Month: March 2020

Covid-19 Support For Freelancers

The details below are given in good faith based on the prevailing information as at 12.30pm on 27 Mar 2020.

1 of 3 Covid-19 Measures in General
2 of 3 Covid-19 Support For Freelancers
3 of 3 Covid-19 Bounce Back Loans

This report should be one big flow chart, but in order to make it fully accessible, a numbered list is more straight forward. Please follow the instructions line by line, and follow “go to” instructions as soon as you meet them. Stop at the first mention of “stop” that you come across.

Update 15 April 2020 – owing to recent changes in HMRC guidance, lines 1000 and 1010 have been renumbered and repositioned as lines 1033 and 1034.

1020 Do you have limited liability protection because you operate as a limited company?

1030 Yes – go to 3020

1033 Did your freelance work commence on 6 Apr 2019 or later?

1034 Yes – go to 7000

1040 Has your self employment (or partnership) income declined directly as a result of the Covid-19 crisis?

1050 No – go to 7000

1060 Take care with this double barrelled question, and check your tax return if you are unsure . . .

1070(a) Are you a partner in a traditional partnership and have a page P1 on your last tax return?
1070(b) Are you a sole trader with self employed accounts and a page SE1 on your last tax return?

1080 If you answered “no” and “no” go to 7000

1090 Annual income includes all earnings, all investment income and rent received etc. Is your self employed profit (or partnership share) less than 50% of your annual income?

1100 Yes – go to 7000

1110 Has your self employed trade (or partnership) ceased in 2019/20?

1120 Yes – go to 7000

1130 Will you (or but for the effects of the Covid-19 crisis, would you) continue to trade in 2020/21?

1140 No – go to 7000

1150 Work out the annual average of your net profit between 6 Apr 2016 and 5 Apr 2019 (or pro rata annual profit for businesses that commenced between those two dates). Is your annual average net profit greater than £50,000?

1170 Yes – go to 7000
1180 No – go to 2000

2000 Based on your response, you are eligible for support under the 26 Mar 2020 measures “for the self employed”. HMRC has this info already (from your tax returns) and will contact you. They have asked that you do not contact them. The plan is set out here and grants are expected to be paid in June 2020.

2010 From 13 May 2020 claims can be made here. Look for the “Start Now” button in the middle of the page. There’s also a big warning saying “You must make the claim yourself. Your tax agent or adviser must not claim on your behalf as this will trigger a fraud alert, and you will have to contact HMRC. This will cause a significant delay to you receiving your payment.“. Moreover, you will need the start date that HMRC sent to you by email, SMS or letter. They definitely don’t want to let accountants get involved for some reason!

2020 Stop

Update 15 April 2020 – owing to recent changes in HMRC guidance lines 3000 and 3010 have been renumbered and repositioned as lines 3033 and 3034.

3020 Do you have a proper contract of employment with your own company?

3030 No – go to 6000

3033 Does your company have a PAYE account with HMRC?

3034 No – go to 5000

3040 Has your company’s income declined directly as a result of the Covid-19 crisis?

3050 No – go to 5000

Update 15 April 2020 – owing to recent changes in HMRC guidance lines 3053 and 3054 have been added.

Update 17 April 2020 – HMRC guidance has changed (again) – different conditions for qualifying employees have been added to a new line 3053.

3053 Were you on your employer/company PAYE records on 28 Feb 2020? Friday 28 is the key date, even though there were 29 days in February in 2020. If you officially left before 28 Feb or officially started after 28 Feb, then you should answer no.

3053 Were you on your employer/company PAYE records on 19 Mar 2020? If you officially left before 19 Mar or officially started after 19 Mar, then you should answer no. If your first ever payslip from this employer is dated after 19 Mar 2020 then you should answer no. The criteria require that HMRC was notified of this employment via any payroll RTI submission by 19 Mar 2020 at the latest.

3054 No – go to 5000

3060 Have you been laid off with no work (officially termed “furloughed”) owing to the Covid-19 crisis?

3040 Yes – go to 4000
3050 No – go to 5000

4000 Based on your response, your employer is eligible for support under the 18 Mar 2020 “Job Retention Scheme” and ultimately you should receive some Government funded income through your employer’s payroll system. It is the responsibility of the employer to make a claim to HMRC using an online tool which they say is due to be available “at the end of April 2020”. More details are given here. Office holders should note that this applies only to salary and not to dividend income.

4010 Stop

5000 No support under the 18 Mar 2020 “Coronavirus Job Retention Scheme”.

5010 Stop

6000 As a director, your salary is usually paid to you for the responsibility involved in “holding the office of director” and not for “work done”. This causes two issues.

6010 A director cannot be furloughed according to the Companies Act 2006. The Act does not say that exactly, but the combination of rules means that a director is always active on company affairs. Update 11 April 2020 – HMRC guidance has been adjusted, go to 6080.

Update 11 April 2020 strike out lines 6020 through 6070

6020 Furthermore, a director is not an employee in a strict sense even though the words employee and employment are often used in everyday dialogue about directors. There is no definition of “employee” in Statute. Sometimes case law helps, but there is still no definition of “employee”.

6030 What is clear is that to qualify for support under the 18 Mar 2020 “Coronavirus Job Retention Scheme” the employee must be engaged to do work “under a contract of employment”. Unfortunately “holding the office of director” is not the same thing as “doing work” and you don’t need “a contract of employment” in order to hold an office.

6040 This Government web page has ignored these fine points of detail and professional bodies are seeking clarification from HMRC. To be honest, some of the dialogue on that page demonstrates clearly that the civil servants who authored it have no idea what the legal definition of “self employed” is!

6050 Arguably, this is just legalistic torture but the law is the key issue in all of our interactions with Government. It could be hoped that Rishi Sunak will soon be hauled back to announce further measures. The thing many people want to hear is something like “irrespective of the provisions of the Companies Act 2006, for the purposes of the Coronavirus Job Retention Scheme HMRC will permit directors without contracts of employment to be deemed as furloughed provided that all the other conditions of the Scheme are satisfied”.

6060 And then what would you get? Possibly your company will get 80% of your salary. And nothing extra on account of your dividend income. Go back now and look at line 4000 if you want to, but read the rules carefully, it’s about salary only.

6070 Unless Rishi Sunak suddenly reverses the Government’s attitude to freelancers who operate as small limited companies you currently stand to get nothing. Maybe there will be movement on directors’ salaries. A change of heart on dividend income is highly unlikely given that HMRC has previous form with the original IR35 legislation and later additions to those rules.

6080 Update 11 April 2020 – the desired text (at line 6050 above) has in effect been published here. Office holders may be entitled to claim JRS.

Update 15 April 2020 modify line 6090

6090 Go to 4000

6090 Go to 3033

6100 Stop

7000 No support under the 26 Mar 2020 measures “for the self employed”.

7010 Stop

Footnote

We know where Boris Johnson lives if you want to write to him.

Covid-19 Measures in General

Disclaimer

This report was published, in good faith, based on the prevailing information, at 1.00pm on 23 Mar 2020. The situation is changing on a daily basis and any updates to this report will be clearly marked with a date time stamp.

1 of 3 Covid-19 Measures in General
2 of 3 Covid-19 Support For Freelancers
3 of 3 Covid-19 Bounce Back Loans

Overview

The Government measures are designed to target employees and businesses which are directly affected by the Covid-19 issue. We can argue that we are all affected, but having had dealings with HMRC for 35+ years they can be tricky, and so we suggest that you keep evidence in case you need to (at a later date) show how you have been affected. That includes:

• Medical correspondence for those worst affected.
• Employer correspondence for those laid off.
• Business correspondence for those who experience a downturn.

Do not routinely delete those emails. If somebody cancels a piece of work (or worse) please keep a copy of that email for 6 years beyond the end of your trading year (or tax year).

VAT Registered Taxpayers

VAT due for quarters ended 29 Feb 2020 through to 30 Jun 2020 inclusive will not become due until 7 Aug 2020 at the earliest. This right is automatic and (Government says) no action needs to be taken. If you have VAT to pay, you can pay it on your normal due date if you wish, or hold on to the cash and pay on 7 Aug 2020. No interest will be charged. If you are due a VAT repayment these will be processed as normal.

If you pay quarterly VAT by Direct Debit and want to delay your payments then we recommend cancelling the Direct Debit now. We know from experience (foot-and-mouth disease in 2001 and the farming sector) that “this right is automatic” may not be enough to stop HMRC Direct Debit collections.

Apparently a further announcement is to be made which will allow accumulated VAT debts to be paid over time, and you are to be given until 5 Apr 2021 to bring things up to date.

Irrespective of actual payment dates, VAT returns must still be submitted within the correct time frames.

Mainstream Businesses

Most of the best measures that have been announced are contingent on you being a mainstream business, that is to say, one which:

• has commercial premises subject to business rates; and
• is eligible for either Small Business Rate Relief or Rural Rate Relief.

In these cases you will qualify for grants of up to £10,000 (originally the announcement was £3,000). Whichever local authority deals with your business rates will be in contact you and will automatically initiate the process for you.

All Businesses

Loan scheme – talk to your bank. The Government has agreed to underwrite 80% of any loan capital advanced by your bank under these emergency measures. Theoretically that makes you a lesser risk today that you were a few weeks ago. However, nothing really changes between you and the bank, your application still needs to be well founded and your repayments need to be affordable. The protection is for the bank in case your business goes bankrupt.

Employers and Employees

The Chancellor announced a new a grant from HMRC to employers to cover furloughed workers and keep people on payroll rather than laying them off. The coronavirus job retention scheme would pay up to 80% of employees’ salary to a maximum of £2,500 a month.

The job retention scheme will be backdated to 1 March, with no limit on the amount of funding, and The Chancellor stated that it will be open initially for “at least three months” but didn’t take off the table the option to extend the scheme for longer if necessary.

HMRC will implement a process to fund employers. However, HMRC is in the business of collecting tax and has less experience of handing out grants. The infrastructure to do this is currently a work in progress. Nobody knows when the first grants will be paid.

27 Mar 2019 12.30pm Update – strike out this heading – Self Employed Trade or Partnership

27 Mar 2019 12.30pm Update – new heading – All Self Assessment Cases

Self assessment tax instalments due on 31 Jul 2020 have been postponed, without interest etc, and will now become due on 31 Jan 2021. This is automatic and no action needs to be taken.

27 Mar 2019 12.30pm Update – strike out this para – Apparently you need to be in a self employed trade or be a partner in a traditional partnership to take advantage of this. That means (until we hear otherwise) that self assessment tax instalments due on 31 Jul 2020 on account of your rental income or dividend income, etc, are still due.

Freelance Limited Company

Other than claiming the 80% job retention scheme figure (see “employers” above) there are no specific provisions for small freelance limited companies.

27 Mar 2020 12.30pm update – even the eligibility for this 80% has been questioned by some legal experts. Please see this newer blogpost.

The Government is still addressing this issue and has called for submissions to made by 5pm GMT on 23 Mar 2020.

https://twitter.com/CommonsTreasury/status/1240620040803803136

Use the email address specified in that tweet and (in meaningful words) spell out precisely what you want The Cabinet Office to help with.

Other Resources

Well respected tax lecturer Giles Mooney has posted a 17 min video on YouTube:

Although we have covered key points above, clients of Proactive may be interested in the following sections:

• 10min02 – 10min40 – statutory sick pay
• 10min41 – 11min30 – the self employed
• 14min10 – 15min25 – loan guarantee
• 15min25 – 15min59 – claiming on business insurance

The Government Support for Business page is here:

https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses

The Coronavirus helpline: 0300 456 3565

This telephone number has been rebranded as the Coronavirus Helpline. It’s not a new service as some claim. It has been in existence for many years and is also known as the Business Support Helpline. As far as we know, it is mainly of use to taxpayers who wanted to negotiate “time to pay” arrangements.

Director shareholder payments 2020/21

This is a basic guide to the small salary big dividend method of rewarding yourself from your own company for the tax year ended 5 Apr 2021.

Your company is responsible tor maintaining a corporation tax reserve. Dividends can only be paid from the company’s post tax profit, so that means that the company tax reserve must stay in the company.

If you have no profit then you can pay no dividends. If most of your income is from dividends then you will need a personal income tax reserve as well. Keep corporate stuff corporate and personal stuff personal. Maintain two tax reserves properly and then you’ll never get a shock when it’s tax payment time.

Follow this system precisely. Ensure bank transactions between your company bank account and your personal bank account follow this system accurately. If it’s not right then HMRC may decide that PAYE tax and National Insurance is due on all of your personal income. You definitely do not want that to happen.

For this process to be legitimate you must be a director/shareholder of a UK limited company.

Your salary is paid to you for the responsibility involved in “holding the office of director” and not for “work done”.

All shareholders must receive dividends in direct proportion to their shareholding.

Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Other than salary, describe these amounts as “drawings” until the overall tax picture for the year is clear. The “dividend” is calculated later. Separate bank transfers are required in order to distinguish salary from drawings. In most cases that means setting up 4 separate payments at end of every calendar month. As Proactive does not hold any authorities on client bank accounts, it’s up to you to make the correct transfers at the correct time.

Basic rate taxpayers

For people whose monthly income does not exceed 4,165.

Basic rate taxpayers year ended
5 Apr 2021
Monthly figures
Salary 732
Primary “Tax Free” drawings (personal allowance) 309
Secondary “Tax Free” drawings (dividend rate band) 166
Tertiary drawings (max) liable to 7.5% tax 2958
Provided always that the monthly income does not total more than 4165
Put aside 7.5% of your tertiary drawings as a personal tax reserve.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 4,165 and 8,333.

Higher rate taxpayers – 40% year ended
5 Apr 2021
Monthly figures
Salary 732
Primary “Tax Free” drawings (personal allowance) 309
Secondary “Tax Free” drawings (dividend rate band) 166
Tertiary drawings liable to 7.5% tax 2958
Supplementary drawings (max) liable to 32.5% tax 4168
Provided always that the monthly income does not total more than 8333
Put aside 7.5% of your tertiary drawings as a personal tax reserve.
Also put aside 32.5% of your supplementary drawings as a personal tax reserve.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,333.

There are graduated changes for annual incomes between 100,000 and 150,000 and the 45% rate of income tax also kicks in.

Top rate taxpayers – 45% year ended
5 Apr 2021
Monthly figures
Salary 0
Primary “Tax Free” drawings (personal allowance) 0
Secondary “Tax Free” drawings (dividend rate band) 166
Tertiary drawings liable to 7.5% tax 2958
Supplementary drawings liable to 32.5% tax 5209
Additional drawings liable to 38.1% tax excess over 8,333.00
Put aside 7.5% of your tertiary drawings as a personal tax reserve.
Also put aside 32.5% of your supplementary drawings as a personal tax reserve.
And put aside 38.1% of your additional drawings as a personal tax reserve.

Is this legal?

Yes.

Lord Tomlin stated in the case of IRC vs Duke of Westminster (1936) 19 TC 490 every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.

The key thing is to keep this system in “order” and in compliance with the various Taxes Acts. If you deviate from the guidance above then you may find that your tax planning is not legal.