Contractor model decision tree

Transcription

1 Contractor model decision tree PSC in place? 1 Yes No Use PSC 2 Length of engagement Under one year Over one year Registered self-employed 3 Earning over 45,000 4 Yes No Yes Construction work? 5 No SDC? 6 PSC Yes Yes No CIS 7 Umbrella 8 High risk 9 Yes No Umbrella 8 Self-employed 10 Link to guidance 1. PSC guidance: what it is, how to register and what to consider 2. IR35 guidance 3. What is self-employed? 4. Rationale behind question 5. What is construction work? 6. Explanation of supervision direction and control 7. Construction Industry Scheme explanation 8. Umbrella model, factors to consider 9. List of high-risk sectors 10. Guide to self-assessment for self-employed

2 1. PSC guidance: what it is, how to register and what to consider There is no specific definition of a Personal Service Company. In general parlance it has come to mean a company whose sole director/employee is working for third parties. There are a number of reasons why a PSC is set up including: y Limited liability the business assets are ring fenced, unlike sole traders where the business owner will be personally liable for all business debts; and y Often end users will insist on engaging non-payroll labour through agencies or PSCs only due to the tax risks, if the worker is deemed to be an employee of the end user, staying with the agency/psc. As the PSC is a company constituted and registered in England & Wales/Scotland/Northern Ireland, there are compliance obligations greater than sole traders. Tax returns will be required as the worker is a director of the company but also there will be the need to submit annual returns to Companies House, dividends must be approved by the board and are only payable from profits and annual accounts must be compiled (although generally the PSC will not be large enough to require those accounts to be audited). Due to these compliance obligations, which are required even if the company only trades briefly, it is not recommended to incorporate a business for short term contracts. Depending on how the contractor extracts the funds from the company, this will impact on the levels of tax paid. If the contractor takes the money out as salary, they will pay income tax and NIC (at a combined rate of up to 47%) plus the company will pay employer s NIC at 13.8%. If however payments is in the form of dividends, income tax of up to 38.1% (but no NIC) will be payable, although this would be on the net amount after corporation tax (currently 20%) has been paid. It is of course possible for the contractor to extract the funds in a mixture of salary and dividends, the exact mix suitable for them should be discussed with their accountant. If the PSC has turnover exceeding 85,000 a year (2018 limits), it must register for VAT. If the turnover is below 150,000 a year (2018 limits), the flat rate scheme can be applied which means VAT need only be charged between 8% and 14.5%, depending on the services provided unless goods cost under 1,000/2% of turnover in which case a flat rate of 16.5% is used regardless of the services provided. 2. IR35 guidance IR35 is the name of the HM Revenue & Customs (HMRC) note announcing a change in policy in respect of workers engaged via PSCs. Essentially this states that where a worker is providing services to an end user and would be considered to be an employee of the end user but for the PSC (which in strict terms is the worker s employer), IR35 obliges the PSC to operate PAYE/ NIC on the payments extracted by the worker from the PSC in respect of the payments received from the end user. IR35 only applies if the contract for services is between the end user and the PSC, payment is made from the end user to the PSC and the PSC is registered in the UK. If these conditions do not apply and the worker is deemed to be an employee of the end user, the PAYE/NIC liability falls on the end user. For IR35 to apply there must be a deemed employment contract between the worker and the end user. For that contract to be deemed, the following factors are taken into account: y Does the end user control the work done by the contractor? Please note this is a separate test to Supervision, Direction or Control in note 6. y Is the worker personally required to provide the services as opposed to be able to send a substitute? y Is there a lack of financial risk to the worker in engaging with the end user as payment will be assured and there is no opportunity to make a profit or loss? y Does the worker expect work to be offered and similarly, when offered, does the end user expect the worker to accept it? This is known as mutuality of obligation. If any of these tests are met, other factors such as is the worker considered part and parcel of the end user s workforce (such as appearing on the staff directory, having a parking space and address) and are benefits akin to employees provided (such as pension contributions and holiday/sick pay) provided will also be taken into account. The guidance above only relates to workers providing services to the private sector via PSCs. Workers providing services to the public sector via PSCs are subject to different rules and separate advice will be required. Public sector in this context is any organisation covered by Freedom of Information legislation.

3 3. What is self-employed Workers who are self-employed are responsible for their own taxes, are not afforded employment protections (unlike agency/ umbrella workers) and their personal assets are not protected from business liabilities (unlike limited companies). Self-employment is a popular and flexible working option and for workers engaged by end users as self-employed but who HMRC considers to be employees, the PAYE/NIC risk falls on the engager and not the worker. The profits made by working as a self-employed worker are taxed at standard income tax rates the same as an employee although in practice self-employed workers generally pay lower levels of tax compared to comparable employees as deductions from taxable income are more generous. For example the standard test for deduction of expenses from taxable employment income is that the expense must be incurred wholly, exclusively and necessarily for the performance of the duties. For self-employed workers the exclusively test is not applicable and therefore while an employee cannot claim a deduction for mixed business/personal expenses, a selfemployed worker can claim a deduction for the proportion related to business. With regards to NIC, self-employed workers pay Class 2 NIC (at a flat rate, currently 2.95 a week but collected annually through the tax return) plus Class 4 NIC on profits (a standard rate of 9% compares marginally favourably against the comparable employee rate of 12%). For higher rate taxpayers, the marginal tax and NIC rates for employees and selfemployed workers are the same, therefore self-employment for these workers is unlikely to be tax-driven. For a guide to self-assessment for self-employed workers, see note 10. A self-employment business is treated the same as a PSC for VAT purposes and therefore if the sole trader has a turnover exceeding 85,000 a year (2018 limits), it must register for VAT. If the turnover is below 150,000 a year (2018 limits), the flat rate scheme can be applied which means VAT need only be charged between 8% and 14.5%, depending on the services provided unless goods cost under 1,000/2% of turnover in which case a flat rate of 16.5% is used regardless of the services provided. 4. Earning over 45,000? The guidance notes for option 1 explain what a PSC is and what it entails. Due to the additional compliance requirements, PSCs are only suitable for longer term agreements of at least a year. One of the advantage of the PSC model is that, structured correctly the tax due would be lower than would be the case for employment or self-employment as the table below shows. Salary Dividends SE profit Pre-tax profits 45,000 45,000 45,000 Employers NIC ( 5,047) Gross salary/ drawings 39,953 8,424 45,000 Profits chargeable to corporation tax 36,576 Corporation tax ( 6,949) Dividend 29,627 Personal allowance ( 11,850) ( 11,850) ( 11,850) Taxable income 28,103 26,201 33,150 Tax/NIC on salary/ drawings ( 9,404) 0 ( 9,922) Tax on dividend ( 1,815) Net pay 30,549 36,236 35,078 Effective tax rate 32.11% 19.48% 22.05% The above figures are based on UK (excluding Scotland) tax rates. Separate tax rates on income and dividends apply for Scottish resident taxpayers.

4 5. What is construction work? The definitions below are relevant for income tax, and in particular the Construction Industry Scheme for income tax withholding. Therefore there are activities which under their usual meaning could be considered to be construction but have been specifically carved out of the tax definition. Essentially all construction work in the UK and UK territorial waters is covered. Most construction operations are carried out as work on buildings and structures and can be permanent, temporary or offshore. Construction is a broad term that covers all of the following, to: y Build y Make y Put together y Assemble Construction does include the assembly of prefabricated units and site facilities. The main types of construction work are: y Alteration where a building or structure has been made different in any way. Alterations can be major or can be as simple as an adjustment or modification. y Repair, including making good and replacement of defective or damaged parts of a building or structure. Repairs also include repair of a building or structure that is necessary following a repair to any systems in the building or structure, even though a repair to the system itself isn t a construction operation for the purposes of the scheme. y Extension adding to or enlarging an existing building or structure. y Demolition pulling down a building or structure. y Dismantling taking a building or structure apart. This is usually where the materials are expected to be used again. Sometimes part of a building may be destroyed or dismantled prior to a refurbishment or to its use being changed. Often this type of work will be an alteration to the building or structure as well and the legislation is broad enough to include any work that involves any of the following: y Taking a building or structure apart. y Totally destroying a building or structure. y Rebuilding a building or structure. y Altering a building or structure. The resulting building or structure may be permanent or temporary. y Works forming part of the land all types of construction work that don t involve buildings or structures are called works forming, or to form, part of the land including minor works, such as a wooden fence with concrete posts, major works such as roads, railways, bridges, harbours and power lines plus industrial plant such as petrochemical plant, a silo, tank or water treatment plant. Plant that is located in a building will not form part of the land and so will not fall within the scheme under this section. However, in some circumstances the installation of plant may require that the building be altered to accommodate or remove the plant so this will still be a construction operation. y Alteration, repair, extension, and demolition of works forming part of the land are also construction operations. y Installation of systems something that is made up of connected parts to perform a particular function such as systems of heating or lighting. The scheme includes the installation of systems. As such, it includes the installation of complete systems rather than parts of a system. Complete systems will be installed in new builds or existing buildings and structures undergoing reapplydevelopment. Repairs to a system, such as new taps on a sink or an extension to a system such as adding an extra radiator are not installations of systems and are therefore not included within the scheme. y Internal and external cleaning this is regarded as a construction operation if it s undertaken whilst the construction contract is ongoing. External cleaning or routine cleaning of existing commercial or industrial premises that are not undergoing any types of construction operations isn t regarded as a construction operation unless it s preparatory to painting and decorating. y Painting and decorating.

5 y Integral works are works that must be carried out for a construction operation to be completed for example erection of scaffolding might not be considered to be the construction of a structure in its own right, but it s a construction operation because it wouldn t be possible to carry out other works that are construction operations without it. y Preparatory works works that must be carried out before a construction operation can be started such clearing a site or draining land in a flood plain before building houses. y Finishing operations work that renders complete or finishes off any of the construction operations in the previous paragraphs. For example in most modern commercial buildings much of the internal fixtures and fittings will be included in the design specifications and a building will not be considered complete without them. Finishing operations aren t regarded as construction operations in their own right. They must be considered as part of the overall work that is being carried out as well as part of the contract as a whole. Often, the same work won t be a construction operation when it s carried out as an independent activity such as tree planting and landscaping in the course of forestry or estate management are not construction operations or tree planting and landscaping as part of a new housing development are construction operations. The only exception to finishing operations is carpet fitting. Carpet fitting (but no other floor covering) is regarded as excluded from the scheme. However, if carpet fitting is part of a wider construction operation, carpet fitting will be included within the definition of construction. Some operations are specifically excluded from the definition of construction for income tax purposes. Where a contract includes operations that are construction operations and operations that aren t construction operations, all payments for both types of work will fall within the scheme. y Drilling work connected with actual, physical extraction of minerals or natural resources. y Extraction, including drilling for oil and gas, pumping of oil and gas, digging for coal and other minerals from underground deposits, removal of coal and other minerals from underground deposits and associated surface workings, such as open cast mine quarrying. Work connected with the primary purpose of mineral extraction also isn t a construction operation including tunnelling, boring and shoring up tunnels in mines, installing rail systems, conveyor systems and other systems. This is in contrast to tunnelling done in connection with the construction of a mainline railway for example, which would be a construction operation because it s an integral part of the construction of a work forming part of the land. y Manufacture of building or engineering components and delivery. y Manufacture of components for systems such as heating, lighting, air-conditioning and ventilation. Delivery of these is also not a construction operation. y Professional work done by architects and surveyors as part of their normal professional discipline, whether on or off site, isn t a construction operation. The only exception is where a professional goes beyond their professional discipline to take on the role of developer or main contractor in addition to providing professional services. In this case, the work isn t excluded from the scheme. The work of other professionals is excluded only if they are acting purely as consultants. Typically, this would include the production of designs, plans, technical assessments and reports relating to construction projects including site testing. Any work that goes beyond a consultative or advisory role and becomes the supervision of labour or the co-ordination of construction work using that labour isn t excluded from the scheme. y Artistic works but only to the extent they are wholly artistic. If the works fulfil a normal functional purpose associated with a building, they aren t excluded from the scheme. For example a statue, even if commissioned with a new building, has no function other than to be enjoyed as an artistic work - its construction and installation wouldn t be regarded as a construction operation or a stained glass window with artistic merit, but it s a window that lets in light and is a decorative version of a common feature of a building, so its construction and installation would be regarded as a construction operation y Signwriting and work related to signboards and advertising boards is excluded from the definition of construction for these purposes. This exclusion is very specific and doesn t extend to traffic signs or street furniture.

6 y Seating, blinds and shutters in theatres, sports stadiums and other locations, and fixed seating is excluded from the definition of construction. This exclusion also covers louvered shutters, venetian blinds, other similar internal blinds, and curtain fittings. Awnings aren t excluded. y Installation of security systems that are dedicated to security only is excluded from the scheme. Specific types of systems specifically mentioned in the legislation are burglar alarms, closed circuit television and public address systems. Preparatory works on the land such as digging, building/erecting concrete posts on which to install the closed-circuit television (CCTV) is within CIS. For example the installation of a computer controlled centralised locking system with programmable key cards, such as those used in hotels, would be excluded from the scheme. The installation must be a system and not simply a building feature that incidentally fulfils a security purpose. Examples include doors equipped with locks provide a measure of security, but they don t represent a system, so they wouldn t be excluded from the scheme, fencing may deter intruders but it s a traditional feature of buildings and their surrounds and not a security system, even if it has security features, so it wouldn t be excluded from the scheme. 6. Explanation of supervision direction and control There are a few points to bear in mind regarding the supervision, direction and control (SDC) tests: y The test is a negative, ie it does not apply only if it can be shown the worker who personally provides the services is not subject to SDC; y SDC can be exercised by anyone involved in the work undertaken and is not limited to the end user of the services it can include the agency, project managers, consultants etc; y It is not necessary that SDC is actually exercised, simply that it can be exercised; y HMRC would look at the facts as a whole a contractual clause saying there is no SDC would not be sufficient in itself; y Workers subject to external regulations due to the industry they operate in (for example healthcare) will be assumed to be operating under SDC; y It is an all or nothing test SDC is met or not; and y Deeming direct employment of the worker by the end user (eg IR35) would imply SDC but in contrast SDC existing does not automatically deem employment. HMRC has given some examples of SDC on its website at 7. Construction Industry Scheme explanation The Construction Industry Scheme (CIS) is a tax withholding at source scheme for individuals and companies undertaking construction work. Workers actually doing the work are known as subcontractors. For subcontractors, the following points need to be considered: y CIS registration is recommended and can be done online; y The company paying the contractor will make that payment subject to the required CIS deduction. For CIS registered subcontractors, the deduction will be 20% (unless gross payment status is held). For subcontractors not CIS registered, the deduction is 30%; y The subcontractor will be notified of the amounts paid and the deductions made; and y A tax return will be required (as the subcontractor is self-employed) and the amounts withheld under CIS at the time of payment are offset against the overall tax/nic liability. y Gross payment status, whereby no amounts are withheld at the time of payment, is available. However on the basis that one of the requirements is an annual turnover of 30,000 and the decision making tree would divert workers earning over 40,000 to a PSC model, it has not been considered further here. 8. Umbrella model, factors to consider An umbrella company is a company that acts as an employer to agency contractors who work under a fixed term contract assignment, usually through a recruitment employment agency in the UK. Recruitment agencies issue contracts to a limited company as the agency liability would be reduced. It issues invoices to the recruitment agency (or client) and, when payment of the invoice is made, will typically pay the contractor

7 through PAYE with the added benefit of offsetting some of the income through claiming expenses such as travel, meals, and accommodation. An umbrella company processes timesheets received from the employee/contractor, then issues an invoice to the client for payment. As the umbrella company is an employer, contractors working with them must sign a contract of employment and understand they are an employee whose pay will be subject to PAYE. The umbrella company is obliged to give certain employment related benefits such as the opportunity to enter a pension scheme and paid leave (holiday, sick leave and maternity/ paternity leave). The contractor is also entitled to employment rights such as protection from unfair dismissal and minimum notice periods. As the employment relationship is one of agency worker, the terms of the agency worker regulations which stipulate, amongst others, that the employee is entitled to pay between assignments, also applies. The umbrella company provides payroll on behalf of the contractor and bills the agency (who in turn bills the client) for work completed by the contractor. The umbrella company operates PAYE and NIC on behalf of the contractor and is liable to employer s NIC. Since April 2016 umbrella employees operating under the supervision direction or control (see note 6) of the umbrella company, agency or end user are not entitled to claim taxfree travel between their home and work even where the placement is for under 24 months. 9. List of high-risk sectors y Agricultural y Assembly plant y Benefits assessor/housing/council officer y Call centre y Data entry y Document controllers y Hospitality y Industrial y Lab technicians/biomedical scientists y Labourers y Light industrial y Low skilled/admin roles y Mail centres y Non-skilled manual workers y Package handling y Pharmacy technician y Restaurant/food service y Retail y Secretaries/personal assistants y Social care y Warehouse 10. Guide to self-assessment for self-employed Self-employed workers are responsible for declaring and paying their own tax. Annual tax returns are required to be submitted by 31 January following the end of the tax year and instalment payments of tax/nic are due on 31 January and 31 July with balancing payments due when the return is filed. A further consideration is that there are complex basis period rules for calculating profits in the opening years of trading, which can lead to an element of double taxation unrelieved until trading ceases or the basis period is changed (although there are further restrictions on changing these periods), unless the basis period equals the tax year. Professional advice in what can be claimed as deductions, calculating of trading profits and completing tax returns is recommended. Saffery Champness Contractor model decision tree is published on a general basis for information only and no liability is accepted for errors of fact or opinion it may contain. Professional advice should always be obtained before applying the information to particular circumstances. J6748. Saffery Champness LLP August Saffery Champness LLP is a limited liability partnership registered in England and Wales under number OC with its registered office at 71 Queen Victoria Street, London EC4V 4BE. The term partner is used to refer to a member of Saffery Champness LLP. Saffery Champness LLP is regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales. Saffery Champness LLP is a member of Nexia International, a worldwide network of independent accounting and consulting firms.