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| CURRENT SECTION :: IR35 / IR591 | UK's most visited IT Contractor Site - 250k unique visitors March 2008 |
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This article was written by Ralph Elliot-King from MAAP. For personal services companies with a financial year ending on the 31 March 2002, there are precious few tax planning tips one can give to minimise the impact of IR35. Of the few tips that do apply, in order to be effective they must all be carried out before the end of this month. So you have little time left to consult your own accountant and make sure you are properly prepared. Point 1: Billings Consider billing your March 2002 work a little later than usual, to ensure that your client does not pay you until after the 5 April 2002. The IR35 taxation is calculated on a cash received, fiscal year basis. By delaying payment until after 5 April 2002, you effectively take March's billings out of this year's IR35 calculation, and defer it back to 2003. Of course what goes around, comes around - so remember you need to take into account any invoices dating back to March 2001, that were paid after 5 April 2001. Point 2: Salary Bonus? It is worth considering the benefits of neutralising any deemed payment that may arise on the 5th April 2002 by paying a salary bonus in March. If a deemed payment does arise, your company will have to pay PAYE and NI on this nominal amount by the 19 April 2002. To make matters worse, if your financial year ends on the 31 March 2002, you will not receive corporation tax relief on the PAYE and NI paid over in respect of the deemed payment until the following year. This has the effect, that in addition to paying the extra IR35 payroll tax this April, you will also end up paying even more corporation tax on or before the 1 January 2003. Although you will eventually get the tax relief in the following year, your cash flow from January 2003 will certainly suffer. On the other hand, if you work out what the potential deemed payment may be - your company may have enough funds to pay you whatever salary bonus is required to neutralise the deemed payment. The payment of this bonus has the advantage of bringing the tax relief into the current year's corporation tax computation. Your company will be able to offset the costs of your salary bonus and related employer's National Insurance against the corporation tax payable on 1 January 2003. Whether you pay this salary bonus or not, the same amount of PAYE and NI will fall due for payment on or before the 19 April 2002 anyway. It therefore makes a great deal of sense to consider the advantages of paying a bonus before the 31 March 2002. It all comes down to whether there is enough money or credit in the company's bank accounts to pay it. Point 3: Pensions You may find it beneficial to have your company make a contribution to your pension fund before the end of the month if that is your year-end, or by 5 April 2002 in other cases. Such a payment reduces the potential IR35 deemed payment pound for pound. To be effective you have to make sure it is the company, not you personally, that makes the payment directly into your pension fund on your behalf. Whether your company should commit to making additional pension contributions has to be examined on a case by case basis. Apart from the obvious maximum funding limits based on your net relevant earnings, there are other complex tax issues that surround this decision. You will certainly need to take professional advice. If you wish to explore the pension route to reducing your IR35 tax liability, contact your financial services adviser immediately. You have little time left to make the necessary arrangements. Point 4: Compliance Inspections It should come as no surprise to learn that personal services companies are much more likely to be targeted by the Inland Revenue for early compliance inspection visits. If you haven't done so already, you should consider taking out tax investigation protection insurance. Many support organisations, including your accountant should be able to give advice, or even arrange cover. The insurance safeguards you against the cost of obtaining professional services that may arise from the Inland Revenue deciding to open an investigation in to your business affairs. At the moment such cover is remarkable inexpensive. Especially when you consider the high risk associated with IR35 compliance. I suspect premiums may soon rise in line with other professional indemnity insurances. So if you are going to jump on to this bandwagon, do it sooner rather than later. Click here for Part 2. Mar 18, 2002 Email this article Printer friendly page Previous Page
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