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NFD 2012 - Paul Mason: Freelance Tax Matters

Question by AJ in Bournemouth:

I want to take a client out to dinner to thank him for a project. Can I claim it against tax?

Answer:

Entertaining of customers is not a deductible item against corporation tax and so the amount that you spend can be paid for by your company, but at the time that your company accounts are prepared the cost of the dinner must be added back to the profit so that corporation tax can be charged on that amount.

Question by Maria P in Newcastle:

I operate as a sole practitioner and pay my VAT using the Flat Rate Scheme. I also have rental income from domestic letting that is VAT exempt. How do I deal with this on my VAT return?

Answer:

Hi Maria, VAT is payable as output tax on exempt income as well as taxable sales so unfortunately you should apply your Flat Rate % to your rental income too. If the rental amounts are significant, you may find it financially beneficial to withdraw from the Scheme. Consider calculating one quarter using ‘normal’ VAT accounting as a comparative to see what the impact is first.

Question by D from London:

What figure can you ascribe to the increase in likelihood of an HMRC investigation now, and is being caught within IR35 statistically more likely now than before?

Answer:

Hi D, HMRC do not release information about active enquiry levels, but what we do know is that HMRC issued new guidance on 9th May this year (please see http://www.hmrc.gov.uk/ir35/guidance.pdf), and also created three specialists offices of 12 staff in Croydon, Edinburgh & Salford to coordinate their IR35 activity. This we believe was in recognition that their IR35 investigations activity had been less than successful in previous years and as a result we believe that the chances of a limited company freelancer getting an enquiry have increased, but by how much, we will only know in the future. However, whether this translates into “success” for HMRC remains to be seen. Despite pressure being brought to bear on public sector contractors in particular, and HMRC being very keen to promote their Business Entity Tests, legally nothing has changed. The key status tests of personal service/substitution, control & mutuality of obligations still remain the indicators and no-one should be deflected from this path. On the basis of these key issues, if you were ‘not caught’ by IR35 before, it is unlikely that your situation will have changed now.

Question by Andrew from London:

I'm taking out new life assurance policies for me and my wife and am wondering if we can put these through the business as 'Death in Service' benefit? (We're both shareholders, although my wife is not working in the business). On a separate topic, I'm also taking out an income protection policy for myself - again, can this be put through the business?

Answer:

MODERTATOR'S NOTE: Hi Andrew, as this question has a financial planning element, it is actually a good one for Julian Gilbert, our financial planning expert. I have reposted the question there along with Julian's answer.

Question by Francis from London:

I am thinking of striking off my limited company in a years time and would like to know what is the most tax efficient way of drawing money out of the Company? The accumulated fund is ~�200k. Thanks.

Answer:

Much depends on when in the tax year the company is wound up/struck off.

Either income or gains are added to income arising in the year, so, generally, a higher rate of tax applies to Income distributions than capital distributions of £200k.

Since March 2012, it has been possible to take £25k cash out of a company on winding up under s1000 Companies Act 2006, and have treated as a capital gain.

The balance would be treated as a dividend. The conditions for this treatment is that the company clears out all debts and liabilities and does not trade again.

So, even without any other income received in a tax year, in 2012/13, Income Tax will be £56468 and CG tax £1140 ie total £57608. However if the company were to be formally liquidated, even under a voluntary liquidation, all distributions would be capital distributions, so the tax bill would be around £19000 (with a liquidators bill typically in range £2500 to £3500 on top).

However, the above presupposes that the CGT Entrepreneurs Relief (ER) will be available. ER is aimed at trading entities, so there cannot be too much investment income in the company. As a rule of thumb, if more than 20% of the balance sheet is represented by active investments (which would not include current account balances), then no ER is due.

The effect of this is to increase the CGT bill to £49595. So, on balance, a formal liquidation seems the best bet.

(MODERATOR'S NOTE: You can find more info on the various options on page 20 of the PCG Guide to Freelancing www.pcg.org.uk/guide)

More in: NFD 2012 > Ask the Experts

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