HMRC have indicated that they are considering reclassifying self-employed construction workers as employed. They have actually launched a consultation process with interested parties. Reclassified workers would be taxed through the PAYE system regardl

ess of the length or brevity of each employment assignment.

HMRC are convinced that a significant number of construction workers are taxed as if self-employed even though they are providing their ser

vices to contractors effectively as if they were employees.

HMRC are calling this status issue “false self-employment”. HM

RC plan to introduce legislation to protect income tax and national insurance revenue that they feel is being lost.

The consultation document that HMRC have published assumes that these changes will happen and simply seeks input as to how such changes should be introduced.

Comments on this proposal have to be sent to HMRC before the 12 October 2009; so change, if it is coming, may not be that far away!

HMRC have now agreed that all medical check-ups provided by employers to an individual employee will be treated as tax and NIC free, even if the check-ups are not available to all employees.

This clarifies a number of changes in their approach, and informal concessions, in the last few years. The change will be acknowledged in the forthcoming Finance Bill 2009.

If your local tax office sent you a demand to pay tax you would obviously take some interest in the issue – is this change correct? When do I have to pay it?

Would you feel the same if you received a notification of change to your PAYE code number?

Your tax code is set at the level at which you pay no tax. If your tax code is 600L, you can earn up to £6,000 a year (£500 per month) tax free. If towards the end of a tax year this reduces to say 400L, your annual tax free allowance will have dropped to £4,000. Depending on the degree of reduction and the timing of the adjustment, you may suffer an immediate and perhaps significant drop in your take home pay.

What to do?

Your tax code can be revised in a downwards direction for a number of reasons. Some of the more frequent causes are set out below:

*  State Pensions – your State Pension is paid to you with no deduction for tax. Unfortunately the pension is treated as income for tax purposes and if you are employed and in receipt of the pension, HMRC will seek to collect any tax due by reducing your tax code.
* Benefits in kind – if your employer provides any form of taxable benefit, company car, health insurance etc.
* Unpaid tax from previous tax years.

An interesting situation arises if the total reduction in a tax year exceeds your basic tax free allowance. For instance if at the beginning of a tax year your tax free allowance was set at £6,500, but your untaxed State Pension for the forthcoming year was £10,000, this would result in a negative code of -350. (£6,500 – £10,000). On your Notice of Coding this would be displayed as K350. A K code means that you have no allowances to set off against your salary before tax is calculated – in fact, in the example set out above, £3,500 will be added to your taxable earnings! An increase in a K code will increase your tax deductions and reduce your take home pay.

If you receive a notification that your tax code has changed do check it out, H M Revenue & Customs have been known to make mistakes!

The basic rules for employers with new employees are important for any business.

There is no ‘Casual Labour’ exemption, if you take an employee on with intention of keeping them for just a couple of weeks on a temporary basis – the rules still apply.

If the correct PAYE and NIC is not deducted off employees, then the Employer will be held liable for any shortfall discovered.

If a new employee does not have a P45 from their previous job, then they must sign a P46 (or if they are students working only in the holidays, a P38S).

If they tick Boxes A or B – they will be on the emergency PAYE code (of 647L in 2009/10)

Employees on the basic code of 647L will pay no tax on earnings up to £125 a week, above that tax is deducted at 20%.

National Insurance Contributions are paid by the employee (11%) and employer (12.8%) on earnings above £110 per week.

If the week’s earnings are between £95.01 and £110.00 per week there are no contributions deducted but the employee is still credited with a basic National Insurance contribution. For this reason a form P11 (deduction sheet) must be maintained throughout the year for the employee.

If the employer does not pay an employee more than the NIC LEL (Lower Earnings Level) (of £95 a week in 2009/10), they do not have to prepare a P11 deductions sheet for them or include them on the year end P35. However, the employer must still have a record of wages paid to each employee in each week or month.

It’s time for employers to complete and file the annual PAYE return (form P35), and for the second year the form asks about the status of the company, causing some confusion and concern.

The form has these two questions which require yes or no answers:

- Are you a Service Company?

-  If “yes”, have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?

Guidance on how to answer these questions is found on page 18 of the leaflet E10 (2009): Finishing the Tax year up to 5 April 2009.

If the business has no employees it will not be completing a form P35.

The introduction the guidance to section 6 says:

The first question narrows those employers who need to consider whether the second question applies.

This is a helpful statement as it leads you to believe that if your business is not a Managed Service Company (MSC) and is not affected by IR35 you can answer “no” to both the first and second questions.

However, the detailed guidance to question 1 indicates that you should answer “yes” to question 1 if the owners of the business perform any services in person for the customers of the business, and the income from that work forms at least half the total business income. Services are generally anything that is not the provision of goods.

It is clear that you should only answer “yes” to question 2 if the IR35 or MSC rules do apply to your business, all other businesses should answer “no”.

However, a “yes” to question 1 and “no” to question 2 might give the Taxman cause for concern as it will not be what he is expecting. Indeed these companies could well be contacted at some point in the future by HMRC.

Businesses who are confident they are not subject to IR35 or the MSC legislation, might therefore wish to answer “no” to both questions 1 and 2 in section 6 of part 3 to the P35 form for 2008/09.

If you are concerned that IR35 could apply to your business please contact us.

A dispensation removes the requirement to return to HMRC on P11d forms expense payments which are not taxable. If no dispensation exists the employee then has to submit a claim that the expenses reimbursed were incurred solely in relation to the business, and are therefore not taxable.
In short a dispensation can save work for the employer, the employees and HMRC.

For example the provision of business travel for an employee is often included in a dispensation. Items covered by a dispensation do not have to be returned on the annual P11D form.(Payments for the use of a company car or van are not included here as they are covered by separate rules.)

For some businesses this could take some of the pain out of this annual chore.

HMRC require that you need to have the following systems in place to qualify you for a dispensation, they are:

You must have an independent system in place for checking and authorising expenses claims. At a minimum, this means having someone other than the employee claiming the expenses check that:

* the amount claimed isn’t excessive
* the claim doesn’t include disallowable items

If it is not possible for you to operate an independent system for checking and authorising expenses claims, for example, because you are the sole director of your company and you have no other employees, you will only be able to obtain a dispensation if you:

* ensure all expenses claims are supported by receipts for the expenditure
* demonstrate that the claim relates to expenditure that can be covered by a dispensation, your receipts may be sufficient for this purpose, but if not you must retain additional information.

Once a dispensation is granted it will last indefinitely although HMRC may review from time to time to make sure the conditions under which the original grant was made still apply.

Generally speaking dispensations are granted from the application date. However HMRC may agree to apply the dispensation from the beginning of the tax year in which you apply. It’s not too late to apply for 2008-09, call if you would like assistance to do this.

Any salaried employee of a business can be paid a long service award. The way in which the award is given can radically influence the tax treatment!

All cash awards are taxable. They will be treated as part of your remuneration and subject to deduction of tax and National Insurance. Cash awards include:

* a payment including a cheque (This also rules out National Savings Certificates, premium bonds and so on.)
* a cash voucher
* a credit token
* shares other than those issued by the company employing the person who receives the award
* an interest or rights over securities or shares

Non cash awards are tax free if certain conditions are met. The conditions are:

1. The award must be made to mark a period of not less than 20 years service with the same employer.
2. It must not be a cash payment.
3. The taxable value of the award must not be more than £50 for each completed year of service.

For most employees the amount of the award is determined as the cost to the employer. For lower paid employees it is the second hand value of the award.

If the award exceeds the £50 for each year of service limit, only the excess is taxable.

If an employer makes multiple awards to the same individual, say after 20 years and then again after 30 years; each award qualifies as a separate award – this further concession does not apply unless there is a gap of at least 10 years between the awards.

If you have clocked up 20 years service you could receive goods to the value of £1,000 and pay no tax or National Insurance – that buys a lot of golf equipment!

Filing deadlines
We are approaching a number of important filing deadlines that will apply to businesses who operate a payroll. We have summarised the main key dates below. If you have any problems meeting these dates we may be able to help.

19 May 2008 – Last date for your 2007-08 forms P14, or substitutes, and P35 to reach your HM Revenue & Customs office. You have until midnight on the 19th to file your Return. Penalties are chargeable on any Returns received after this date.

31 May 2008 – Last date for giving a 2007-08 form P60 to each employee who was working for you at 5 April 2008.

6 July 2008 – Last date for your 2007-08 forms P9D and forms P11D, or substitutes, to reach your HM Revenue & Customs office. These forms show details of ‘benefits in kind’ provided to employees, such as company cars or private healthcare.

6 July 2008 – Return of Class 1A NICs on form P11D(b) for 2007-08 to reach your HM Revenue & Customs office. (penalties will be charged automatically on any Returns not received by 19 July 2008)

6 July 2008 – Giving a copy of the 2007-08 form P9D, P11D, or equivalent information, to each relevant employee.

18 July 2008 – If you are not subject to the mandatory electronic payment rules and you post your payment, you should pay all outstanding Class 1A NICs so your payment reaches HMR&C no later than 18 July. Interest will be charged on any payments received after this date (and surcharge in the case of employers who are subject to the mandatory electronic payment rules).

22 July 2008 – Last date for any outstanding 2007-08 Class 1A NICs payments to be cleared in HMR&C’s bank account if you pay by an approved electronic payment method. Interest will be charged on any payments received after this date (and surcharge in the case of employers who are subject to the mandatory electronic payment rules).

Employees and employers receive periodic updates to tax code numbers. This number is used by your employer/pension provider to calculate the amount of tax you are stopped on your salary and/or pension.

If your affairs are straight forward (and you are not able to claim certain age related allowances) you are entitled to earn the first £5,225 of your income in 2007-2008, tax free. If this were the case your code number would be 522L.

If your code number drops, to say 200L, you will pay more tax each pay period. If the tax code increases, you will pay less tax. (But see note on K codes below.)

We have listed below a number of generalised factors that may affect your code number. The list is not comprehensive so do contact us if you receive a code number adjustment that is difficult to understand.

1. Reduction for unpaid tax in earlier years. If you had underpaid tax in the tax year to 5 April 2006 by say £500 the Revenue will allow you, in certain circumstances, to pay the tax back in a following tax year. To facilitate this, the Revenue will deduct an amount from your tax code. For instance if you are a standard rate tax payer, currently 22%, your tax allowances would need to be reduced by £2,272 to effectively recover the £500 you owe. (For those of you who like to see the maths this is calculated by dividing £500 by 22 and multiplying the result by 100 = £2,272). On your notice of coding you would see a reduction in your code number from say 522L to 295L. (522-227).

2. Reduction for benefits provided by employer. If your employer provides you with a company car, or private medical insurance, or indeed any other form of benefit, without an adjustment to your tax code you would always owe the Revenue the tax on the benefit at the end of each tax year. So that this does not happen your code number will be reduced accordingly. The reduction works by deducting the value of the benefit from your code; thus a benefit of £500 will result in a reduction in your code number of £500, i.e. 50 points.

3. Reduction for higher rate tax payers. If your earnings are part subject to tax at 40%, and they include significant interest received or dividend income, you will owe the higher rate tax on your investment income at the end of the tax year. To counter this the estimated higher rate tax on your non-salaried/pensionable income will be recovered by reducing your tax code. As your interest and dividends received are taxed at the basic rate, only the marginal increase above the tax already deducted will be taken into account.

What happens if the reduction in your code number is more than your present code?

K Codes – If your tax free allowance of £5,225 is reduced by £2,272, as in example 1 above, you will still have a positive tax code of 295L. If however the deduction from your tax allowance is £10,000 you will have changed a positive tax free deduction of £5,225 into a negative position of -£4,775. This “negative deduction” is actually taxable income. Instead of receiving a tax free allowance of £5,225 you are being taxed on additional income of £4,775.

Your tax code could be changed from 522L to -477L. In their wisdom the Revenue have chosen to display -477L as K477. When you see a tax code prefixed by the letter “K” add on a zero and this is the equivalent income being added to your tax assessment for the year. The larger the K code, the more tax you will pay – although the revenue cannot take more than 50% of your salary in tax in this way!