Electric Trainer

Self-employment and personal service companies

I get a lot of questions on my self-employment training courses about the mysterious personal service company (PSC). Most people have heard the term in connection with working for yourself, but are confused about what it means. As I mostly work with people going freelance it's a very relevant issue.

This update from the CIPD provides a nice overview. The legislation around PSCs (IR35) is so opaque that there are constant rumours that it will be changed/clarified/abolished. Now the Office of Tax Simplification are trying to make things, er... simpler. They might also put the onus on the work provider (client or employer) to define whether the job is legitimately one that can be paid gross, or whether the worker has to be paid PAYE through the payroll.

http://www.cipd.co.uk/pm/peoplemanagement/b/weblog/archive/2015/09/04/employers-may-have-to-decide-tax-status-of-personal-service-company-workers.aspx

Self-employed national insurance - more changes

The days following a budget announcement are always interesting to me. As the headlines fade it's possible to delve into the small print and find quite substantial changes that no one seems to have noticed.

The one that's caught my eye this year is the proposed change to national insurance (NI) for sole traders. In fact there are two changes coming up, one of which is definitely happening, and another which might not, but which has significant knock-ons.

Firstly, as I've written before, from April 2015 sole traders will no longer have to pay Class 2 NI separately. It will be accounted for (and paid for) through the tax return system. The bill will come at end of the year, so no monthly direct debits or six monthly cheques are required from April. The rate of Class 2 NI from April 2015 is calculated at £2.80 per week, and you can read more on gov.uk.

So far so sensible.

The second proposal, announced yesterday, is to "abolish class 2 NI". Now, we've been here before with the word "abolish". (See Gordon Brown's budget in 2007.)  It seems like a good idea to abolish a tax. But national insurance is a kind of tax which brings benefits. So if you abolish a whole class of NI there is a danger you might abolish the benefits for the people who used to pay it.

At the moment Class 2 NI makes you eligible for state pension, ESA, maternity allowance and bereavement benefits. No one's suggesting that self employed people shouldn't get any of those. But how will the Department of Work and Pensions know you're eligible if Class 2 doesn't exist?

One suggestion is that Class 4 NI (already paid by sole traders through the tax return system) will be part of the eligibility test. The problem with that is that Class 4 is only paid if your profits are high enough. What about sole traders with low profits? 

Or are they saying that sole traders should be eligible for these benefits from the point of registration, even when no financial contribution to NI is made?

Watch this space. And do bear in mind that this might be kicked into touch if the Tories don't get in in May.

If you're interested you can read more on this from a proper accountant here.

Connected to this is the proposal to "abolish" the tax return, which has been generally well received. At some point it will be possible for you to enter all your income and expense information on a digital portal of some sort, and pay your tax as you go along. 

The date being talked about is 2020, but a version of this is going to start as soon as 2016 for some small businesses.

Plenty to keep an eye on in the coming years.

Getting tax back

I meet quite a few people on business skills courses who have been through a redundancy process and are receiving a payout as a result. 

Redundancy payments greater than £30,000 are taxed at source, so I'm often asked how you get the tax back if you've been taxed too much for that financial year.

I'm no tax advisor, but this link might help:
www.gov.uk/claim-tax-refund/youve-stopped-work

It's part of the new-look GOV.UK site, where HMRC has been migrating lots of useful guidance.

A few years ago I also ranted slightly about a related issue.

New VAT rules for e-selling in the EU

OK. So e-selling isn't really a word, but if you're selling digital stuff online to EU customers you need to be aware of some new rules. *Takes deep breath...*

Small businesses are being warned about new VAT changes from 1st Jan 2015, which mean sellers of apps, downloads and other e-services to customers in other EU countries will have to charge VAT at the rate within the customer's countries, not the UK rate.

The potential for confusion is enormous (giving rise to the hashtag #VATMESS), as VAT will have to be charged on EVERY sale, even where a UK business doesn't have to be VAT registered within the UK. This is likely to be a challenge for entrepreneurial sole traders in particular.

The VAT 'mini one stop shop' is supposed to help, avoiding the need to become VAT registered in every European country (!).  But you'll still need a UK VAT registration number to use the one stop shop, even if you are below the UK VAT threshold.

It all seems very bureaucratic, but you can read more via these useful links, presuming you haven't lost the will to live:

• gov.uk - Explanation of the new rules
• gov.uk - Some extra guidance
• Registering for VAT Mini One Stop Shop (MOSS)

Fair play to the Daily Telegraph, which has pointed to the challenges for small online businesses, and especially people who work for themselves but sell all around Europe using the internet. You'd have thought the tax people would want to make this simple and straight forward. 

You can read the Telegraph's take on the latest twists here.

How HMRC chases tax

I'm often asked by worried freelance trainees if they're ever likely to be audited by the taxman (or woman). I haven't a clue, of course.  But this article in the Telegraph is quite interesting. The mega-computer certainly sounds scary.

Are you next on the taxman's list >> 

Freelancing through an agency - rule changes

We've met quite a few media freelances recently who operate through an agency to get work and receive payment.

As the rules about employment status and taxation for agency workers changed this April (2014) I thought it might be useful to link to HMRC's guidance, neatly encapsulated (!) in 6 pages of PDF.

It's difficult to reduce this sort of thing to a one-liner, but in short if your work is unsupervised or you can send someone else along in your place you might be able to be self-employed and still get work through an agency. Otherwise it's more likely that the agency will have to treat you as an employee, and take off tax and national insurance before they pay you.

 

Simplified accounting for sole traders (webinars)

I'm often asked by trainees on our self-employment workshops where to get more information about keeping records. The short answer is 'the horse's mouth'.

HMRC have been developing a series of webinars aimed at new small businesses. I've taken part in some of the live webinars and they are very friendly and helpful. I find Twitter is the easiest place to keep on top of what's on offer.

There are two new simplified accounting systems which may be of interest if you're self-employed and have a turnover less than the VAT threshold (£81,000 per year as of April 2014).

The first system is called 'Cash Basis' and allows you to calculate income tax based on what you've received rather than what you've invoiced for.

The second change is the introduction of a couple of flat rates to cover using your home as your business base (or your business base as your home - eg when you run a small hotel and live there too).

The flat rate mileage system for using your own vehicle is unchanged.

All these approaches are optional. You can calculate all expenses the long way round and in detail if you prefer, and you can still base your end of year accounts on invoice dates rather than cash received if you like.

You can watch a pre-recorded video on YouTube about all this. Yes - HMRC has a YouTube channel. Who knew!

 

 

Changes to self-employed national insurance

One of the enduring mysteries of life in the UK why we have a tax that's still called national insurance, and why it's still so complicated. There are four different types, and two sub-categories for goodness sake - all with different rules.

When we cover NI in our finance for freelances or sole trader workshops, there's always bemusement in the room, even among highly intelligent people who've been paying it for years.

The reason it's complicated is because it's had numerous bits bolted on over the years as Chancellors have realised they can get more money out of us while saying they're not putting up income tax, even though NI is a kind of tax and it's usually based on income.

So NI has come to resemble a kind of steam punk traction engine with go-faster stripes - an interesting feat of engineering but not exactly fit for purpose.

But there's a small change coming that should benefit you if you're self-employed. It's a simplification in the way the Class 2 NI contribution is taken. At the moment Class 2 is calculated as a weekly amount (£2.75 in 2014-15), which you arrange to pay monthly or six monthly, separately from any other taxes.

The plan is to move Class 2 into the self-assessment process, i.e. put it in the tax return. This will remove the need for a separate process and may even help some self-employed people to remember to pay it. The timing was outlined in the 2014 Budget:

"These changes will have effect from April 2016, however customers will start to see the benefits after April 2015." (Nope. I'm not sure what that means either.)

Meanwhile another go-faster stripe is being added shortly in the form of a new temporary  'Class 3a' voluntary national insurance contribution. This could help people who have been self-employed (and others) to buy slightly more state pension if they are about to reach pensionable age. You can read about it on www.gov.uk.

Self-employment and financial skills

There have been a couple of announcements this week which caught my eye and should be of interest to anyone who is going into self-employment, doubly so if you have school-age children.

Firstly, the Office for National Statistics revealed that there's been a sharp increase in people becoming self-employed. Full marks to the Daily Mail for living up to their reputation and finding a depressing angle to this: that people have been made redundant and can't find work any other way.

I'm sure some feel forced into self-employment but in my training I find most people up for it and positive about their future, if a little anxious sometimes.

The ONS announcement has led inexorably to the Sunday papers coming up with 'how to' guides for self-employment.

I spotted two articles worth a quick look - remarkably similar, so probably drawing on some of the same press releases:

• The Telegraph
• The Guardian

Neither article really underlines how different employment and self-employment are. And the differences are not just about the way you earn money, they're about how you run your life. Having said that, they both contain useful tips, as do some of the comments underneath them.

Catch 'em young

The other announcement that caught my eye caused a little whoop and a skip in the air. Financial skills are likely to become part of the school curriculum next year. You can read about it here:

• The FT
• The Guardian
• The Telegraph

At last teenagers will be shown that maths is relevant to everyday life, and that everyone needs financial skills to survive. Tellingly, this will come under 'citizenship studies' rather than the maths curriculum, underlining that these skills are essential for a properly functioning society.

The reason I'm so chuffed to hear this is because I meet people all the time in our self-employment workshops who have no clue at all about how finance works. I don't judge them for it. I was exactly the same until I had to learn the hard way - when I set up my own business 8 years ago. I just wish I'd been told some of this stuff when I was 16.

So here's to the next generation of financially savvy citizens and small businesses.

Apple, Apps and VAT receipts

If you're a VAT-registered small business or freelance you occasionally come up against ignorance or pure willfulness on the part of bigger organisations. 

I love this story about one man's tenacity in the face of Apple's 'have a good day' wall of indifference.

The real problem is that so many people in big organisations haven't got a clue how VAT works, which is why it's such fun when we talk about it in our self-employment workshops.

And small businesses can avoid all the nonsense of collecting piddling VAT receipts by using the VAT Flat Rate Scheme, one of Gordon Brown's better ideas.