.
£100 x 0.2 x 0.71 = £14.2
If you work for 25 hours or more a month from home, you may be able to use HMRC’s simplified expenses system or if you work from home because of Coronavirus you can claim working from home allowance.
Working from Home allowance
✓ if you are required to work from home on a regular basis either for all or part of the week;
✓ if you are required to work from home because of coronavirus (COVID-19);
✓ you can only claim the part of your bill that relates to your work.
✘if you choose to work form home.
You can either claim tax relief as a working from home allowance, which is £6 a week form 6 April 2020 (no evidence needed). Or calculate the exact amount of extra costs you’ve incurred above the weekly amount (evidence needed).
If you choose to claim tax relief as a working from home allowance, you will get tax relief on the rate at which you pay tax.
Tax Relief on £6
HMRC’s simplified expenses system
There are flat rates that can be used for vehicles, working from home, and living on your business premises. You are not required to use simplifies expenses if you decide it suits your business.
✓ goods vehicles,
✘ cars designed for commercial use,
✘ vehicles already claimed as capital allowances.
Once you use the flat rates for a vehicle, you must continue to do so as long as you use you use that vehicle for business.
You can claim all other travel expenses and parking on top of your vehicle expenses.
Also, 5p per passenger per business mile for carrying fellow employees in a car or van on journeys which are also work journeys for them.
Flat rate per mile with simplified expenses
Cars and goods vehicles first 10,000 miles
Cars and goods vehicles after 10,000 miles
e.g. If you have driven 13,500 business miles over the year by car and 1,500 business miles over the year by motorcycle in total, you can claim £5,735.
10,000 miles car x 45p = £4,500
3,500 miles car x 25p = £875
1,500 miles motorcycle x 24p = £360
£4500 + £875 + £360 = £5,735
Working from home (only if you work for 25 hours or more from home)
✓ you do not need to work out the proportion of personal and business use for your home;
✘ does not include telephone or internet expenses (you can claim the business proportion of their bills by working out the actual costs).
Hours of business use per month
Flat rate per month
25 to 50
51 to 100
101 and more
e.g. Over the 12 months, you worked for 110h over 9 months, and 30h over the remaining 3months, in total you can claim £264
9 months x £26 = £234
3 months x £10 = £30
£234 + £30 = £264
Living at your business premises
bed and breakfast,
small care home.
You can use simplified expenses instead of working out the split between what you spend for your private and business use of the premises.
With simplified expenses you calculate the total expenses for the premises. Then use the flat rates to subtract an amount for your personal use of the premises, based on the number of people living on the premises and claim the rest as your business expenses.
Number of people
Flat rate per month
e.g. If you run bed and breakfast and live there entire year. And both of your children are at university for 9 months a year but come back to live at home for 3 months in the summer. The total you can claim is £5,100
9 months x £350 = £3,150
3 months x £650 = £1,950
£3,150 + £1,950 = £5,100
How to claim?
In order to claim tax relief, you must file a self-assessment.
The current tax year (as of the publishing date) runs from the 6th of April 2020 to the 5th of April 2021 and repeats each year with the same concurrent dates. The deadline to submit your self-assessment is the 31st of January each year and the earliest you can start your self-assessment is the 6th of April after the tax year has ended.
You need to keep records of all your business expenses as proof of your costs.
Add up all allowable expenses for the tax year and put the total amount in your self-assessment tax return.
If you require assistance to do so, please do not hesitate to get in touch.
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