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Income Tax

Content:
Introduction
Sole traders and partnerships
Employment status for tax purposes
Construction industry
IR35 and Managed Service Companies
Comparison between income tax and corporation tax
Tax return deadlines

Introduction

Tax is an immensely complicated subject and whenever possible professional advice should be obtained. The purpose of this section is limited to providing some basic information and links, particularly for those considering or about to start up a business and for owners and managers of SMEs.

Sole traders and partnerships - income tax

For those trading as a sole trader or in partnership, HM Revenue & Customs (“HMRC”) provide an Introduction to Income Tax.

See also:
* HMRC self-employed information;
* HMRC partnerships information

What’s new item on this topic [see What’s new page or archive for full item]:

18/02/2014: HMRC urges small businesses to use cash basis accounting scheme
www.gov.uk/government/news/small-businesses-urged-to-cash-in-with-simpler-accounting
HMRC is encouraging small businesses to use a new ‘cash basis’ scheme that allows them to be taxed on money flowing in and out of their business. The scheme applies to sole traders and other unincorporated businesses with an annual income under £79,000.

Employment status for tax purposes

Individuals who are contemplating trading either as a sole trader or through the form of a limited company should be aware of the legal distinction between services performed by an employee for an employer (i.e. employment status) and services performed by an independent contractor for a customer.

In theory, the law on this distinction is the same for purposes of employment law as well as tax law. However, because of the different procedures for resolving employment law cases and tax cases, similar situations may well be resolved in one way by an employment tribunal and in another way by HMRC or by a tax tribunal.

For a discussion of this issue in the employment law context, see our section on Employment.

HMRC has a section on employment status at:
http://www.hmrc.gov.uk/employment-status/index.htm
This provides useful information on the tests applied by HMRC. It includes an online tool called the “Employment Status Indicator”.

What's New [see What's New page or archive for full item]:

Construction industry

Contractors and subcontractors in the construction industry should be aware of special tax rules which apply to payments. See Construction industry

IR35 and Managed Service Companies

Prior to the tax year 2000/2001, an individual could avoid being taxed as an employee on payments for services and paying Class 1 National Insurance Contributions (“NICs”) by providing those services through an intermediary. The worker could take the money out of the intermediary, normally a limited company, in the form of dividends instead of salary. As dividends are not liable to NICs, the use of a dividend remuneration strategy results in the worker paying less in NICs than either a conventional employee or a self-employed person. Further, PAYE would not apply to the dividends.

HMRC therefore arranged for special legislation (commonly called “IR35”) designed to ensure that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary, the worker pays broadly tax and NICs on a basis which is fair in relation to what an employee of the client would pay.

Further information on this issue is available in HMRC’s guide Supplying services through a limited company or partnership – A general guide to IR35

Decisions of HMRC may be appealed to the First-tier Tribunal. For examples of recent decisions by HMRC regarding employment status which were overturned by the tribunal on appeal, see Self-employment tax tribunal cases.

What’s new on this topic [see What’s new page or archive for full item]:

07/02/2020: HMRC announces change to IR35 off-payroll working rules

Source: GOV.UK HMRC

HMRC has announced that the off-payroll working rules will only apply to payments made for services provided on or after 6 April 2020, today ahead of the publication of the government’s review.

The government has listened to concerns raised over the course of the review of the IR35 rules over what payments the rules apply to and from when. The rules will now apply only to payments made for services provided on or after 6 April 2020. Previously, the rules would have applied to any payments made on or after 6 April 2020, regardless of when the services were carried out.

The guidance in the Employment Status Manual has been updated.

The off-payroll working rules have been in place since 2000. They are designed to make sure that an individual who works like an employee, but through their own limited company, pays broadly the same Income Tax and National Insurance contributions as those who are directly employed.

 

Comparison between income tax and corporation tax

The after-tax profit of a business carried on by a sole trader or by partners will be different from the after-tax profit of a business carried on by a legal entity including for example a limited partnership.

Tax is one but not the only factor to be considered in deciding, for a new business, whether to trade as a sole trader or a non-limited partnership or to trade through the form of a limited company.

This issue is considered in our section Should I run my business through a limited company

Tax return deadlines

In order to avoid incurring penalties and interest, it is important to comply with deadlines for submission of tax returns which are:
* 31 October: all paper returns must reach HMRC by midnight on 31 October (unless advised otherwise by HMRC by letter, telling you to send a tax return, after 31 July.)
* 31 January: online returns must reach HMRC by midnight on 31 January (unless advised otherwise by letter, telling you to send a tax return, after 31 October).

Penalties for late tax returns: The penalties payable for late submission of a tax return are as follows (in the case of a partnership tax return, each partner will have to pay the penalties shown below):
* 1 day late: penalty of £100 (applies even if you have no tax to pay or have paid the tax you owe)
* 3 months late: £10 for each following day up to a 90 day maximum of £900, in addition to the fixed penalty above.
* 6 months late: £300 or 5% of the tax due, whichever is the higher, in addition to the above penalties.
* 12 months late: £300 or 5% of the tax due, whichever is the higher. In serious cases you may be asked to pay up to 100% of the tax due instead. Penalties are in addition to the penalties above.

Tax payment dates: * 31 January: You must pay any tax you owe by 31 January following the end of the tax year. For example, for the tax year 2011/12 (ending on 5 April 2012) you must pay any tax you owe by 31 January 2013.
The payment deadline is the same for both paper and online returns. The payment consists of one or both of the following:
- any tax you still owe for the previous tax year;
- the first of two “payments on account”.

Payments on account are part payments towards your next tax bill. HMRC will usually send you a “Self Assessment Statement” that shows how much you owe.
* 31 July: this is the deadline for making any further payments on account. For example on 31 July 2012, the second payment on account for the 2011-12 tax year is due.
Interest and penalties for late payment:
* 30 days late: 5% of the tax you owe at that date
* 6 months late: 5% of the tax you owe at that date, in addition to the 5% above
* 12 months late: 5% of the tax unpaid at that date, in addition to the two 5% penalties above.

The penalties above do not apply to any payments on account that you pay late.
Interest will be payable on any amount owed in tax and penalties until HMRC receives your payment.

[Page updated: 11/02/2020]

 

 

 

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