Limited Liability Partnerships

Most important features of LLPs

The key advantage of a LLP compared with a traditional partnership is that the members of the LLP (it is very important that they should not be called partners but members) are able to limit their personal liability if something goes wrong with the business, in much the same way as shareholders in a company have always been able to do. Of course anyone lending money to the LLP such as a bank may still require personal guarantees from the members, as they frequently do with directors/shareholders in a company.

Where business owners have wanted to limit their personal liability in the past, they have normally set up companies and any profits made by those companies are subject to corporation tax. Dividends paid by the companies can then be taken as income of the shareholders. LLPs are taxed quite differently in that the profits are treated as the personal income of the members as if they had run their business as a partnership. The taxation of companies and partnerships is very different but taxation should not be the main consideration in choosing a business vehicle. The Government has announced that it intends to introduce new rules which will change the tax status of some LLP members (see Changes ahead for some LLP members). We would be very pleased to discuss the impact of this in any particular case.

LLPs must produce and publish financial accounts with a similar level of detail to a similar sized limited company (although micro entity provisions are not available for LLPs) and must submit accounts and an annual return to the Registrar of Companies each year. This publication requirement is far more demanding than the position for non-incorporated partnerships and specific accounting rules may lead to different profits from those of a normal partnership. The filing deadline is nine months after the period end.

Setting up LLPs or converting an existing partnership

A LLP is set up by a legal incorporation process which involves sending certain documents to the Registrar of Companies (more details from Companies House at www.companieshouse.gov.uk) along with the relevant fee. Although it is not legally necessary, every LLP should have a thorough and comprehensive members’ agreement in place and needs to have taken legal or professional advice about the issues that should be covered by this agreement.

Existing partnerships can convert to a LLP by exactly the same process of incorporation and providing there are no changes in membership or in the way in which the partnership operates, there may well be no impact on the partnership’s tax position. Again care and advice needs to be taken before any decisions are made.

It is not possible for a limited company to convert into a LLP and there will be a significant legal and taxation impact where a LLP takes over the business of a company.

Which businesses might want to use a LLP?

The types of business that LLPs were originally designed for were professional partnerships such as lawyers, surveyors and accountants. In many of these cases, though not all, they have not been able to operate through limited companies because of restrictions from their professional associations and the option of using a LLP offers some advantages.

However other businesses may also benefit from using LLPs, particularly new start-ups who might otherwise have formed limited companies.

What liability might members of a LLP have if something goes wrong?

Because LLPs are relatively new compared to other forms of businesses, there are no decisions yet by the courts where something has gone wrong. This is therefore a hard question to answer but it looks as if the following describes the position as most people understand it at present:

• if, for example, a member of a LLP were to give bad advice to a client and the client suffered a loss as a result, the client may be able to take the LLP to court and be awarded appropriate compensation
• in certain circumstances it could be possible that the member who actually gave the advice may also be required by a court to pay compensation to the client
• it is however probable that any other members who were not directly involved in the advice will not have any personal liability. In a normal partnership it is quite possible that they would have had a personal liability.

It will still be essential for LLPs (and individual members) who might find themselves in this position to have suitable insurance cover.

The other area that needs to be considered is to do with what the law calls unlawful or insolvent trading. In just the same way as company directors can be prosecuted for these offences, members of a LLP can also be prosecuted (and can be disqualified from being a member of a LLP in the future).

A decision to use a LLP?

Increasing numbers of LLPs are being created, despite take up being relatively slow to begin with. Initially many LLPs were start ups but an increasing number of conversions are being made. Any decision to convert an existing partnership or to set up a new business using a LLP is a complex one, involving legal, accounting and tax issues.

Changes for some LLP members

The LLP is a unique entity as it combines limited liability for its members with the tax treatment of a traditional partnership. Individual members have historically been deemed to be self-employed and taxed on their respective profit shares.

With effect from 6 April 2014 the Government considers that deemed self-employed status is not appropriate in some cases. For example, individuals who would normally be regarded as employees in high-salaried professional areas such as the legal and financial services sectors have been benefitting from self-employed status for tax purposes which resulted in a loss of employment taxes payable.

The rules apply when an individual is a member of an LLP and three conditions are met. The conditions are:

• There are arrangements in place under which the individual is to perform services for the LLP, in their capacity as a member, and it would be reasonable to expect that the amounts payable by the LLP in respect of their performance of those services will be wholly, or substantially wholly, disguised salary. An amount is disguised salary if it is fixed or, if is variable, it is varied without reference to the overall profits of the LLP.
• The mutual rights and duties of the members and the LLP and its members do not give the individual significant influence over the affairs of the LLP.
• The individual’s contribution to the LLP is less than 25% of the disguised salary. The individual’s contribution is defined (broadly) as the amount of capital which they contributed to the LLP.

These rules took effect from 6 April 2014.

How we can help

We would be delighted to discuss these issues with you and demonstrate what the impact on your business would be. Please contact us for further information.

Data Security – Access

Many businesses are now completely reliant on the data stored on their Network Servers, PCs, laptops, mobile devices and cloud service providers or internet service providers. Some of this data is likely to contain either personal information and/or confidential company information.

Here we look at some of the issues to consider when reviewing the security of your computer systems with respect to access controls, and to ensure compliance with Principle 7 of the Data Protection Act. This states that –

Appropriate technical and organisational measures shall be taken against unauthorised or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data.

Access security

Good access controls to the computers and the network minimise the risks of data theft or misuse.

Access controls can be divided into two main areas:

• Physical access – controls over who can enter the premises and who can access personal data
• Logical access – controls to ensure employees only have access to the appropriate software, data and devices necessary to perform their particular role.

Physical access

As well as having physical access controls such as locks, alarms, security lighting and CCTV there are other considerations such as how access to the premises is controlled.

Visitors should not be allowed to roam unless under strict supervision.

Ensure that computer screens are not visible from the outside.

Use network policies to ensure that workstations and/or mobile devices are locked when they are unattended or not being used.

Ensure that if a mobile device is lost it can be immobilised remotely.

Mobile devices being small are high risk items so sensitive data should always be encrypted and access to the service should be controlled via a pin number or password.

It may be necessary to disable or restrict access to USB devices and Optical readers and writers.

Finally, information on hard-copy should be disposed of securely.

Logical access

Logical access techniques should be employed to ensure that personnel do not have more access than is necessary for them to perform their role.

Sensitive data should be encrypted and access to this data controlled via network security and user profiles.

Access to certain applications and certain folders may also need to be restricted on a user by user basis.

Finally, it may be necessary to lock down certain devices on certain machines.

Passwords

It is accepted, universally, that a password policy consisting of a username and password is good practice.

These help identify a user on the network and enable the appropriate permissions to be assigned.

For passwords to be effective, however, they should:

• be relatively long (i.e. 8 characters or more)
• contain a mixture of alpha, numeric and other characters (such as &^”)
• be changed regularly through automatic password renewal options
• be removed or changed when an employee leaves
• be used on individual files such as spreadsheets or word processed documents which contain personal information

and should NOT

• be a blanket password (i.e. the same for all applications or for all users)
• be written on ‘post it’ notes which are stuck on the keyboard or screen
• consist of common words or phrases, or the company name.

How we can help

We can provide help in the following areas:

• defining and documenting security and logical access procedures
• performing a security/information audit
• training staff in security principles and procedures.

Please contact us if you would like any help in any of these areas.

Pensions – Tax Reliefs

Types of pension schemes

There are two broad types of pension schemes from which an individual may eventually be in receipt of a pension:

• Occupational schemes
• Personal Pension schemes.

An occupational pension is an arrangement an employer can use to provide benefits for their employees when they leave or retire. The number of occupational pension schemes has declined in recent years in part due to the regulations imposed upon the schemes.

A Personal Pension scheme is a privately funded pension plan but can also be funded by an employer. In many cases the employer may organise the establishment of pension plans for their employees through a Group Personal Pension scheme.

A stakeholder pension is a personal pension plan but has restrictions on the amounts that may be charged by the pension provider (typically a pension company).

We set out below the tax reliefs available to members of a Personal Pension scheme.

It is important that professional advice is sought on pension issues relevant to your personal circumstances.

What are the tax breaks and controls on the tax breaks?

To benefit from tax privileges all pension schemes must be registered with HMRC. For a Personal Pension scheme, registration will be organised by the pension provider.

A Personal Pension scheme allows the member to obtain tax relief on contributions into the scheme and tax free growth of the fund. If an employer contributes into the scheme on behalf of an employee, there is, generally no tax charge on the member and the employer will obtain a deduction from their taxable profits. Self employed and employed individuals can have a Personal Pension.

When the ‘new’ pension regime was introduced from 6 April 2006 no limits were set on either the maximum amount which could be invested in a pension scheme in a year or on the total value within pension funds. However two controls were put in place in 2006 to control the amount of tax relief which was available to the member and the tax free growth in the fund.

Firstly, a lifetime limit was established which set the maximum figure for tax-relieved savings in the fund(s) and has to be considered when key events happen such as when a pension is taken for the first time.

Secondly, an annual allowance sets the maximum amount which can be invested with tax relief into a pension fund. The allowance applies to the combined contributions of an employee and employer. Amounts in excess of this allowance trigger a charge.

There are other longer established restrictions on contributions from members of a Personal Pension scheme (see below).

Key features of Personal Pensions

• Contributions are invested for long-term growth up to the selected retirement age.
• At retirement which may be any time from the age of 55 the accumulated fund is generally turned into retirement benefits – an income and a tax-free lump sum.
• Personal contributions are payable net of basic rate tax relief, leaving the provider to claim the tax back from HMRC.
• Higher and additional rate relief is given as a reduction in the taxpayer’s tax bill. This is normally dealt with by claiming tax relief through the self assessment system.
• Employer contributions are payable gross direct to the pension provider.

Persons eligible

All UK residents may have a Personal Pension. This includes non-taxpayers such as children and non-earning adults. However, they will only be entitled to tax relief on gross contributions of up to £3,600 per annum.

Relief for individuals’ contributions

An individual is entitled to make contributions and receive tax relief on the higher of £3,600 or 100% of earnings in any given tax year. However tax relief will generally be restricted for contributions in excess of the annual allowance.

Methods of giving tax relief

Tax relief on contributions are given at the individual’s marginal rate of tax.

An individual may obtain tax relief on contributions made to a Personal Pension in one of two ways:

• a net of basic rate tax contribution is paid by the member with higher rate relief claimed through the self assessment system
• a net of basic rate tax contribution is paid by an employer to the scheme. The contribution is deducted from net pay of the employee. Higher rate relief is claimed through the self assessment system.

In both cases the basic rate is claimed back from HMRC by the pension provider.

A more effective route for an employee may be to enter a salary sacrifice arrangement with an employer. The employer will make a gross contribution to the pension provider and the employee’s gross salary is reduced. This will give the employer full income tax relief (by reducing PAYE) but also reducing National Insurance Contributions.

There are special rules if contributions are made to a retirement annuity contract. (These are old schemes started before the introduction of personal pensions).

The annual allowance

The level of the annual allowance is £40,000 for 2015/16 but in order to determine whether the allowance has been exceeded a pension input period needs to be determined for the scheme.  A pension input period does not have to be the same as the tax year. In addition, each scheme can have a different pension input period, so special care is required in this area.

Any contributions in excess of the £40,000 annual allowance are potentially charged to tax on the individual as their top slice of income. Contributions include contributions made by an employer.

The stated purpose of the charging regime is to discourage pension saving in tax registered pensions beyond the annual allowance. It is expected that most individuals and employers will actively seek to reduce pension saving below the annual allowance, rather than fall within the charging regime.

The rate of charge

The charge is levied on the excess above the annual allowance at the appropriate rate in respect of the total pension savings. There is no blanket exemption from this charge in the year that benefits are taken. There are, however, exemptions from the charge in the case of serious ill health as well as death.

The appropriate rate will broadly be the top rate of income tax that you pay on your income.

Example Anthony, who is employed, has taxable income of £120,000 in 2014/15. He makes personal pension contributions of £50,000 net in 2014/15. He has made similar contributions in the previous three tax years. The charge will be: Gross pension contribution £62,500 Less annual allowance (£40,000) Excess £22,500 taxable at 40% = £9,000 Anthony will have had tax relief on his pension contributions of £25,000 (£62,500 x 40%) and now effectively has £9,000 clawed back. The tax adjustments will be made as part of the self assessment tax return process.

Carry forward of unused annual allowance

To allow for individuals who may have a significant amount of pension savings in a tax year but smaller amounts in other tax years, a carry forward of unused annual allowance is available.

The carry forward rules apply if the individual’s pension savings exceed the annual allowance for the tax year (i.e. £40,000). The annual allowance for the current tax year is to be treated as increased by the amount of the unused annual allowance from the previous three tax years.

Unused annual allowance carried forward is the amount by which the annual allowance for that tax year exceeded the total pension savings for that tax year.

This effectively means that the unused annual allowance of up to £40,000 per year from 2014/15 (previously £50,000) can be carried forward for the next three years.

Importantly no carry forward is available in relation to a tax year preceding the current year unless the individual was a member of a registered pension scheme at some time during that tax year.

An amount of the excess for an earlier tax year is to be used before that for a later tax year.

As the annual allowance has been far higher than £50,000 before 2011/12 when the new rules were introduced, when looking at whether there is unused annual allowance to bring forward from 2008/09, 2009/10 and 2010/11, the annual allowance for those years is deemed to have been £50,000.

Example Bob is a self employed builder. In the previous three years Bob has made contributions of £30,000, £20,000 and £30,000 to his pension scheme. As he has not used all of the £40,000 (2013/14 and prior years £50,000) annual allowance in earlier years, he has £60,000 unused annual allowance that he can carry forward to 2015/16. Together with his current year annual allowance of £40,000, this means that Bob can make a contribution of £100,000 in 2015/16 without having to pay any extra tax charge.

The lifetime limit

The lifetime limit sets the maximum figure for tax-relieved savings in the fund remains at  £1.25 million for 2015/16.

If the value of the scheme(s) exceeds the limit when benefits are drawn from the scheme there is a tax charge of 55% of the excess if taken as a lump sum and 25% if taken as a pension.

The Chancellor has announced that for the tax year 2016/17 onwards the lifetime allowance will be reduced to £1 million. It will then be indexed annually in line with CPI from 6 April 2018.

Accessing your pension

In Budget 2014, George Osborne announced ‘pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want’. Some of changes have already taken effect but the big changes will come into effect on 6 April 2015 for individuals who have money purchase pension funds.

The tax consequences of the changes are contained in the Taxation of Pensions Bill which is currently going through Parliament.

Under the current system, there is some flexibility in accessing a pension fund from the age of 55:

• tax free lump sum of 25% of fund value
• purchase of an annuity with the remaining fund, or
• income drawdown.

For income drawdown there are limits, in most cases, on how much people can draw each year.

An annuity is taxable income in the year of receipt. Similarly any monies received from the income drawdown fund are taxable income in the year of receipt.

From 6 April 2015, the ability to take a tax free lump sum and a lifetime annuity remain but some of the current restrictions on a lifetime annuity will be removed to allow more choice on the type of annuity taken out.

The rules involving drawdown will change. There will be total freedom to access a pension fund from the age of 55. Access to the fund will be achieved in one of two ways:

• allocation of a pension fund (or part of a pension fund) into a ‘flexi-access drawdown account’ from which any amount can be taken over whatever period the person decides
• taking a single or series of lump sums from a pension fund (known as an ‘uncrystallised funds pension lump sum’).

When an allocation of funds into a flexi-access account is made the member typically will take the opportunity of taking a tax free lump sum from the fund (as under current rules).

The person will then decide how much or how little to take from the flexi-access account. Any amounts that are taken will count as taxable income in the year of receipt.

Access to some or all of a pension fund without first allocating to a flexi-access account can be achieved by taking an uncrystallised funds pension lump sum.

The tax effect will be:

• 25% is tax free
• the remainder is taxable as income.

Further flexibility for annuity holders

The Chancellor announced just before the Budget a new flexibility for people who have already purchased an annuity. From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity for a capital sum.

Individuals will then have the freedom to take that capital as a lump sum, or place it into drawdown to use the proceeds more gradually. Income tax at the individual’s marginal rate will be payable in the year of access to the proceeds.

The proposal will not give the annuity holder the right to sell their annuity back to their original provider. The government has begun a consultation on the measures that are needed to establish a market to buy and sell annuities and who should be permitted to purchase the annuity income.

Pensions – changes to tax relief for pension contributions

The Government is alive to the possibility of people taking advantage of the new flexibilities by ‘recycling’ their earned income into pensions and then immediately taking out amounts from their pension funds. Without further controls being put into place an individual would obtain tax relief on the pension contributions but only be taxed on 75% of the funds immediately withdrawn.

Currently an ‘annual allowance’ sets the maximum amount of tax efficient contributions. The annual allowance is £40,000 (but there may be more allowance available if the maximum allowance has not been utilised in the previous years).

Under the  rules from 6 April 2015, the annual allowance for contributions to money purchase schemes will be reduced to £10,000 in certain scenarios. There will be no carry forward of any of the £10,000 to a later year if it is not used in the year.

The main scenarios in which the reduced annual allowance is triggered is if:

• any income is taken from a flexi-access drawdown account, or
• an uncrystallised funds pension lump sum is received.

However just taking a tax-free lump sum when funds are transferred into a flexi-access account will not trigger the £10,000 rule.

How we can help

This information sheet provides general information on the making of pension provision. Please contact us for more detailed advice if you are interested in making provision for a pension.

e-commerce – a Guide to Trading Online

According to the latest UK statistics, over 44m adults (that’s an average of over 85% of adults) have internet access and a large majority of these regularly use the internet for online shopping or to search for a provider of goods/services.

As well as the domestic market, the internet provides a gateway to the international market place. Furthermore, it can be used to develop relationships with suppliers and other trading partners.

It is therefore vital that your business has an online presence.

This can be anything from a one page ‘shop-front’, to a complex product catalogue with an online ordering and multi-currency payment systems and a world-wide delivery mechanism.

Issues to consider

e-commerce does not have to be either expensive or complicated, but as with all aspects of business, there are a number of issues which need to be considered –

• register the company name or trading name as a domain name (this will incur an annual fee)
• allocate both a start up and a recurring annual budget for the online project
• set some milestones for the website and a timeline for achieving these goals
• have a look at other websites and go through the check-out process – note what you like and dislike about these and how your clients/customers might react
• consider the needs of the disabled user
• decide whether to host the website in-house, or to use an external hosting company (ISP)
• consider the ease of being able to update website content on a regular basis
• have the website optimised to ensure that it features in popular search engines
• consider pay per click advertising options to increase ranking
• keep the site simple (and fast) – visitors will not spend ages on navigation or waiting for pages to load.  This includes all elements of the website including graphics, searching the site and the order and payment processes
• think about how the website will link to the back office accounting, invoicing and stock systems
• ensure that both the website and any online payment procedures have all available security measures in place to prevent fraud, hacking and denial of service threats
• enable the user to view/edit orders and to see order history and order tracking
• ensure that regular statistics on number of visitors, pages visited etc are available
• have a contingency plan to ensure that online trading can continue should there be a major problem.

Legal requirements

There are quite a few legal issues to contend with, some of these will not be relevant in all cases –

Who legally owns the website (and the content) and what happens if either the web developer/ISP ceases trading?

Compliance with relevant legislation which includes:

• Companies Act 2006
• E-Commerce regulations 2002
• Privacy and Electronic Communications Regulations 2003
• Distance Selling Regulations 2000
• Data Protection Act 1998
• Disability Discrimination Act 2005
• Provision of Services Regulations 2009

Bear in mind that legislation and the rules and regulations incorporated within primary legislation change over time. For example, all websites need to comply with regulations regarding the use of cookies.

How we can help

If you would like any further assistance please do not hesitate to contact us.

Research and Development

Research and development (R&D) by UK companies is being actively encouraged by Government through a range of tax incentives.

The incentives are only available to companies and include:

• increased deduction for R&D revenue spending and
• a payable R&D tax credit for companies not in profit.

The relief

The R&D revenue relief increases the amount a company can obtain tax relief on to more than the normal 100% revenue deduction. This relief is 225% for expenditure incurred by a SME on or after 1 April 2012 (230% from 1 April 2015). Large companies are subject to a different regime not considered here.

Alternatively a SME may claim a payable R&D tax credit for an accounting period in which it has a surrenderable loss. For expenditure incurred on or after 1 April 2014 the amount of payable tax credit that a company is entitled to for an accounting period is 14.5% of the surrenderable loss for that period. For accounting periods ending on or after 1 April 2012 the R&D credit is no longer restricted to the PAYE/NIC liabilities of the company.

Example The following is an example of the relief in operation. Neuf Ltd is an SME and incurs qualifying R&D expenditure during the year to 31 March 2015 of £100,000. Assuming Neuf Ltd is profitable it will be able to claim a deduction in respect of its R&D expenditure of £225,000. This will reduce its corporation tax liability by £45,000 (assuming a 20% rate), giving the company effective relief on the actual expenditure of 45%. If, on the other hand, Neuf Ltd is making losses, the £225,000 attributable to the R&D expenditure can either be carried forward for relief against future trading profits or converted into a payable R&D tax credit. The rate of conversion is currently set at 14.5% so this would generate a payment to the company of £32,625 (£225,000 x 14.5%) which equates to 32.63% of the original expenditure.

Considerations

There are two main considerations to establish whether the reliefs for R&D are available. These are concerned with the activity and also the conditions relating to the expenditure incurred.

Is the activity qualifying R&D?

The first essential matter to determine is whether HMRC would accept that the particular activities constitute R&D.

Relief is available if a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty and not simply an advance in its own state of knowledge or capability.

Furthermore it must be related to your company’s trade either an existing one, or one that you intend to start up based on the results of the R&D.

HMRC guidance suggests when making the claim for relief that a company should answer the following questions, so they can see how your view of the definition applies to your project.

• What is the scientific or technological advance?
• What were the scientific or technological uncertainties involved in the project?
• How and when were the uncertainties actually overcome?
• Why was the knowledge being sought not readily deducible by a competent professional?

Please do get in touch if you would like advice on R&D so we can maximise the reliefs available.

Does the expenditure qualify?

The second consideration is to ensure the relevant tax conditions are met, the most important being:

• the expenditure must be from a qualifying revenue category and not be capital expenditure
• the spending must not be incurred in carrying out activities contracted to the company by another person (however a slightly different form of R&D tax credit may apply – you may still be able to claim, as a subcontractor, under the Large Company Scheme which is not considered further in this factsheet)
• the expenditure must not have been met by another person (if the R&D project is funded in whole or part by ‘State Aid’ such as a government grant, none of the spending on that project can qualify for R&D tax credits).

The R&D does not have to be undertaken in the UK.

You must make a claim for R&D relief in your Company Tax Return. The normal time limit for making a claim is two years after the end of the relevant Corporation Tax accounting period.

Changes ahead

In the Autumn Statement the Government announced that it is proposing to restrict qualifying expenditure for R&D tax credits from 1 April 2015 so that the costs of materials incorporated in products that are sold are not eligible. There will be a package of measures to streamline the application process for smaller companies investing in R&D.

How we can help

If this is something that you would like to discuss in more detail, please contact us.

Taxation of the Family

Individuals are subject to a system of independent taxation so husbands and wives are taxed separately. This can give rise to valuable tax planning opportunities. Furthermore, the tax position of any children is important.

Marriage breakdowns can also have a considerable impact for tax purposes.

We highlight below the main areas of importance where advance planning can help to minimise overall tax liabilities.

It is important that professional advice is sought on specific issues relevant to your personal circumstances.

Setting the scene

Married couples

Independent taxation means that husbands and wives are taxed separately on their income and capital gains. The effect is that both have their own allowances, savings and basic rate tax bands for income tax, annual exemption for capital gains tax purposes and are responsible for their own tax affairs. Since December 2005, the same tax treatment applies to same-sex couples who have entered into a civil partnership under the Civil Partnership Act.

Children

A child is an independent person for tax purposes and is therefore entitled to a personal allowance and the savings and basic rate tax band before being taxed at the higher rate. It may be possible to save tax by generating income or capital gains in the children’s hands.

Marriage breakdown

Separation and divorce can have significant tax implications. In particular, the following areas warrant careful consideration:

• available tax allowances
• transfers of assets between spouses.

Tax planning for married couples

Income tax allowances and tax bands

Everyone is entitled to a basic personal allowance. This allowance cannot however be transferred between spouses except for the circumstances outlined below.

If either you or your spouse were born before 6 April 1935, a married couple’s allowance is available. This is given to the husband, although it is possible, by election, to transfer it to the wife.

From April 2015 married couples and civil partners may be eligible for a new transferable tax allowance.

The transferable tax allowance will enable spouses and civil partners to transfer a fixed amount of their personal allowance to their spouse. The transferable allowance is £1,060 for 2015/16 being 10% of the personal allowance.

Transferable Tax Allowance

From 6 April 2015 married couples and civil partners may be eligible for a new Transferable Tax Allowance.

The Transferable Tax Allowance will enable spouses and civil partners to transfer a fixed amount of their personal allowance to their spouse. The option to transfer is not available to unmarried couples.

The option to transfer will be available to couples where neither pays tax at the higher or additional rate. If eligible, one partner will be able to transfer 10% of their personal allowance to the other partner which means £1,060 for the 2015/16 tax year.

The claim will be made online and entitlement will be from the 2015/16 tax year. Couples will be entitled to the full benefit in their first year of marriage.

For those couples where one person does not use all of their personal allowance the benefit will be worth up to £212.

Eligible couples can register their interest for marriage allowance at https://www.gov.uk/marriage-allowance. The spouse or partner with the lower income registers their interest in transferring some of their personal allowance by entering some basic details. HMRC will subsequently invite the couple to apply. Those who don’t register their interest will be able to make an application at a later date and still receive the allowance.

Joint ownership of assets

In general, married couples should try to arrange their ownership of income producing assets so as to ensure that personal allowances are fully utilised and any higher rate liabilities minimised.

Generally, when husband and wife jointly own assets, any income arising is assumed to be shared equally for tax purposes. This applies even where the asset is owned in unequal shares unless an election is made to split the income in proportion to the ownership of the asset.

Married couples are taxed on dividends from jointly owned shares in ‘close’ companies according to their actual ownership of the shares. Close companies are broadly those owned by the directors or five or fewer people. For example if a spouse is entitled to 95% of the income from jointly owned shares they will pay tax on 95% of the dividends from those shares. This measure is designed to close a perceived loophole in the rules and does not apply to income from any other jointly owned assets.

We can advise on the most appropriate strategy for jointly owned assets so that tax liabilities are minimised.

Capital gains tax (CGT)

Each spouse’s CGT liability is computed by reference to their own disposals of assets and each is entitled to their own annual exemption, for 2015/16 £11,100 (2014/15 £11,000) per annum. Gains are treated as an individual’s top slice of income and charged at 18% or 28% or a combination of both rates.

Some limited tax savings may be made by ensuring that maximum advantage is taken of any available capital losses and annual exemptions.

This can often be achieved by transferring assets between spouses before sale – a course of action generally having no adverse CGT or inheritance tax (IHT) implications. Advance planning is vital, and the possible income tax effects of transferring assets should not be overlooked.

Further details of how CGT operates are outlined in the factsheet Capital Gains Tax.

Inheritance tax (IHT)

When a person dies IHT becomes due on their estate. Some lifetime gifts are treated as chargeable transfers but most are ignored providing the donor survives for seven years after the gift.

The rate of inheritance tax payable is 40% on death and 20% on lifetime chargeable transfers. The first £325,000 is not chargeable and this is known as the nil rate band.

Transfers of property between spouses are generally exempt from IHT. New rules have been introduced which allow any nil-rate band unused on the first death to be used when the surviving spouse dies. The transfer of the unused nil-rate band from a deceased spouse, irrelevant of the date of death, may be made to the estate of their surviving spouse who dies on or after 9 October 2007.

The amount of the nil-rate band available for transfer will be based on the proportion of the nil-rate band which was unused when the first spouse died. Key documentary evidence will be required for a claim, so do get in touch to discuss the information needed.

A gift for family maintenance does not give rise to an IHT charge. This would include the transfer of property made on divorce under a court order, gifts for the education of children or maintenance of a dependent relative.

Gifts in consideration of marriage are exempt up to £5,000 if made by a parent with lower limits for other donors.

Small gifts to individuals not exceeding £250 in total per tax year per recipient are exempt. The exemption cannot be used to cover part of a larger gift.

Gifts which are made out of income which are typical and habitual and do not result in a fall in the standard of living of the donor are exempt. Payments under deed of covenant and the payment of annual premiums on life insurance policies would usually fall within this exemption.

Children

Use of allowances and lower rate tax bands

It may be possible for tax savings to be achieved by the transfer of income producing assets to a child so as to take advantage of the child’s personal allowance.

This cannot be done by the parent if the annual income arising is above £100. The income will still be taxed on the parent. However, transfers of income producing assets by others (eg grandparents) will be effective.

A parent can however allow a child to use any entitlement to the CGT annual exemption by using a ‘bare trust’.

Child Tax Credit

A Child Tax Credit (CTC) is available to some families. We have a separate factsheet which provides more detail about this area. To see whether you are entitled to claim go to HMRC website at https://www.gov.uk/child-tax-credit

Junior Individual Savings Account (Junior ISA)

The Junior ISA is available for UK resident children under the age of 18 who do not have a Child Trust Fund account. Junior ISAs are tax advantaged and have many features in common with existing ISAs. They are available as cash or stocks and share based products.

High Income Child Benefit Charge

A charge applies to a taxpayer who has adjusted net income over £50,000 in a tax year where either they or their partner are in receipt of Child Benefit for the year. Where both partners have adjusted net income in excess of £50,000 the charge will apply to the partner with the higher income.

The income tax charge will apply at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid.

Child Benefit claimants can elect not to receive Child Benefit if they or their partner do not wish to pay the charge.

Example The Child Benefit for two children amounts to £1,770. The taxpayer’s adjusted net income is £54,000. The income tax charge will be £708. This is calculated as £17.70 for every £100 above £50,000. For a taxpayer with adjusted net income of £60,000 or above the income tax charge will equal the Child Benefit.

Marriage Breakdown

Maintenance payments

An important element in tax planning on marriage breakdown used to involve arrangements for the payment of maintenance. Generally no tax relief is due on maintenance payments.

Asset transfers

Marriage breakdown often involves the transfer of assets between husbands and wives. Unless the timing of any such transfers is carefully planned there can be adverse CGT consequences.

If an asset is transferred between a husband and wife who are living together, the asset is deemed to be transferred at a price that does not give rise to a gain or a loss. This treatment continues up to the end of the tax year in which the separation takes place.

CGT can therefore present a problem where transfers take place after the end of the tax year of separation but before divorce, although gifts holdover relief is usually available on transfers of qualifying assets under a Court Order.

IHT on the other hand will not cause a problem if transfers take place before the granting of a decree absolute on divorce. Transfers after this date may still not be a problem as often there is no gratuitous intent.

How we can help

Some general points can be made when planning for efficient taxation of the family.

Any plan must take into account specific circumstances and it is important that any proposed course of action gives consideration to all areas of tax that may be affected by the proposals.

Tax savings can only be achieved if an appropriate course of action is planned in advance. It is therefore vital that professional advice is sought at an early stage. We would welcome the chance to tailor a plan to your own personal circumstances so please do contact us.

Recruitment Procedures – Seven Steps for Good Procedures

In order to avoid the danger of discriminating in some way, particularly unconsciously, employers must take care to develop and use recruitment procedures which will avoid the risk. Using sensible procedures will also inevitably improve recruitment decisions and the quality of the people, taken on.

Professional advice should be sought before any action is taken.

Seven Steps

Sensible procedures would include the following:

1. Always produce clear job descriptions which identify both the essential activities of the job and the skills and attributes needed by candidates. It should be possible to see from this whether a disabled candidate would be able to deal with those essential activities. Avoid gender references such as he or she and only refer to qualifications and/or experience which are clearly required by the job. The danger is that any such attributes which cannot be shown to be essential could be inferred as being there to deter women, candidates from ethnic minorities or those with a disability.
2. In seeking candidates ensure that any wording used does not imply that some category (such as men or women) are favoured candidates, and be careful with words like energetic (unless this is a genuine requirement of the role) which might deter candidates with disabilities. The process for seeking candidates must also be non-discriminatory and not restricted in a way which could be seen to be discriminatory. An obvious error would be to put an advertisement in a place where it would only be seen by, for example, males (such as an all male golf club).
3. Selection methods must be chosen which will enable the appropriate skills and attributes to be assessed but should avoid anything which would in effect be discriminatory. An example could be written tests involving English comprehension for a basic cleaning job where the skills assessed by the test would be irrelevant. Where tests are used all candidates need to be given the same tests to avoid any suggestion of discrimination.
4. Be careful to avoid discriminatory questions at interview (eg when do you expect to have a family?) and generally try to ensure that all candidates are asked the same questions.
5. Do not ask candidates health related questions during the interview process or before an offer of a job is made, this would include questionnaires or general questions such as ‘the number of days sickness during the last 12 months’. Enquiries as to whether any adjustments are required to enable candidates to attend interview are permitted.
6. Consider modifying the workplace to make it suitable for candidates with disabilities – the code refers to a reasonable cost as being what the extra costs involved in recruiting a non-disabled person might be. You should also look critically at the physical arrangements for recruitment to assist candidates with disabilities to apply more easily (eg wheelchair ramps) and consider whether changes may need to be made to application forms. These should not ask questions which do not impact on the suitability of the candidate for the particular job and should not ask if a candidate is registered disabled.
7. It is essential that good records are kept for an appropriate period of time about applications, reasons for rejection and performance in any assessments and at interviews, and that these complement the job description and the skill requirements for the job. Obviously such processes help with selection anyway but these records may be essential if anything goes to an Employment Tribunal.

How we can help

We will be more than happy to provide you with assistance or any additional information required so please do contact us.

Bring your own device (BYOD)

BYOD refers to the policy by which employees can use their own personal mobile devices (such as phones, tablets, laptops) to access company networks/systems. We consider guidelines on creating a policy.

In practice BYOD means that an individual’s mobile device can be used, or potentially used, to access, store and even process confidential information relating to both the firm itself and the firms’ clients.

Broadly what should a BYOD policy cover?

Firms need a policy which sets out the devices which may or may not be connected to a firms’ network; procedures to ensure that non-approved devices can never be ‘accidentally’ connected; and appropriate mechanisms in place to maintain security over personal data which may be stored on mobile devices.

Audit of existing devices and access rights

The first step is to perform an audit of the current situation. Which devices use the network, and what for?

What does the law say?

As the employer (who is the data controller) there are obligations under the Data Protection Act 1988 (DPA) to take appropriate technical and organisational measures against unauthorised or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data.

There is a high risk that confidential corporate and client data can find its way onto personal devices – which are usually not very secure, can be easily lost/mislaid/stolen and can be sold on.

The risks of reputational damage

Imagine the scenario, an employee receives an email with an attachment containing a mailing list of all clients and their contact details which they open and save onto their mobile device. If that device then goes missing the data stored on it could find its way into the public domain, or be mis-used, or sold onto a competitor. What’s worse is that the ICO will need to be notified of the loss of data, as will each individual on that mailing list. This can cause major reputational damage as well as a large financial penalty.

Which devices are acceptable?

Having performed an audit, the second stage is to decide what to include or exclude from a BYOD policy, and this is usually done at device level.

	Device
1	No devices (zero-tolerance)
2	A list of ‘approved’ devices
3	Any/all devices

1 – Zero-tolerance

This may be the quickest, easiest and simplest solution, but may not necessarily be the most pragmatic or practical.

It may also serve to hinder rather than help some employees perform certain tasks, which can lead to job dissatisfaction and a lowering of morale.

So an outright ban could prove to be counter-productive.

It can also be quite difficult (and therefore expensive) to control and police a zero-tolerance policy without strong network security controls.

2 – Approved devices

This allows a set list of devices, or, devices with particular operating software (e.g. iOS devices only or Android and Windows devices only).

The approved device approach can make it easier to manage and control access, but may leave some employees disadvantaged if their device is not covered. It can also be difficult to manage, as new models and new devices emerge on a daily basis.

3 – Any device

This allows any device to be ‘plugged in’.

This approach is entirely opposite to zero-tolerance and allows any device to be ‘plugged in’ at any time. Advantages are a) for the employee who is not restricted by device, and b) for the company which does not have to keep updating a list of approved devices.

Which applications are acceptable?

The firm may wish to restrict access to certain applications – most often email and internet only. Full blown network and applications access should be avoided where possible other than from PCs or Laptops and then only via trusted intranets or secure remote access tools.

Business v. Private use

BYOD devices owned by an employee are likely to be used for both business and private purposes.

On the one hand the employee has to have the confidence that the company will not access personal material stored on the device or use device monitoring tools, whilst on the other hand the company will want to protect corporate and client confidential information which may also be stored (or visible) on the device.

Employers also need to be aware that devices may be used (for personal purposes) not just by the employee, but the device might also be used by other family members.

Wireless security

The easiest and quickest way for devices to be attached to a network is for employees to use their device to login to a network, wirelessly. Some firms publish their wireless key to employees without realising that they are using the key on all devices including personal devices.

So, one of the cheapest methods of providing device security is to make the wireless key very strong (i.e. difficult to remember), only available on request and only entered into the device by a member of the IT support team or other nominated individual. Thus control can be maintained at device level relatively easily.

Device registration

Most current versions of network operating software (Windows and Mac) have inbuilt security tools which can be used to maintain a list of ‘approved’ devices.

This is done through a registration process whereby the device is presented and registered on the network.

If a device gets mislaid it can be blocked/removed from the list of registered devices.

Mobile device management (MDM)/Mobile applications management (MAM)

A more expensive way of providing device security is to use MDM services – these may either be provided as part of the network operating software, or this service may be provided by a third-party.

There are different levels of this type of service ranging from simple registration and device reset services, to sandboxing personal and corporate data – which will allow separate wiping of corporate data only.

Employees will have to have to agree/consent to whichever Mobile device management system is used if they want to adopt BYOD.

Employees must also agree/consent if MDM software is used to monitor the device, the activities which are monitored and whether or not geo-location is used.

Finally, employees will need to understand what will happen to their own personal data stored on the device, in the event the device has to be disabled.

Data encryption

A BYOD policy in itself is not enough to provide sufficient safeguards. All confidential/personal data must be encrypted. Just setting a document/spreadsheet as read-only, or creating a password to open the document/spreadsheet is not the same as encrypting the data.

Firms must assess what personal data is being transferred from and to which devices, perform a risk assessment of the chances of the data getting into the public domain, and then use appropriate encryption methods to protect that confidential/personal data.

Other issues to consider

• Device password protection – Each BYOD device must have a start-up password/pin and should lock if not active for n minutes
• Mislaid devices – as part of the BYOD policy the employee will need to know who to contact and what will happen to the device if it is mislaid (i.e. what data might be wiped from the device)
• Cost – the firm may or may not agree to pay for certain mobile device charges
• Acceptable use policy – the firm will want to ensure that any acceptable use policy also applies to BYOD devices
• Devices which have been rooted/jail-broken should not be permitted
• Storage media – the firm may want to specify the approach with regard to memory/SD cards.

Implementing the BYOD policy

BYOD can either be formulated as a separate policy, added to an existing Acceptable use Policy, or added to an existing Internet and email policy or Social media Policy.

Company devices, by default, will come under the scope of BYOD.

Employees with their own personal devices should be given the opportunity to Opt-out or Opt-in to the BYOD policy –

• Opt-out – Decline to sign-up for the BYOD policy – in which case the employee will not be able to use any personal devices for work.
• Opt-in – Agree to sign-up for the BYOD policy – in which case their device will need to be registered on the network and also, if applicable, with a mobile device management service.

See our summary for our 4 easy steps in defining and implementing a BYOD policy.

Summary

It is important that the employer (who is the data controller) remains compliant with the DPA with regards to the processing of personal data. In the event of a security breach the employer must be able to demonstrate that all personal data stored on a particular device is secured, controlled or deleted. Having a BYOD policy will go a long way towards meeting that objective.

4 steps to defining and implementing a BYOD

Step 1
Audit devices and usage

What devices are currently allowed onto the network?

What access rights do they have?

What applications do they use?

Step 2
Level of BYOD

Decide which level of BYOD is to be adopted –

1. No devices
2. Approved list
3. All/any devices
4. Define which applications are accessible to mobile devices

Step 3
BYOD policy

Formulate and write BYOD policy

Make appropriate network infrastructure security changes and procure any additional services (such as MDM)

Decide if additional security is required such as data encryption tools

Define and communicate date for implementing the policy

Step 4
Implementation date

Remove all current devices

Register approved devices

Employees who own such devices sign BYOD.

How we can help

Please contact us if you require help in the following areas:

• Performing a security/information audit of corporate/client data and who and what access this data
• Defining a BYOD policy
• Implementing a BYOD policy and training staff.

Payroll – Basic Procedures

New employer

In order to set up a Pay As You Earn (PAYE) scheme with HMRC it is necessary to contact the New Employer’s Helpline on 0300 200 3211 or register online via the GOV.UK website.

As an employer you will be responsible for operating PAYE and National Insurance (NI). There are also certain statutory payments you may have to make from time to time which you need to be aware of. These include:

• statutory sick pay (SSP)
• statutory maternity pay (SMP) and
• ordinary statutory paternity pay (OSPP)
• shared parental pay (ShPP).

A vast amount of information is available on the GOV.UK website detailing the operation of PAYE together with online calculators these can be accessed as part of the HMRC Basic PAYE tools at  https://www.gov.uk/business-tax/paye

If requested HMRC will send you several booklets and tables to enable you to make the relevant deductions and payments to your employees. However the majority of employers use the HMRC Basic PAYE tools or equivalent software.

Real Time Information reporting

 Employers, or their agents, are generally required to make regular online payroll submissions for each pay period during the year detailing payments and deductions made from employees on or before the date they are paid to the employees.

More detailed guidance and information on operating your payroll under Real Time Information can be found at https://www.gov.uk/paye-for-employers or in our Payroll Real Time Information factsheet.

What tax do I have to deduct?

By using the calculators provided on HMRC’s website or equivalent software, you should be able to calculate the tax and NI due in respect of your employees.

The tax due for a particular employee is calculated by reference to their gross pay with a deduction for their tax free pay which reflects their particular circumstances (using their coding notice and the pay date). The remainder of the pay is subject to tax and this is calculated using the Basic PAYE tools or software.

Tax is generally calculated on a cumulative basis, looking at the individual’s circumstances for the tax year to date.

What about NI?

NI is payable by the employee and the employer on the employee’s gross pay for a particular tax week or month and is calculated on a non cumulative basis. The NI can be calculated using the HMRC Basic PAYE tools or equivalent software.

When does the tax and NI have to be paid to HMRC?

The tax and NI should be paid to HMRC by the 19th of the month following the payment. Tax months run from the 6th to the 5th of the month, so if an employee was paid on 25 July (tax month being 6 July to 5 August) the tax and NI would need to be paid over to HMRC by 19th August.

Any employer can pay electronically, if they wish, taking advantage of the cleared electronic payment date of 22nd as opposed to the usual 19th.

Employers whose average monthly payments are less than £1,500 are allowed to pay quarterly rather than monthly.

Large employers, with more than 250 employees, must pay tax and other deductions electronically.

Forms you will need to complete

You will need to complete the following forms or maintain the equivalent digital records:

• P11 Deductions working sheet
  This form (or a computer generated equivalent) must be maintained for each employee. It details their pay and deductions for each week or month of the tax year.
• P60 End of year summary
  This form has to be completed for and given to all employees employed in a tax year.
• P45 Details of employee leaving
  This form needs to be given to any employee who leaves and details the earnings and tax paid so far in the tax year. New employees should let you have the form from their previous employer.
• Starter Checklist
  When a new employee starts you will need to advise HMRC so that you can pay them under RTI. Some of the necessary information may be obtained from the P45 if the employee has one from a previous job.

Penalties

HMRC impose penalties on employers who fail to:

• make the online submissions on time
• pay the liabilities on time
• keep the necessary records
• operate PAYE or NI correctly
• make the correct statutory payments
• provide HMRC or the employees with the relevant forms on time.

It is important that employers comply with all the regulations.

How we can help

The operation of PAYE can be a difficult and time consuming procedure for those in business. We will be happy to show you how to operate PAYE correctly, offer ongoing advice on particular issues, or to carry out your payroll for you so please do contact us.

National Insurance

National insurance contributions (NICs) are essentially a tax on earned income. The NICs regime divides income into different classes: Class 1 contributions are payable on earnings from employment, while the profits of the self-employed are liable to Class 2 and 4 contributions.

National insurance is often overlooked yet it is the largest source of government revenue after income tax.

We highlight below the areas you need to consider and identify some of the potential problems. Please contact us for further specific advice.

Scope of NICs

Employees

Employees are liable to pay Class 1 NIC on their earnings. In addition a further secondary contribution is due from the employer.

For 2015/16 employee contributions are only due when earnings exceed a ‘primary threshold’ of £155 per week. The amount payable is 12% of the earnings above £155 up to earnings of £815 a week. In addition there is a further 2% charge on weekly earnings above £815. The equivalent thresholds are £153 and £805 for 2014/15.

Secondary contributions are due from the employer of 13.8% of earnings above the ‘secondary threshold’ of £156 per week for 2014/15 (£153 for 2014/15). There is no upper limit on the employer’s payments.

Employer NIC for the under 21s

From 6 April 2015 employer NIC for those under the age of 21 are reduced from the normal rate of 13.8% to 0%. For the 0% rate to apply the employee will need to be under 21 when the earnings are paid.

This exemption will not apply to earnings above the Upper Secondary Threshold (UST) in a pay period. The UST is a new term for this new NIC exemption. It is set at the same amount as the Upper Earnings Limit, which is the amount at which employees’ NIC fall from 12% to 2%. The weekly UST is £815 for 2015/16 which is equivalent to £42,385 per annum. Employers will be liable to 13.8% NIC beyond this limit. The employee will still be liable to pay employee national insurance contributions.

Benefits in kind

Employers providing benefits such as company cars for employees have a further NIC liability under Class 1A. Contributions are payable on the amount charged to income tax as a taxable benefit.

Most benefits are subject to employer’s NI. The current rate of Class 1A is the same as the employer’s secondary contribution rate of 13.8% for benefits provided.

The self-employed

NICs are due from the self-employed as follows:

• flat rate contribution (Class 2)
• variable amount based on the taxable profits of the business (Class 4).

Class 2 contributions are currently paid by direct debit at a rate of £2.80 per week for 2015/16 (£2.75 for 2014/15). Class 4 contributions are collected with the income tax liability payable on the profits of the business.

For 2015/16 Class 4 is payable at 9% on profits between £8,060 and £42,385. In addition there is a further 2% on profits above £42,385. The equivalent thresholds are £7,956 and £41,865 for 2014/15.

Voluntary contributions

Flat rate voluntary contributions are payable under Class 3 of £14.10 per week for 2015/16. The equivalent thresholds are £13.90 per week for 2014/15. They give an entitlement to basic retirement pension and may be paid by someone not liable for other contributions in order to maintain a full NICs record.

National Insurance – £2,000 employment allowance

The Employment Allowance of up to £2,000 per year was introduced from 6 April 2014 and is available to many employers and can be offset against their employer Class 1 National Insurance Contributions (NIC) liability.

There are some exceptions for employer Class 1 liabilities including liabilities arising from:

• a person who is employed (wholly or partly) for purposes connected with the employer’s personal, family or household affairs
• the carrying out of functions either wholly or mainly of a public nature (unless charitable status applies), for example NHS services and General Practitioner services
• employer contributions deemed to arise under IR35 for personal service companies.

From April 2015 the availability of the allowance is extended to those employing care and support workers.

There are also rules to limit the employment allowance to a total of £2,000 where there are ‘connected’ employers. For example, two companies are connected with each other if one company controls the other company.

The allowance is limited to the employer Class 1 NIC liability if that is less than £2,000.

The allowance is claimed as part of the normal payroll process. The employer’s payment of PAYE and NIC is reduced each month to the extent it includes an employer Class 1 NIC liability until the £2,000 limit has been reached.

NIC for apprentices under 25

The government will abolish employer NIC up to the upper earnings limit for apprentices aged under 25. This will come into effect from 6 April 2016.

Class 3A Voluntary National Insurance

From October 2015 a new class of voluntary NIC (Class 3A) will be introduced that gives those who reach State Pension age before 6 April 2016 an opportunity to boost their Additional State Pension.

The Government expects that Class 3A will give pensioners an option to top up their pension in a way that will protect them from inflation and offer protection to surviving spouses. In particular, it could help women, and those who have been self-employed, who tend to have low Additional Pension entitlement. The top up will be available to those who reach State Pension Age before 6 April 2016 including those who have already started to draw their state pension.

Potential problems

Time of payment of contributions

Class 1 contributions are payable at the same time as PAYE ie monthly. Class 1A contributions are not due until 19 July (22nd for cleared electronic payment) after the tax year in which the benefits were provided.

It is therefore important to distinguish between earnings and benefits.

Earnings

Class 1 earnings will not always be the same as those for income tax. Earnings for NI purposes include:

• salaries and wages
• bonuses, commissions and fees
• holiday pay
• certain termination payments.

Problems may be encountered in relation to the treatment of:

• expense payments
• benefits.

Expense payments will generally be outside the scope of NI where they are specific payments in relation to identifiable business expenses. Round sum allowances give rise to a NI liability.

In general benefits are not liable to Class 1 NICs. There are however some important exceptions including:

• most vouchers
• stocks and shares
• other assets which can be readily converted into cash
• the payment of an employee’s liability by an employer.

Directors

Directors are employees and must pay Class 1 NICs. However directorships can give rise to specific NIC problems. For example:

• directors may have more than one directorship
• fees and bonuses are subject to NICs when they are voted or paid whichever is the earlier
• directors’ loan accounts where overdrawn can give rise to a NIC liability.

We can advise on the position in any specific circumstances.

Employed or self-employed

The NICs liability for an employee is higher than for a self-employed individual with profits of an equivalent amount. Hence there is an incentive to claim to be self-employed rather than employed.

Are you employed or self-employed? How can you tell? In practice it can be a complex area and there may be some situations where the answer is not clear.

In general terms the existence of the following factors would tend to suggest employment rather than self-employment:

• the ‘employer’ is obliged to offer work and the ‘employee’ is obliged to accept it
• a ‘master/servant’ relationship exists
• the job performed is an integral part of the business
• there is no financial risk for the ‘employee’.

It is important to seek professional advice at an early stage and in any case prior to obtaining a written ruling from HMRC.

If HMRC discover that someone has been wrongly treated as self-employed, they will re-categorise them as employed and are likely to seek to recover arrears of contributions from the employer.

Enforcement

HMRC carry out compliance visits in an attempt to identify and collect arrears of NICs. They may ask to see the records supporting any payments made.

HMRC have the power to collect any additional NICs that may be due for both current and prior years. Any arrears may be subject to interest and penalties.

Please contact us for advice on NICs compliance and ways to minimise the effect of a HMRC visit.

How we can help

Whether you are an employer or employee, employed or self-employed, awareness of NICs matters is vital.

HMRC have wide enforcement powers and anti-avoidance legislation available to them. Consequently it is important to ensure that professional advice is sought so that all compliance matters are properly dealt with.

We would be delighted to advise on any compliance matters relevant to your own circumstances so please contact us.