How your imminent self-assessment is affected by your set-up

With the starting pistol of 2018 now well and truly fired, countless contractors are finding themselves staring down the barrel of another self-assessment deadline -- and it could trigger taxing times if you’re not armed with the right resources or know-how, writes Mike Parkes, technical director of GoSimple Software.

That’s partly because of a one-off this January from HMRC. From this coming Saturday (January 13th – so roughly two weeks before the January 31st deadline), the tax authority says you will no longer be able to use your personal credit card to pay your self-assessment bill.

It’s also because of complications that are ingrained in the self-assessment system. There’s unfortunately not one set of hoops for every contractor or consultant to jump through. So what you’re going to focus on in compiling your self-assessment before the 31st as an umbrella company worker, is NOT what you’ll likely focus on if you’re a Personal Service Company (PSC).

And as a hefty chunk of the latter have become the former due to the April 2017 changes to IR35 in the public sector, it’s going to be a step into the unknown for many. Oh, and if you’re freelance consulting as a sole trader, there’s a different set of tax-self-assessing hoops for you too!

I’m an umbrella contractor, get me out of this confusion!

The 2016/17 financial year is subject to a change in HMRC expenses rules. Whereas umbrella workers once had the luxury of claiming tax back on their subsistence and travel payments, this is now a lot harder to prove.

HMRC stipulates that its recently introduced T&S legislation can only be escaped by umbrella users who are outside SDC (Supervision, Direction or Control). You can read about the specifics of SDC here – yet it refers, broadly, to the amount of power that the client (and potentially other contractual parties) can exert over you and how you work.

If you believe SDC does NOT apply to you, evidence of expenditure AND your reasoning must be shown.

Evidence may include a signed agreement by the head of the company; the payroll manager, or additional parties (such as a contracted project manager) stating that you are not subject to Supervision, Direction or Control (or the right of SDC).

However, bear in mind this written submission may not be sufficient for HMRC, and they might wish to review how you work on a day-to-day basis. The onus is on the contractor to prove that SDC does not apply. We would advise that certainty, and a good amount of evidence, is essential when you make a claim this month for your travel and subsistence.

I’m a sole trader, get me out of this confusion!

As a sole trader, you may be liable to pay Class 2 and Class 4 National Insurance.

Class 2 contributions are charged at a rate of £2.80 per week when annual profits are over £5.965; Class 4 National Insurance is a 9% charge on profits between £8,060 to £43,000, plus 2% for any profits over that threshold. However, Class 2 NI will be abolished from 2018, so this could be the last time you have to pay it!

There’s a possibility you’re exempt from both Class 2 and Class 4 National Insurance if you are over the age of 65. You may also pay a lower level of Class 4 if you are in receipt of income from an employment where you also pay Class 1 NI.

Additionally, it’s worth factoring in that, should you have losses from your self-employment, there might be a chance to utilise them for a reduction in your overall tax liability.

For instance, you could have self-employed sales of £20,000 in 2016/17, yet spent £25,000 on expenses, resulting in a net loss of £5,000. There are several options for how to utilise the losses – many of them are helpfully outlined by the Low Incomes Tax Reform Group.

I’m a Personal Service Company, get me out of this confusion!

IR35 is something of a minefield for contractors. HMRC seems to be constantly challenging PSCs over their status.

However, if you are outside IR35, a PSC enables you to extract profits in a tax-efficient manner. This is achieved by paying a small salary, followed by dividend payments (which do not attract NI contributions). But be aware, the benefit is being eroded.

For 2016/17, only the first £5,000 of dividends received are ‘tax-free’ in the hands of the recipient. Amounts above £5,000 will be subject to a tax charge, designed to reduce the tax gap, based on the following rates:

Basic rate: 7.5%

Higher rate: 32.5%

Additional rate: 38.1%

Paying your tax bill within the next 20 days

Once you've filed your self-assessment, you can pay your tax bill via the gov.uk website. Bear in mind that online services may be slow during busy periods. If you're worried about last minute submissions or you're experiencing any issues, check for problems or times the service won’t be available.

As mentioned at the outset, it's also important to understand that you will no longer be able to pay your tax bill with a personal credit card from this Saturday -- January 13th 2018. Also due to how HMRC is choosing to reflect a new directive, you won’t be able to pay the Revenue any stamp duty, VAT or corporation tax by personal credit from the 13th either.

If personal credit card was your intended payment method this self-assessment season, the onus is on you to pay before Saturday. Alternatively, do what HMRC says and get in touch with its officials because “depending on the type of tax you owe,” the department says it may be able to agree a protected payment.

Final thoughts

As you can see, self-assessment tax returns are never a cut-and-dried affair. Quite apart from the penalty regime in place for those who miss the tax deadline, this January the returns process is even stricter thanks to the ban on a popular payment method. Do note however, there are other ways to pay including business credit card.

The process also depends heavily on your structure as a freelance contractor. Fortunately, software like ours exists to easily assess and organise what you owe, whatever structure you’ve adopted. We think this helps towards making hassle-free tax declarations and, just as importantly, quick-and-easy entitlements to tax breaks -- something every contractor who’s eligible can’t afford to miss between now and the 31st.