HMRC looking to curb travel expenses for self employed?

HMRC looking to curb travel expenses for self employed?

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Discussion

Dr Jekyll

23,820 posts

261 months

Wednesday 29th April 2015
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Greg_D said:
You are correct, they absolutely are on the way.

hmrc have introduced quarterly reporting requirements that compel employers to report quarterly all payments to all non paye staff (ltd co. and umbrella) which will automatically flag up those people who are disguising themselves.

the next step is obvious......... they are clearly looking to clarify the currently muddy water between avoidance and evasion.
How are those working through an umbrella disguising themselves?

Greg_D

6,542 posts

246 months

Wednesday 29th April 2015
quotequote all
Dr Jekyll said:
Greg_D said:
You are correct, they absolutely are on the way.

hmrc have introduced quarterly reporting requirements that compel employers to report quarterly all payments to all non paye staff (ltd co. and umbrella) which will automatically flag up those people who are disguising themselves.

the next step is obvious......... they are clearly looking to clarify the currently muddy water between avoidance and evasion.
How are those working through an umbrella disguising themselves?
they're not, but they are still subject to ir35 and are claiming all the same expenses as a ltdco contractor, they are being jumped on in exactly the same way as an IT contractor

plasticpig

12,932 posts

225 months

Wednesday 29th April 2015
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Eric Mc said:
HMRC simply can't look at everybody.

There are many limited company contractors out there who should be very worried about IR35. However, in most cases nothing happens because HMRC does not have the resources to examine each case in detail. Now and then however, one unfortunate contractor falls into their clutches and it becomes very expensive.
For a couple years I was a director, a partner and self employed at the same time. Never heard a peep from HMRC. I thought that was waving a big red flag. I am not sure how HMRC operate now but years ago the Inland Revenue used to spend a number of months targeting a particular sector. 6 months going after waiters for not declaring tips and then 6 months going after plumbers for not declaring income from scrap.


Mario149

7,758 posts

178 months

Friday 1st May 2015
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Ref the IR35 debate, I've always understood it as designed to stop contractor's gaining an unfair tax advantage compared to perm employees. Yet in another thread, myself and a couple of other's calculated that on £120K annual sales of a contractor (about £500/day) with a sensible pension contribution and about £5K of expenses, if the contractor was to pay themselves min wage and the rest dividends "emptying" the company every and pay the appropriate taxes required (corp, NI, IT, div tax etc), the difference in take home compared to a PAYE worker on £120K was of the order of a couple of % or so. The only advantage of the contractor is that you don't *have* to take all the money every year if they didn't want to.

So it would strike me that in practical terms, so long as you're not taking the piss and not doing things that are dubious/illegal anyway (fake/exaggerated expenses, income shifting etc), HMRC would leave you alone even if you're not strictly speaking IR35 compliant in their eyes because there's not benefit to be had, they're not missing out.

I'd be intereste to know if any accountants/tax advisors had come to the same conclusion?

Eric Mc

122,032 posts

265 months

Friday 1st May 2015
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Have you properly factored in the NI savings (both Employer's and Employee's.

If a company director mainly remunerates himself through dividends, there will be virtually no NI payable. On £120,000 that is quite a substantial saving.

Moonhawk

Original Poster:

10,730 posts

219 months

Friday 1st May 2015
quotequote all
Mario149 said:
Ref the IR35 debate, I've always understood it as designed to stop contractor's gaining an unfair tax advantage compared to perm employees.
But surely that is only fair if they also gain all the advantages of being a permanent employee?

Mario149

7,758 posts

178 months

Friday 1st May 2015
quotequote all
Eric Mc said:
Have you properly factored in the NI savings (both Employer's and Employee's.

If a company director mainly remunerates himself through dividends, there will be virtually no NI payable. On £120,000 that is quite a substantial saving.
Well spotted, I did forget to include employers NI on the £120K salary.

Making the comparison a little more realistic though (not that it matters for HMRC obviously), the perm rates in the area I work in are about half that of contract rates. So a "proper" comparison of HMRC's revenue for perm/contract via Ltd co for the same job is actually £60K vs £120K, so....

Tax to HMRC for perm = £18K + emp NI of £7K = £25K
Tax to HMRC for Ltd co = ~£45K

Eric Mc

122,032 posts

265 months

Friday 1st May 2015
quotequote all
The overall situation is that for a given income, a contractor working through his own limited company will pay over less to HMRC than an employee on a similar salary. Obviously, the rates negotiated between an employer and and employee and the same employer and an outside limited company contractor may vary as the nature of the relationship is different.

However, HMRC just looks at the amounts being paid out by the "employer" and will look at how much it is collecting in taxes and NI on that amount.

IR35 is an attempt to return to the Revenue the lost tax and NI they have missed out on by a limited company contractor using his limited company to "disguise" the fact that he was really being treated just like an employee.

As for the "benefits" of being an employee compared to a contractor - they are not always as clear cut as it might seem.

Pit Pony

8,577 posts

121 months

Tuesday 5th May 2015
quotequote all
Moonhawk said:
Mario149 said:
Ref the IR35 debate, I've always understood it as designed to stop contractor's gaining an unfair tax advantage compared to perm employees.
But surely that is only fair if they also gain all the advantages of being a permanent employee?
How is becoming lethargic, demotivated and dead from the neck upwards an advantage.

I have recently been contracting at an global engineering company with a strong international brand image, where "everyone" over 40 is in a waiting room heading very slowly towards retirement, and / or has an over inflated view of themselves and their ability, whilst seemingly using 12% of the brain they possess.

98elise

26,608 posts

161 months

Tuesday 5th May 2015
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Mrr T said:
98elise said:
plasticpig said:
Dr Jekyll said:
I daresay you can, but I was initially responding to the accusation that any contractor who operates through a Ltd must be running a tax dodge.
Hmm. Well I know a few contractors. Pretty much all of them minimize their salary and maximize their income through dividends. Why wouldn't you avoid paying out loads in both employer and employee NI contributions if you can avoid it? If this isn't a tax dodge what is it?
Its completely legitimate and normal tax planning if you run a Ltd Company. Its within the rules set out by HMRC. Its not a dodge, loophole etc.

Its no different to using something like an ISA to "dodge" income tax on interest.
Its completely different to investing in an ISA as IR35 will apply for most contractors so income should not be paid as dividends.
Thats a different argument. There is nothing wrong with paying yourself that way if the work you do is outside of IR35, ie are working within the law.



GT03ROB

13,263 posts

221 months

Wednesday 6th May 2015
quotequote all
Pit Pony said:
Moonhawk said:
Mario149 said:
Ref the IR35 debate, I've always understood it as designed to stop contractor's gaining an unfair tax advantage compared to perm employees.
But surely that is only fair if they also gain all the advantages of being a permanent employee?
How is becoming lethargic, demotivated and dead from the neck upwards an advantage.

I have recently been contracting at an global engineering company with a strong international brand image, where "everyone" over 40 is in a waiting room heading very slowly towards retirement, and / or has an over inflated view of themselves and their ability, whilst seemingly using 12% of the brain they possess.
I could equally apply the same to many of the contractors I've seen...... smile

Mario149

7,758 posts

178 months

Wednesday 6th May 2015
quotequote all
In 8 years of contracting, I've only come across one contractor in my field who was genuinely useless, whereas in each office I work in (I change contracts roughly every 9 months) I would say on average at least 10% of the perms could be classified as incompetent, with one notable exception where everyone was fully on the ball. Incidentally, it was the company that paid the most as well.

Frankly a lot of the crap perms were crap because they weren't motivated/enabled enough by management, but there were some who were just no hopers

jonah35

3,940 posts

157 months

Wednesday 6th May 2015
quotequote all
Mario149 said:
Eric Mc said:
Have you properly factored in the NI savings (both Employer's and Employee's.

If a company director mainly remunerates himself through dividends, there will be virtually no NI payable. On £120,000 that is quite a substantial saving.
Well spotted, I did forget to include employers NI on the £120K salary.

Making the comparison a little more realistic though (not that it matters for HMRC obviously), the perm rates in the area I work in are about half that of contract rates. So a "proper" comparison of HMRC's revenue for perm/contract via Ltd co for the same job is actually £60K vs £120K, so....

Tax to HMRC for perm = £18K + emp NI of £7K = £25K
Tax to HMRC for Ltd co = ~£45K
It's so much better to be a contractor, far better than you make out

If you're an employee

You pay your travel expenses, insurance, road tax, mobile phone, parking and so on.

As a contractor you can offset so many things against your income as business expenses - travel, insurance, phone, parking and much more besides

Eric Mc

122,032 posts

265 months

Wednesday 6th May 2015
quotequote all
To some extent that is true. However, by and large, employees can same the exact same types of expenses as the self-employed or those who operate through their own companies. The extra difficulty for employees is the test that the expense has to pass before it becomes a tax deductible expense.

Self employment rules state that the expense has to be "wholly and exclusively for the purpose of the trade".

Employees have to show that the expense was incurred "wholly, exclusively and NECESSARILY as part of the duties of employment". It's the "necessarily" bit that makes expense claims for employees so hard.

Mario149

7,758 posts

178 months

Wednesday 6th May 2015
quotequote all
jonah35 said:
Mario149 said:
Eric Mc said:
Have you properly factored in the NI savings (both Employer's and Employee's.

If a company director mainly remunerates himself through dividends, there will be virtually no NI payable. On £120,000 that is quite a substantial saving.
Well spotted, I did forget to include employers NI on the £120K salary.

Making the comparison a little more realistic though (not that it matters for HMRC obviously), the perm rates in the area I work in are about half that of contract rates. So a "proper" comparison of HMRC's revenue for perm/contract via Ltd co for the same job is actually £60K vs £120K, so....

Tax to HMRC for perm = £18K + emp NI of £7K = £25K
Tax to HMRC for Ltd co = ~£45K
It's so much better to be a contractor, far better than you make out

If you're an employee

You pay your travel expenses, insurance, road tax, mobile phone, parking and so on.

As a contractor you can offset so many things against your income as business expenses - travel, insurance, phone, parking and much more besides
You are right, but in this example I was talking more that HMRC does far better out of someone doing a job as a contractor compared to someone doing a job as a permie. The fact that both HMRC *and* the contractor have more money is a double win.

Believe it or not, while I don't enjoy paying taxes, I do get a certain satisfaction from knowing that I contribute much more than most. Only problem is that I probably get more frustrated than most when governments spunk it away or make daft decisions with my money frown

98elise

26,608 posts

161 months

Wednesday 6th May 2015
quotequote all
Mario149 said:
jonah35 said:
Mario149 said:
Eric Mc said:
Have you properly factored in the NI savings (both Employer's and Employee's.

If a company director mainly remunerates himself through dividends, there will be virtually no NI payable. On £120,000 that is quite a substantial saving.
Well spotted, I did forget to include employers NI on the £120K salary.

Making the comparison a little more realistic though (not that it matters for HMRC obviously), the perm rates in the area I work in are about half that of contract rates. So a "proper" comparison of HMRC's revenue for perm/contract via Ltd co for the same job is actually £60K vs £120K, so....

Tax to HMRC for perm = £18K + emp NI of £7K = £25K
Tax to HMRC for Ltd co = ~£45K
It's so much better to be a contractor, far better than you make out

If you're an employee

You pay your travel expenses, insurance, road tax, mobile phone, parking and so on.

As a contractor you can offset so many things against your income as business expenses - travel, insurance, phone, parking and much more besides
You are right, but in this example I was talking more that HMRC does far better out of someone doing a job as a contractor compared to someone doing a job as a permie. The fact that both HMRC *and* the contractor have more money is a double win.

Believe it or not, while I don't enjoy paying taxes, I do get a certain satisfaction from knowing that I contribute much more than most. Only problem is that I probably get more frustrated than most when governments spunk it away or make daft decisions with my money frown
Same here. As contracting pays more than my old perm job the net result is:

HMRC get more tax (actual £).
I get paid more.
My clients get flexibility.



Sheepshanks

32,769 posts

119 months

Wednesday 6th May 2015
quotequote all
jonah35 said:
It's so much better to be a contractor, far better than you make out

If you're an employee

You pay your travel expenses, insurance, road tax, mobile phone, parking and so on.

As a contractor you can offset so many things against your income as business expenses - travel, insurance, phone, parking and much more besides
Isn't that the point of this thread - HMRC is looking to curb such expenses for the self-employed?

Eric Mc

122,032 posts

265 months

Wednesday 6th May 2015
quotequote all
No - they are only making sure self employed individuals apply the claiming of expenses properly. They are not changing any rules.

Complex

514 posts

175 months

Wednesday 6th May 2015
quotequote all
Perfectly acceptable application of what should already be the case, as someone who is currently self-employed.

The level of (tax evasion) wriggle that seems to get through under the current system beggars belief in some circumstances.