A&C Weekly Post W/C 14/10/2013

BUSINESS ENTITY TESTS

If you are a contractor or in business providing your ‘personal services’ through a limited company then you may be aware of IR35.  If not you should be!

HMRC has begun the process of overhauling its operation of the IR35 regime for personal services companies with new guidance that sets out some basic risk factors that will affect a contractor’s chances of being investigated.   The overhaul may mean an increase in IR35 investigations.

HMRC said the tests are designed to build up a picture of how a contractor’s business works and how they provide their services. The 12 tests and their scores include:

• Business premises test – Does the business own or rent business premises separately from the contractor’s home or end client’s premises? (10 points if yes)
• PII test – Does the contractor need professional indemnity insurance? (2 points if yes)
• Efficiency test – Has the business had the opportunity in the past two years to increase its revenue by working more efficiently? (10 points if yes)
• Assistance test – Does the business employ any workers who bring in at least 25% of the yearly turnover? (35 points if yes)
• Advertising test – Has the business spent over £1,200 on advertising in the past year; entertainment does not count as advertising (2 points if yes)
• Previous PAYE test – During the past year, has the end client engaged you with no major changes to your working arrangements (Minus 15 points if yes)
• Business plan test – Does your business have a business plan with a regularly updated cash flow forecast, and does it have a business bank account, identified by the bank as such and separate from your personal account? (1 point if yes to both parts of the question)
• Repair at own expense test – Would the business have to bear the cost of rectifying any mistakes? (4 points if yes)
• Client risk test – During the past two years, has the business been unable to recover payment amounting to more than 10% of yearly turnover? (10 points if yes)
• Billing test – Does the business invoice for work carried out before being paid and negotiate payment terms? (2 points if yes)
• Right of substitution test – Does the business have the right to send a substitute? (2 points if yes)
• Actual substitution test – Has the business hired anyone in the previous two years to do the work it has taken on? (20 points if yes)

The scores used to assess contractors’ risk profiles are as follows:

Less than 10 points        High risk
10-20 points                 Medium risk
More than 20 points       Low risk

The HMRC guide explains that the tests are not set in stone, and are an extension of the risk-based approach to extends to all of its investigations. They already undertake risk assessments of who is most likely for investigation. The business entity tests are something you can use to self-assess to see how you score by their internal rating. But they aren’t telling us what the detailed risk criteria are because of the fear people will arrange their affairs accordingly.

The business entity tests are just a diagnostic tool. The actual application of IR35 will always come down to employment status factors that must be tested against case law going back to the 1968 Ready Mixed Concrete decision.

He explained that the new operational approach to IR35 will involve:

• Strengthening specialist teams, to reduce the length of time an IR35 enquiry takes.
• Tighter risk assessment process to select the highest risk cases for review.
• At the start of an enquiry, HMRC will take into account a contractor’s reasons why they think IR35 does not apply, along with evidence to support their view, rather than asking for a long list of documents.
• Beefed up helpline/review service for contractors staffed with specialist staff who can offer informed opinions on IR35.

And finally – BUDGET 2013 impact on IR35

• The Government will make a small amendment to the existing IR35 provisions to equalise the tax and NICs treatment of office holders, and put beyond doubt that the legislation applies to office holders for tax purposes.

Please give paul a call on 0161 962 1855 if you would like to discuss the above

A number of clients have asked us if they can get tax relief on the costs of meals they have incurred whilst conducting their business.  This is a grey area and each case needs to be considered on its own merits.  I now detail the guidance that is available to help you decide.  If you want to discuss further then please call paul on 0161 962 1855

Initial standpoint
The cost of food, drink and accommodation is not in general an expense incurred wholly and exclusively for business purposes, since everyone must eat in order to live. They are (either wholly or partly) normal costs of living incurred by all and not as a result of trading and they cannot be apportioned to allow extra costs incurred from the necessity of lunching away from home or the place of business. The attempt to apportion betraying the essential duality of purpose.

However by HM Revenue and Customs ( i.e the Tax Office ) concession
In calculating the profits of a trade, a deduction is allowed for any reasonable expenses incurred on food or drink ( e.g. breakfast, lunch and evening meals ) for consumption by the trader at a place to which the trader travels in the course of carrying on the trade, or while travelling to a place in the course of carrying on the trade, if

• at the time the expenses are incurred on the food or drink, the trade is by its nature itinerant, or
• the trader does not travel to the place more than occasionally in the course of carrying on the trade and either—

the travel in connection with which the expenses are incurred on the food or drink is undertaken otherwise than as part of the trader’s normal pattern of travel in the course of carrying on the trade, or

the trader does not have such a normal pattern of travel.”.

Our thoughts – determining whether business travel has occurred first!

It is first necessary to determine if business travel has occurred.  I trust you can appreciate that any such claims will only succeed based on the facts of each case and we and you cannot, therefore. be 100% sure each claim will be successful. This is an area where the Tax Office do challenge claims.  It is often necessary to rely on case law to help decide the outcome of any claims.  Relevant cases are:-

Horton v Young [1971] 47TC60

A subcontracting bricklayer assessed as self employed claimed travelling from work to site as an expense.  The bricklayers tools were kept at home and his books were written up at home.  In addition, the bricklayer held meetings at his house with contractors to establish fees.  The travel included daily travel to building sites, picking up other bricklayers and inter-site travel.  The daily travel varied between 5 and 55 miles.  Each project would take no more than three weeks.  The bricklayer claimed the whole expense, the Revenue wanted to only allow the inter-site travel.  It was held that whole expense was allowable as it satisfied the wholly and exclusively rule.

Newsom v Robertson [1952] 33TC452

The taxpayer carried out professional work both in their office and at their home did not change the essential private nature of the journey between the two. Notwithstanding that the barrister in Newsom undertook significant work at home, that was no more the base of his operations than was the train that took him between home and chambers.

Powell v Jackman [2004]

Powell operated a milk round under a franchise agreement with Unigate. Every day he travelled from his home to a depot owned by Unigate to collect his milk float and the milk which he delivered on his designated round. There were no office facilities for franchisees at the depot. Unigate would object if a franchisee wished to do all his office work at the depot.Powell claimed to deduct from the profits of his trade the expenditure which he incurred in travelling every day from his home to the depot. The Revenue refused the claim.

Family or owner-managed companies

Travelling expenses are allowed where they cover the full cost of necessary travel in the performance of the duties, and the full cost of travel to/from a place where necessary duties are performed. For this purpose, ‘in the performance of the duties’ covers travel:

• to/from a place the employee has to attend; or
• to carry out duties at a ‘temporary workplace’; or
• after duties have commenced (necessary ‘on-the-job’ travel).

A ‘temporary workplace’ is a workplace where the employee goes only to perform a task of limited duration or other temporary purpose. This includes attendance for a continuous period likely to last not more than 24 months or where less than 40% of working time is spent. It does not include a permanent workplace under a fixed term appointment of less than 24 months.

A journey which is really ‘ordinary commuting’ cannot be made a business journey just by arranging a business appointment on route. The test is necessity to attend the particular place, rather than personal convenience of attending.

If you have you own limited company – Daily Benchmark Scale Rates are available for costs of meals incurred on business travel

The Tax Office has introduced an advisory system of benchmark scale rates which employers can use to make subsistence payments to employees who incur allowable business travel expenses free of tax and National Insurance contributions.

The advisory system only covers benchmark scale rates for day subsistence payments.

Description Amount (up to)

Breakfast rate                          £5

One meal (5 hour) rate             £5

Two meal (10 hour) rate          £10

Late evening meal rate £15

Breakfast rate – The rate may be paid where an employee leaves home earlier than usual and before 6.00 am and incurs a cost on breakfast taken away from his home after the qualifying journey has started. If an employee usually leaves before 6.00 am the breakfast rate does not apply.

Late evening meal rate – The rate may be paid where the employee has to work later than usual, finishes work after 8.00 pm having worked his normal day and has to buy a meal before the qualifying journey ends which he would usually have at home.

The breakfast and late evening meal rates are for use in exceptional circumstances only and are not intended for employees with regular early or late work patterns (see examples at EIM05232).

One meal (5 hour) rate – The rate may be paid where the employee has been undertaking qualifying travel for a period of at least 5 hours and has incurred the cost of a meal.

Two meal (10 hour) rate – The rate may be paid where the employee has been undertaking qualifying travel for a period of at least 10 hours and has incurred the cost of a meal or meals.

Benchmark scale rate payments must be limited to three meal rates on one day or 24 hour period. A meal is defined as a combination of food and drink and would take a normal dictionary meaning. Where employees are required to start early or finish late on a regular basis, the over 5 hour and 10 hour rate, whichever is applicable, can be paid provided that all the other qualifying rules are satisfied.

Qualifying conditions – Benchmark scale rates must only be used where all the qualifying conditions are met. The qualifying conditions are:

the travel must be in the performance of an employee’s duties or to a temporary place of work

the employee should be absent from his normal place of work or home for a continuous period in excess of five hours or ten hours

the employee should have incurred a cost on a meal (food and drink) after starting the journey

Overnight subsistence rate – A benchmark rate has not been set for overnight subsistence. It will still be necessary to agree a rate, if applicable, with the employer.

Staying with friends and family rate – A benchmark rate has not been set for a scale rate payment for staying with friends and family. Furthermore, HMRC no longer accepts that a scale rate payment for this purpose should be agreed with an employer as part of a dispensation. The travel rules still apply to actual costs of subsistence incurred while staying with friends and family

Finally, employees can make additional tax free claims for Personal Incidental Expenses re overnight night stays

The allowance applies to employees’ minor personal expenditure. The above figures represent the maximum daily amounts whilst on business-related activities. If exceeded the whole amount provided is taxable.

If you need any more help, please call paul on 0161 962 1855

Many thanks