The main changes to the scheme will take place in 2016 and 2017 and it is thought that approximately 40,000 businesses will be affected.
The objectives of the changes are to make the scheme simpler to administer which will be achieved by allowing more sub-contractor businesses to achieve and maintain gross payment status.
This will vastly improve cashflow as 100% of the invoice will be payable with no stoppage of CIS tax. This may be a double edged sword as the tax will still have to be found when the accounts are prepared and the self-assessment tax return submitted.
There are two types of expenses, chargeable and non-chargeable.
Chargeable : These are claimed via your client and get paid to your umbrella company on top of your hours. They are tax free and are expenses that are incurred during working hours allowing you to fulfil your contract such as, travel and accommodation.
Non-chargeable : These are expenses that do not come back to you as cash but are deducted from the sum processed via the Umbrella company for tax purposes. For example, if you are due to be paid £1000 in salary and have £100 of expenses (such as mileage) then you only pay tax and NIC on the £900.
There is no definitive answer to this, it may depend upon how you wish to be perceived within the marketplace and the type of potential client you wish to attract. Many companies will only deal with other limited companies and not individuals.
The advantages to becoming limited, aside from the “prestige” associated with it are that are all personal assets are protected as the liability falls on the company and not the individual. The downfall to becoming limited are the higher costs associated with owning a business such as accountancy fees and insurance.
The main factor in determining this is control. In its simplest format a self-employed person works under a “contract for services” and an employee works under a “contract of service”.
HMRC will carry out a test for you to determine your status but there are a few guidelines that you can use.
Can you walk away from a contract if you choose to do so ?
Do you negotiate a price for the job and bear your own expenses and overheads ?
Is there an expectation of further work ?
Do you have the right of control over what is to be done or does the client have the right to move from you from job to job ?
The main factors surrounding the set up of a partnership are those imposed by HMRC. You must notify them of your intention to become a partnership and then both parties must be registered as self-employed.
Up until the date the partnership started a set of accounts must be kept by each individual which must be declared as self-employed income. From the date of the partnership the income and expenditure will be recorded on a partnership return and the resulting profit will be split between the partners and declared on their individual self assessment return. Each partner is responsible for their own tax and Class 2 NIC.
This was introduced in 2002 and is available to small business and sole traders with a turnover of less than £150,000 per year. It operates by you paying a percentage of your turnover (between 4% and 14.5%) to HMRC instead of the difference between sales and purchases.
It works best for those who have few expenses compared to their income.
Factoring can provided a short term boost to cashflow and is good if the business is short of working capital.
It can be cost effective in outsourcing your sales ledger leaving your time free to run the business but in order for it to be truly effective the business needs to be well run with few queries and disputes.
It can help with the financial and resource planning of the business.
The disadvantages are that profit margins are reduced on the sales due to the costs payable to the factoring company. Factoring companies also like to try and influence how the business is run and this could cause friction if it is not in line with your ideas.
Factoring is also costly to get out off as any monies that have been advanced need to be repaid regardless of whether the client has paid or not. This means that your business needs to be cash rich to end the agreement which can be a problem if the reason you decided to factor in the first place was for a boost of working capital.
In the UK the rate of corporation tax currently stands at 20% on profits below £300,000, however the April 2016 budget saw this amount reduced to 19% in 2017 and 18% in 2020.
The profit that is used to calculate the corporation tax is after any allowable business expenses have been deducted and other reliefs have been applied such as capital allowances and research and development.
However, to keep things simple it would be good to try and set aside 20% and this will become payable 9 months after the last day of your accounting year end.
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