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Four tax issues for contractors to be aware of

Liverpool is enjoying a surge of new SMEs and startups, but all contractors need to be aware of tax issues that may affect them. Contractor accountants in Liverpool will be able to deal with all these issues for them, but it helps to know what they are.

1. Section 660

Section 660 deals with situations where income given to one person is passed on to another. This is often referred to as a “settlement”.

An example where contractors have used this principle is when they set up two companies with their partners and transferred some of their income to the other company via dividends to non-working individuals.

HMRC believes that this arrangement is designed to evade tax, and can look at the accounts for the past six years and send a large tax bill to people who are swerving tax in this way.

If you are a contractor that has been paying money as dividends to a lower rate paying partner when they are a higher rate taxpayer, then it is important to get advice from an accountant who will help you deal with HMRC

2. IR35

IR35 is legislation that is designed to stop tax avoidance by workers who supply services to companies via an intermediary company, but who would be classed as an employee if they did not use the company. HMRC regards these as ‘disguised employees’. Changing the status to an employee can result in paying higher tax.

Genuine contractors, freelancers and consultants who have a legitimate business should not be affected by IR35. However, to make sure, consult a contractor accountant,

3. Childcare

Many contractors know most of the items and expenses that they can claim against their tax liability, but not everyone knows that childcare costs can be claimed for.

Tax rule changes in 2005 made childcare vouchers non-taxable. According to accountant Claire Jolly:

“Both contractors employed by their own limited company and umbrella company contractors can qualify for childcare vouchers. Yet many contractors with families don’t take advantage of this valuable tax break because the scheme isn’t widely publicised.”

Vouchers up to the value of £55 per week are tax free. To qualify, the child or stepchild must be maintained in full or part by the contractor or employee, and be resident with them.

4. Avoidance and evasion

Tax avoidance is the term for legal strategies for reducing tax. These can range from pension investing to offshore tax avoidance schemes. Some of them are controversial, but your contractor accountants can advise on the safe and worthwhile tax avoidance schemes.

Tax evasion, on the other hand, is illegal and no reputable accountant will advise you to do this.

Sometimes, tax avoidance schemes are declared invalid by HMRC and are shut down. The HMRC may claim back tax for the tax avoided.

Contractors need to be aware of any risks before using tax avoidance schemes. An accountant will be able to advise on this.

Tax is complicated,which is why it helps to use a contractor accountant in Liverpool and focus on earning a living, rather than tax issues.

Posted by Peter
March 4, 2019

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