Questions & Answers

New Construction industry Scheme

Q: I currently working a self employed bricklayer and have heard on site that the Construction Industry Scheme which I am registered under is changing. Can you tell me when this is likely to occur and if there is anything I need to consider ?

A: You are correct, there is a new scheme being introduced with effect from April 2007 and it applies to everyone who is a contractor and/or subcontractor in the construction industry. This can include limited companies, partnerships, trusts and self-employed individuals such as you. It does not apply to employees.

The main differences between the scheme which currently applies and the new one which is going to be introduced is that cards and certificates will be replaced by a “verification” service to confirm whether subcontractors should be paid gross or net of 18% tax. Subcontractors who cannot be verified will have tax deducted at a higher rate, which is believed to be 30%. The contractor will issue statements which detail the amount of income paid during the month and tax deducted, and makes monthly returns to HM Revenue & Customs. These monthly returns will include a declaration that the contractor has considered the status of the workers on the return and that none of them are deemed to be an employee.

Further details will continue to be published between now and April 2007 when the regulations start, but it is important to seek advice from your accountant as soon as possible to see how the regulations will affect you.

Charity Auction purchases qualify for Gift Aid

Q: I recently attended a charity auction and purchased an item of clothing previously owned by a local celebrity for £500, to support the charity. Am I able to claim tax relief on this purchase, as if I had just donated the money to charity I would be able to claim gift aid and receive tax relief at 40% as I am a higher rate taxpayer?

A: Officially, the payment for an item at a charity auction is not a gift to charity, but HM Revenue & Customs do recognise that when a person purchases an item at a charity auction they may intentionally pay more than it is worth in order to support the charity. On this basis, they accept in some cases that a payment for an auction item as a donation to the charity. However, they do publish special rules on this, and unfortunately the payment you have described above will not qualify.

Charities sometimes receive items owned or used by celebrities for auction. Such items have an enhanced value over and above their purchase price and bids to secure such items cannot be Gift Aided. The Gift Aid benefit rules state that “for a commercially available item that has had its value enhanced, for example because it has been owned by a celebrity, the market value (and hence the benefit for Gift Aid purposes) will not be the original price of the item but the amount it fetches in the auction.” The benefit you have therefore received is £500, which is 100% of the payment. Consequently the £500 cannot be paid under Gift Aid.

However, there are certain situations where items purchased may qualify for Gift Aid so it is worth checking with your local TaxAssist accountant to confirm in each case.

Making Additional Pension Contributions

Q: I currently run my own small grocery store and pay higher rate tax at 40% on a proportion of my earnings. Around this time each year my accountant calls to suggest I may like to consider making an additional pension contribution to reduce my tax liability in January. Is this still possible as I am aware the rules for pension contributions have recently changed?

A: I’m afraid under the new pension rules that were introduced in the 2006 Budget, and commencing on 6th April 2006, you will now not have the ability to carry-back contributions paid after the end of the tax year. This used to be a useful planning option for people in your situation who are unaware of their tax liability until after the tax year, as they could contribute a sum which would obtain tax relief at 40% against the preceding tax year’s income. In addition, the rules that allowed a contribution to be based upon the best earnings in the preceding five years has also been removed.

However, one advantage of the new rules is that the complicated structure of basing the allowable contribution on a percentage of earnings that vary with age has been removed. These have been replaced with new rules that allow you to contribute what you want, when you want subject to certain contribution limits. This may be useful to consider if your earnings are likely to be of a similar again in the current 2006/07 tax year which ends on the 5thApril 2007.

These new rules allow you to make contributions to a registered pension scheme and get tax relief on the lower of 100% of net relevant earnings or the annual allowance (2006/07 £215,000 rising to £255,000 in 2010/11). If you have no earnings in a year, or earnings are less than £3,600, you will be able to pay contributions with relief up to that amount. You should speak to your accountant to discuss your options and how the new rules will affect you.

Part Time Hours – Benefit Entitlement

Q: One of my full-time employees has recently switched to part time hours due to family commitments. She is concerned that this change may affect her entitlement to the basic state pension and other state benefits. Is this the case?

A: Assuming your employee earns more than £97 per week on these new hours, no change to her entitlement will occur as she will continue to pay Class 1 National Insurance contributions on her earnings.

For each week that your employee she earns between £84 (the lower earnings limit) and £97 (the primary threshold) during the 2006/07 tax year, she will be treated as paying National Insurance contributions even though no contributions are deducted from her pay. This means that she will continue to build up entitlement to contributory benefits such as the basic State Pension and Incapacity Benefit, even though she is not paying standard rate National Insurance contributions.

However, if she earns less than the lower earnings limit of £82 per week, she will not pay National Insurance contributions and will not receive credit for state pension and benefit purposes either. She may still be able to protect her entitlement to the basic State Pension if she pays NI class 3 voluntary contributions, gets certain benefits or if she is a carer who receives Home Responsibilities Protection.

PAYE Settlement Agreements

Q: I want to reward my employees for their hard work over the past year. I know if I pay them an end of year bonus I will need to account for income tax and national insurance through the PAYE scheme but I actually want to purchase my staff presents rather than cash. Do I still need to account for tax and national insurance on this, and is there a possibility that I could settle the liability on their behalf?

A: Unfortunately, if you purchase gifts for your employees each will receive a P11d benefit in kind based on the value of the assets or goods that you have gifted. The employees will be charged to tax but not national insurance, on the value of the gifts. The employer will have to pay a class 1A National insurance at 12.8% on the market value of the gifts being made.

As only the tax liability is payable by the employee, you can actually make a voluntary agreement with the Inspector of Taxes to meet the tax payable. This is known as a PAYE Settlement Agreement (PSA). Once you have a signed agreement for a tax year, you do not have to include the amounts in your employees pay or on an end of year form P11d.

You will actually pay Class 1B National Insurance Contributions on the items included in any PSAs, and meet the tax liability on the total amount of the gifts to your employees. This will result in your employees paying no tax on the gifts they have received. To discuss these agreements further you should speak to your accountant.

Advantages of filing VAT forms online

Q; I spoke to the VAT office recently and they suggested that there are substantial benefits of filing my quarterly VAT returns online. Is this true and what are they?

A: Yes, the eVAT system has substantial benefits for small business like yours. As with all other online filing systems, one of the main advantages is that the process is simple and very user friendly, with the added advantage that you will not need to file any more paper VAT returns by post. With the eVAT system you actually get an on-screen acknowledgement and a unique reference number, so that you know that the HMRC have received your details. Other advantages of the system include email alerts to keep you up-to-date on developments that affect your business and the ability to request an amendment to a VAT registration online.

Also, if you pay your VAT bill by Direct Debit you will also receive 7 calendar days from the standard due date for your return to reach us. It will be a further three working days before payments are collected from your bank account. Generally anyone with a UK VAT Registration number will be able to pay by Direct Debit. This 10 day extension will create be a substantial cash flow benefit to your small business. To register for the scheme you should speak to your accountant.

Employed and Self Employed in the same year

Q: My work in the building industry involves a mixture of short periods of work for an employer under Pay As You Earn and periods of self-employment within the same year. Is it necessary for me to register for self employment on a contract by contract basis?

A: You will initially have to become registered for Self-Employment using form CWF1 and as a subcontractor for CIS (Construction Industry Scheme). The easiest way is to register is to call the Self–Employed Registration Helpline on 08459 15 45 15, or visit www.hmrc.gov.uk.

To register as a subcontractor you should contact your local HMRC office. The HMRC will then give you a Registration Card for the Construction Industry Scheme. There will be no need for you to re-register on a future occasion unless you notify the HMRC that you have ceased self-employment on a permanent basis and finalised your Self Assessment affairs and now wish to re-start.

Payroll issues – Employee Death

Q: One of my employees recently passed away after a short illness. I have continued paying him up until his death under the terms of his contract, but I don’t know what I need to do with regard to the payroll now?

A: When you learn of the death of an employee you should complete a form P45 as normal for any employees who leave, write D in the box at the bottom of the form, and send all four parts of the form to your Inland Revenue office.

Obviously there may be some of the payments due to this employee made after the date of death. In this situation, you should make the payments of the outstanding wages to the personal representative of the deceased employee. Pay As You Earn deductions will need to be made on this, using tax code BR on any payments after you have completed the form P45 as advised above. Also all payments made after the date of death should continue to be detailed on the PAYE working sheet (form P11)

If the payments you are making fall into a later tax year than the one in which your employee died, you should deduct PAYE using the code BR and record details on a new form P11 in the name of the deceased employee. Again these payments should be made to the personal representative of the deceased.