Britain’s Self-Employed Army Missing Out On Tax Savings

London, 19.8.2014: Ahead of tomorrow’s figures from the Office of National Statistics (ONS) on self-employed workers in the UK, experts at leading wealth manager Brewin Dolphin warn that many are not taking advantage of all the tax allowances they can, particularly those ‘olderpreneurs’ who have become self-employed later in life.

“Being self-employed can be great in terms of flexibility and freedom, but it is a double-edged sword,” said Tim Walker, Head of Brewin Dolphin in Exeter. “Employees who go freelance miss out on employee based benefits such as life and health insurance and pensions, and many do not know how to replace them. By maximising the tax savings from self-employment, Britain’s new army of freelancers can maximise their income and ensure that they are ready to have a happy retirement too. Freelancers shouldn’t have to work ‘til they drop.”

Here are six tips for maximising self-employment income and savings:

1.     Don’t forget your pension

Employers’ contributions to your pension fund abruptly cease when you leave the company, so it is important not to stick your head in the sand over pension payments. “The tax relief on your pension is still valuable, so set up your own pension as soon as you can,” advises Tim Walker. Tax relief for higher-rate taxpayers is 40% on pension contributions.

2.     Keep it in the family

If another member of your family of working age is not using his or her full tax allowance, employing them in the family business could help to save tax. “Their salary would be an allowable expense to you, and would allow them to use the current tax allowance of £10,000. “Admin and bookkeeping are popular ways of employing a spouse or adult child,” says Tim Walker. “Ensure that they are doing enough work to justify the salary you are paying though, otherwise the taxman will take a very dim view.”

3.     Claim all of your expenses

You can offset the cost of running your business against income to reduce your taxable profit.  There are full details here http://www.hmrc.gov.uk/factsheets/expenses-allowances.pdf

4.     Maximise your dividends

If you open a limited company you can pay yourself dividends and salary, and an accountant can help you to set the balance between these two forms of payment at the most beneficial level, so that you do not pay too much National Insurance. “Make sure you understand how this works before paying yourself from your limited company,” counselled Tim Walker.

5.     Don’t get caught out by VAT

 If your turnover of VAT taxable goods and services supplied within the UK for the previous 12 months is more than the current registration threshold of £81,000, or you expect it to go over that figure in the next 30 days, you must register for VAT. Not doing so will leave you with fines and a nasty bill from the taxman. “Registering for VAT can be beneficial for tax purposes,” says Tim Walker.

If you are VAT registered, you will have to charge VAT on your goods and services (known as output tax). However, you will also be able to reclaim VAT that you are charged by other businesses. This is known as input tax. As long as your input tax exceeds your output tax in a given period, you will be able to reclaim the difference from HMRC. Note that once you are registered for VAT there are penalties for late filing and payment, as well as significant amounts of paperwork; but failing to register is one of the most common causes of new business failures.

6.    Have an EXIT plan

The aim of most entrepreneurs should be to have an exit plan and selling your business can provide the capital security you need to finally hang up your boots. For those that structure their business properly, up to £10m of Entrepreneurs Relief is available.  This can reduce the CGT liability from 28% to 10% on the sale.

“Taxation – a ‘moral’ issue, or a legal one?”

“Taxation – a ‘moral’ issue, or a legal one?”

 Chris Thorpe - Tax Director Haines Watts Chartered Accountants Exeter

As one of the two certainties in life, taxation is thus important – albeit one that is thoroughly disliked. Nonetheless it is accepted by society generally that taxation is a necessary part of life in order to defend our country and maintain law and order in order to provide an environment within which to live our lives. In the last 100 years an additional call upon our pockets is the provision and maintenance of public services. Income tax is the tax of which we are all aware (it was only supposed to be temporary, introduced in 1799 to pay for the war against France – hence its annual renewal by our Chancellors). In line with this legal requirement to pay income tax, the taxpayers of this country have been entitled to expect some certainty and proportionality on the part of H M Treasury. We have the right to be judged and held accountable to universally-applied laws passed by our elected representatives; those laws tell us how much tax to pay year after year, they tell us what actions are acceptable and which are not and the repercussions of straying over the boundaries of the law. Adam Smith, the founder of the theories of modern economics laid down the fundamental principles behind taxation in his “Canons of Taxation”. As well as “Equality” (payment being proportional to income) and “Convenience of payment” (collection at a time and manner convenient to the taxpayer), there is also “Certainty” (tax liabilities should be clear and certain) and “Economy of Collection” (taxes should not be expensive to collect and should not discourage business). Certainty is a very relevant point; but more significantly it has been coming under attack a great deal of late.

Looking again at those “canons”, how in tact are they in the UK today? Equality? Our tax system is progressive i.e. the more you earn the more you pay – but that’s not equal, 40% is a greater proportion than 20%, whereas 20% of £300,000 is much more in taxes raised than 20% of £30,000. However, out of political necessary, the UK, like most other countries adopt this seemingly fair system. What about Convenience of Payment? Most people pay income tax through PAYE, and the other through Self Assessment Tax Returns – so that one is probably a tick in the box. Economy of Collection – taxes should not be expensive to collect, but H M Revenue & Customs do sometimes seem to make it an overly-arduous task; as for not discouraging business our tax system is wonting there – but that’s for another day. Certainty – until recently it could probably be said that our tax system was certain (if not necessarily clear!); but there is a new trend afoot amongst certain sections of our society which is undermining this fundamental principle.

Our tax statutes (the growing number of them), duly interpreted by the courts, tell us how much tax we should pay. Fellow members of my profession are often called upon to clarify the law, but essentially our tax regime is still governed by laws which are available and equally applicable to all. But to some people the outcome of this is unsatisfactory. Well-advised companies and individuals will follow the letter of the law and do what they are allowed to do to minimise their tax liability. In the House of Lords, Lord Clyde famously stated (in the 1929 case Ayrshire Pullman Motor Services v. Inland Revenue) that:

“No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel into his stores”

i.e. as long as you are obeying the law you can do as you please to lower your tax bill – or carry out “tax avoidance”. That is in stark contrast to “tax evasion” – which is a crime e.g. lying about your income, committing fraud etc.  However, we now have the likes of Margaret Hodge MP, Chair of the Public Accounts Committee and our tax conscience, condemning individuals for engaging in tax avoidance. It is apparently immoral. If it is immoral and so offensive to the common man, then it should not have been made law. What is so offensive is to have laws in place legalising an action but then being told that what you are doing is “immoral”, “egregious”, “not adhering to the spirit of the law”, “not paying your fair share” etc. Instead of obeying the law, we are being expected to obey the opinions of certain self-righteous individuals, many of whom are ignorant of our tax system and some of whom may well dabble in some egregious and immoral tax avoidance themselves. If we are to follow their call and pay our fair share and stop avoiding tax – then what is “our fair share”? How do we quantify it? What types of “tax avoidance” are acceptable? Is getting tax-free interest from an ISA acceptable in their view? Or getting tax relief on pension contributions? Do we have to consult Margaret Hodge on each of these matters and others to get the answers? We shouldn’t have to – we have the laws of the land that tell us what we can do and we should not be forced to follow these subjective and uncertain parallel rules laid down by the opinions of a few individuals.

We have a new development now - the General Anti-Abuse Rule (or GAAR). The word “Abuse” used to read “Avoidance” at the consultation stage of this new piece of legislation which came into effect as part of the Finance Act 2013. The GAAR is now an over-riding arbiter as to what is acceptable tax planning under the law. The change from an anti-“Avoidance” rule, to one of anti-“Abuse” is seemingly an acknowledgement of the fact that tax avoidance is legal and that the purpose of this new law was to combat abuses of the system. The change in words gives this law a more-acceptable face – abuse is never a good thing. Abuse is far worse than anything deemed as being Avoidance, but there is perhaps a fine line between the two as something that is abusive is more often than not still within the boundaries of the law.

Whilst it’s a shame it’s come to this, the GAAR would seem a sensible solution to the problem of abuse. The great thing about it is that at the very least it is a law. It is on the statute books. Some uncertainty with still linger for a while before its judgments over individual actions are passed and digested and passed on as guidance, but instead of the hysterical cat calls from a few individuals, we now have a law telling us how to obey the law. 


www.hwca.com/accountants-exeter/

Chartered accountancy firm Haines Watts celebates launch of its new website

Top 20 Chartered Accountancy firm Haines Watts, with more than 30,000 UK clients across the network and over 60 offices nationwide including Southernhay, Exeter and North Devon LLP based in Bideford, announces the re-launch of its website.

The newly designed site concentrates on Haines Watts’ core marketplace of owner managed businesses – making important and useful business information more accessible to business owners. Digital agency Realityhouse designed the site and HW Technology, who are part of the Haines Watts Group, were responsible for the build.

The introduction of the new website underscores Haines Watts’ commitment to UK owner managers.  It is aimed at giving them access to information 24/7, including advice on the many day to day business challenges they face, a library of business factsheets, online calculators and guides.

Andy Minifie, Haines Watts National Managing Partner commented, “We are proud of our new website, ensuring we are making the most of technology to help business owners and directors.  We have added a new Haines Watts blog on the site.  This is written by a variety of experts in Haines Watts giving insight into our involvement with clients, topical comment on business stories and useful tips. It also gives people the ability to comment and give us valuable feedback and opinion.”

Samantha Davies, Haines Watts Marketing Manager adds, “This is merely a starting point, the website will continue to develop and we will be linking our social media, e-marketing, phone apps and website closely together to ensure that businesses can access up to date information whenever and however they want it.”

www.hwca.com/exeter