Director shareholder payments 2021/22

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 2022.

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 4,188.

Basic rate taxpayers year ended 5 Apr 2022
Monthly figures
Salary 736
Primary “Tax Free” drawings (personal allowance) 311
Secondary “Tax Free” drawings (dividend rate band) 166
Tertiary drawings (max) liable to 7.5% tax 2975

Provided always that the monthly income does not total more than 4188
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 4,188 and 8,333.

Higher rate taxpayers – 40% year ended 5 Apr 2022
Monthly figures
Salary 736
Primary “Tax Free” drawings (personal allowance) 311
Secondary “Tax Free” drawings (dividend rate band) 166
Tertiary drawings liable to 7.5% tax 2975
Supplementary drawings (max) liable to 32.5% tax 4145

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 2022
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 2975
Supplementary drawings liable to 32.5% tax 5192

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.

How much can I draw?

Director/shareholders of UK limited companies tend to reward themselves will a small salary and a dividend. The recommended system for 2021/22 is set out here.

However, in order to get the calculations absolutely right you need to know how much profit the company has, and you probably won’t know that until after the year end accounts have been done. So, part way through a trading year we don’t call these figures “dividends” and we suggest that you take “drawings” in the expectation that a dividend can be declared.

As a rule of thumb you can calculate your drawings using this method. It ignores some fine detail of accounting, but it will get you through to the year end.

Set up a separate company bank account for your company to hold its tax reserve. That’s for corporation tax and (if you’re VAT registered it’s also) for VAT. One savings account is enough.

When a client pays you, put aside 20% of that fee as a provision for corporation tax. Also put aside all of the VAT you charged on that invoice. OK, that ignores allowable expenses and things, and it will be a little too much, but it’s better to have too much tax reserve than too little.

What are you left with, net of corporation tax and net of VAT? Maybe knock off something for expenses as well. Then you have some idea of what the company can afford from its “distributable” profits.

Use that notional figure, and that’s the maximum drawings you can take.

At the end of each quarter, when the bookkeeping reports (and the VAT reports) are done, have a look at your balance sheet. It shows you a forecast of the corporation tax (and the VAT), along with the bank balances on that quarter end date.

In the example above, the tax reserve of £9,000 is £505 more than the total tax forecast of £8,495. This is a good thing.

To the extent that your savings account balance (on the quarter end date) exceeds your creditors balance (on the quarter end date), then you have over provided for tax. If you want to, you can take that excess and move it back to the current account to employ the funds usefully in the business. Or if it’s the other way around, please take steps to restore your tax reserve to its rightful level.

Over time, you might want to adjust that 20% rule down to 19% or 18%. It will take several quarters before you get a feel for what is the right percentage in the case of your own company, and it will depend on having like for like activity each quarter. You’ll know when you hit the right percentage when, every quarter, the excess/deficit on the savings account is consistently small enough to make little difference.

The balance sheet may also show you what the maximum available amount of “distributable” profit is (as long as your name does not already appear under creditors). Assuming that a director’s name does not feature on the balance sheet, then the example above shows that £1,554 is available. That’s just above the bottom line “total funds” figure, and it’s what the company is worth once you ignore the “share capital” line.

Do not draw out more than the company can afford. If you do, then HMRC will seek retribution, and will seek penal levels of tax. We will tell you every quarter when you’re in the danger zone.

I have too much profit, what can I do about it?

This is a fantastic question and we hear it from time to time:

“I have too much profit, what can I do about it?”

It is however a coded version of something else, and it can mean either:

• I don’t have enough profit. I know that, because I have drawn all the money out of my business and I have nothing left to pay my tax bill (and so you must magically engineer a smaller profit for me and a smaller tax bill)!

• I have ridiculously large sums of money floating around, even after paying all my tax bills, I have the home of my dreams, the car of my dreams and I fly everywhere first class, and now I’m in danger of taking up a ridiculously expensive hobby like round-the-world yacht racing!

Depending on which of those statements is the closer to the truth, then the solution is either:

• Make more profit and manage your tax reserve on a weekly or monthly basis. In the short term, borrow some money so that you can pay your tax bill. See Zopa for more details of how you can borrow modest amounts of cash at reasonable rates. We are not in the business of engineering false sets of accounts.

• Become a business angel and invest! There are entry level ways of doing this, even if the pool of cash is as low as £1,000. See Zopa for more details of how you can become an ultra cautious business angel.

If you would like to make more profit, then you need good business advice. Call us and ask about business coaching – we will start by asking you for a copy of your business plan.

Or you can start by looking at Don’t Read My Blog.

Independent Financial Advisors

Proactive is not authorised to provide financial advice, pension advice, mortgage advice, nor to make recommendations about products or companies. We can advise on the tax implications of your intention to act on any advice which you may have received.

The financial advisors you meet are in the business of running a business. They may be trying to find you a good deal, but more importantly they will be trying to find themselves a good deal. The accounting forums are littered with horror stories of advisors putting people into the wrong products, purely because that product gives the advisor a better commission. Additionally, some IFAs tend not to understand the Inheritance Tax implications of products and strategies they advocate.

They’re not doing this for your benefit, they’re doing it for their benefit.

The accountancy profession does not hold IFAs in high esteem. The running joke is “What does IFA stand for? Idiot Financial Advisor”. At Proactive we’ve met a few over the years, but none that we could recommend! It would be nice to find a reliable, ethical one.

When you choose an advisor please establish early on whether they charge you a fee or take a percentage from the Finance House (the pension company, the lender, etc). Check what that figure is. You are more likely to get independent advice if you pay the advisor’s fee, rather than the Finance House.

To give you one example, if a commission based advisor places your business with a Pension House then the commission the advisor receives is roughly equivalent to the pension contributions you pay over the first 24 months of your policy.

If you engage an advisor, expect to start with a lengthy “financial health questionnaire”. In the days of paper, these used to run from 10 to 30 pages of A4. It’s worth your while completing this fully and accurately in order that there can be no misunderstanding about the information the advisor can rely on.

For example, over the last few years there has been a lot of pension mis-selling and this could give rise to a claim for compensation. Even if the financial advisor who sold the pension is no longer trading, then the Finance House can be pursued. That means that you will need a copy of the “financial health questionnaire” if you want to prove any case of negligence.

Any financial advisor who does not start with something like a “financial health questionnaire” is well worth avoiding.

In support of your request for advice, your advisor may ask you to provide copies of your personal tax calculation (a form SA302), copies of your personal tax overview (a summary from the HMRC website), and for people who run a freelance business, copies of the formal accounts. That’s all perfectly reasonable and any accountant should be able to provide that. At Proactive we routinely prepare these documents, generally we have them ready long before they are needed, and we can then let clients have them within seconds, not hours, not days, not weeks.

HMRC has been working with the lending industry on the issue of documentation and has reported that the number of requests for additional evidence has declined significantly. But, they add, that the message has not yet filtered down to all staff in all relevant “financial advice” organisations.

If your advisor questions the veracity of the documents you/we provide, then find a different advisor or work directly with a lender . HMRC has published this useful list of lenders who accept your own documents:

https://www.gov.uk/government/publications/ . . .

Note that the HMRC page says “The lenders on this list have agreed to accept tax calculations and tax year overviews that customers, or their agents or accountants, have printed themselves.”

In the light of this information, if your advisor still refuses to accept these documents and continues to question their content, then they are in effect accusing you, or accusing us, of fraud. A properly completed “financial health questionnaire” along with the form SA302, the tax overview, and the formal accounts is all that they need.

Not since 1988 has a personal tax return had a section for “chargeable assets acquired”. As a result, we do not routinely maintain an overarching asset register of clients’ properties and investments, and we cannot answer questions about those assets. The decision to stop maintaining an asset register was a time saving measure implemented by us donkeys years ago. Subsequently, the GDPR (see below) would have forced that decision upon us anyway!

Subject to de minimis limits, a personal tax return does have a section for “chargeable assets disposed of” and hence we do sometimes seek further information about “chargeable assets acquired” in order to calculate capital gains tax liabilities. Our record keeping strategy follows Einstein’s advice:

“Make everything as simple as possible, and no simpler than that.”

It’s simple. Banks need to lend, like birds need to fly.

Banks that do not lend will fail. Pension Houses that cannot sell pensions will fail. IFAs that cannot offer intelligent financial advice will fail. Some IFAs make the simple task of getting a loan from a lender far more complicated than it needs to be. That’s why we advocate dealing with the lender directly and cutting out the middle man.

All these financial institutions, IFAs and accountants included, need to follow the KYC rules (know your client rules) mandated by various bodies including the Financial Conduct Authority (FCA).

At the same time, we all have to comply with the GDPR. In particular, under Article 5, the amount of data that can be requested is restricted to the minimum needed to do the job.

General Data Protection Regulation 4.5.2016

If your IFA is too enthusiastic about gathering too much data, then please point them to this report on this Proactive website! If they say “it’s our policy” to ask more questions, then please respond with “may I have a copy of that policy document in order that I can fully understand the policy?” and then if the policy document does not exist, or is “for internal use only”, the IFA has something to hide.

“Article 5 – the amount of data that can be requested
is restricted to the minimum needed to do the job”

A properly completed “financial health questionnaire” along with the form SA302, the tax overview, and the formal accounts is all that is needed. If your IFA has not asked you for (or cannot interpret) a properly completed “financial health questionnaire” then you need a different IFA. Likewise, if your IFA cannot read and understand a set of statutory accounts, then you need a different IFA.

We will genuinely help in cases where it is within our power to do so. When we face questions which are outside the remit of the role of the accountant, then we genuinely cannot answer those questions.

“Make everything as simple as possible, and no simpler than that.”

I cannot afford to pay a salary

In the early days of a business, it may be advisable to pay yourself a small salary, even if your company cannot really justify the cost. The reason is tax relief. And, as tax reliefs are linked to tax years and as tax years end every 5 April, once the tax year has gone the opportunity to get the tax relief is lost.

This example uses 2020/21 figures.

Paying a salary from a company is an allowable expense. All things being equal, your company will get 19% tax relief on that. And so, for every £1,000 you pay in salary, your company tax bill is reduced by £190.

In the hands of the company director, the salary is taxable income. However, as there is an annual allowance for personal income, you may be able to take a salary and pay no income tax.

• Monthly salary £732.00
• Annualised £8,784.00
• Corporation tax relief £1,668.96
• Income tax bill £nil

It’s worth a lot of money to your company to take a salary. And if that means orchestrating a loss in the company this year, you can still carry forward the loss, and get the tax relief when the company next has a profit. You cannot carry forward unused personal allowances, and that is why you need the salary in any given tax year.

In some cases that means that the director introduces working capital to a company every month, so that it can pay the salary – in effect, moving about £750 around in circles. That’s OK. The director can receive the salary tax free, and at some point in the future (when the company has the cash) the director can recover all the multiples of £750 which have been loaned to the company.

And it has to actually happen! You cannot say “it happened” at a later stage, if it did not! HMRC have been known to ask for the bank statements to see the exact amounts and the dates on which the bank transfers took place!

It might be worth it, if it saves you around £1,700 per year overall!

Example Letterhead and Invoices

All businesses should prepare standardised documents for their correspondence and invoices. An invoice is basically a standard letterhead with the addition of a number of billing points. The examples set out here assume that your business is a limited company.

If you are a sole trader or if you operate as a partnership, you can ignore the bits about a company registered number and registered office address.

Your trading address must be included in all cases. If your company registered office and your principal place of business are one and the same, that you only need to show the address once, provided that it is clear that they are one and the same!

Example Letterhead

Example Invoices

You can only use a VAT invoice if you are VAT registered. The Excel file has an example of a non-VAT invoice on tab 1 and an example of a VAT invoice on tab 2. Please use the correct one.

There are strict rules about invoicing by VAT registered businesses. They are set out in detail at:

Reg 14(1)(i) The Value Added Tax Regulations 1995

The letterhead legislation is set out here and it includes a requirement that you show these details on your web site and somewhere within your emails:

The Companies (Trading Disclosures) Regulations 2008

and

The Companies (Trading Disclosures) (Amendment) Regulations 2009

Student Loan Statements

In July 2020 the Student Loans Company emailed everyone on their records to say that they will no longer send out paper statements like this example.

They claim that you can get this data from their new web site. You cannot.

Write to the Student Loans Company using a traditional paper letter, and tell them that you want to opt in to receiving paper statements because your accountant needs precise data for every tax year. Use the form of words below and (if necessary) adjust the tax year for the one just ended.

Thank you for your email dated 14 Jul 2020 which states “We’ve listened to your feedback and created a quicker and easier way to view your student loan balance, update your personal details and get information about your loan”. I logged in to the portal to get information about my loan. In order that I can complete my self assessment tax return I need an annual statement which provides a clear analysis of:

• the balance on 6 Apr [old year]
• the monthly rates and the amounts of interest charged
• credits received from HMRC
• the balance on 5 Apr [recent year]

Your site provided me with none of the above, and no way to find that data. My accountant needs this information. Your email also states “With our new service you’ll be able to view and print a copy of your annual statement“. Your new service does no such thing.

The new portal is worse than useless. I want to opt back in to receiving paper statements. Please let me have a paper statement setting out the precise details listed in my four bullet points above. Thank you.

Feel free to copy the image file above and embed that in your letter, so that they are in absolutely no doubt about what we want.

Covid-19 Bounce Back Loans

From 4 May 2020 a number of UK banks are taking part in the government sponsored Bounce Back Loan Scheme (BBLS). This is the name given to the policy announced by Rishi Sunak on 27 Apr 2020 whereby small loans to qualifying businesses are subject to simpler rules than the Coronavirus Business Interruption Loan Scheme (CBILS) and these BBLs are underwritten 100% by the government.

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

You cannot apply for a BBL if:

  • You’re already claiming under CBILS; or if
  • Your business was an “undertaking in difficulty” as at 31 December 2019.

In short:

  • There is no cap on turnover for a micro business applying for a BBL;
  • Loans will be from £2,000 up to 25 per cent of a business’ turnover or £50,000, whichever is the lower;
  • Banks will no longer require forward financials or business plans;
  • You should have access to the funds within days;
  • Loans will be interest free for the first 12 months; and
  • Thereafter the annual rate of interest is capped at 2.5%.

The loans will be easy to apply for through a short, standardised online application, and you will be required to self-certify that you are eligible for a Bounce Back Loan.

The government announcement is here.

A list of participating banks is here and that page will also lead you to a summary page about your bank which leads you to the start of loan application.

Apply directly to your bank. This is a Government initiative and not an HMRC initiative. Consequently, Proactive can not apply on your behalf.

Self Assessment Tax Return

A Checklist

Self assessment tax returns require an extensive amount of personal information.

They encompass income, capital gains, outgoings, residence status, student loans, child benefit and more. They are no longer called income tax returns and you need to take care to include everything that a self assessment tax return requires.

With very few exceptions, the self assessment tax return requires a full disclosure of your worldwide income. There are checks and balances to ensure that you are not subject to double taxation. As your accountant, we need you to make a full disclosure of everything. We would rather have too much information than not enough. Nobody wants HMRC to start an enquiry because something was omitted from a tax return.

You should remember that in UK law the final responsibility for submitting a full and complete tax return (and for paying the tax on time) rests with you, the taxpayer.

Please follow this guide carefully and let us have the information and the documentation detailed below. For self assessment purposes the tax year started on 6 April (more than one year ago) and ended on the 5 April which has recently passed.

Changes since last year

Have you changed your address, your phone number, your name (by marriage or otherwise), or have you married (or entered into a civil partnership)? Please keep us up to date with your correct details.

Tax Return Notice

In order that we can keep track of dates, tax offices and reference numbers, please let us have either a copy of page one of your tax return, or the “Notice to File”.

HMRC get things wrong sometimes. It’s important that we have this document in case any disputes arise. Without the notice it may be difficult to challenge interest charges and penalties. That can depend on many factors, including the date on the notice, the spelling of your name, the address it was sent to, and whether or not it was even issued.

If you do not have a paper document within a few days of 5 April, then please provide us with a copy of the the digital “Notice to File” from your personal tax account on the Government Gateway. Accountants cannot access your Gateway account as it covers many Government services and not only tax.

Additionally, it’s important that you know that anyone visiting their personal tax account online will be requested to agree to communicate digitally by default. If you consent, subsequent communication including statutory notices will be provided digitally, and no paper version will be sent.

Student Loans

A copy of the Student Loan account statement showing the transactions between 6 April last and 5 April just gone.

Tell us if an old loan has been fully paid off since 5 April just gone as we will need to make an adjustment to ensure that you do not overpay.

You cannot get this data from the Student Loan Company web site. Yes, ridiculous, we know! Send them a paper letter as set out in this report and ask them for a paper statement.

Residence and Domicile

Is your Domicile outside the UK?

In UK law the word “domicile” does not mean your address, it means your natural home. This is especially important for people who were not born in the UK or whose parents were not born in the UK, or for people have moved away from the UK and have permanently elected (and proven) that they have established a natural home elsewhere.

There are complex tax rules for people who have a non-UK domicile and who have foreign income or gains. Regardless of your “domicile”, UK residents are taxed on their worldwide income or gains. However, if you do have a non-UK domicile, you may be entitled to claim tax relief on foreign income which is not remitted into the UK. If this applies to you please discuss the situation with us.

If you are not resident in the UK, then we need to consider the Statutory Residence Test which determines residence status for tax purposes. This link is just for information . . .

https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt

. . . and we will work through the process with clients who are affected.

Bank Interest and other Investment Income

Please provide copies of certificates of Bank Interest Received, dividend vouchers and other documents showing amounts of investments received.

Some banks pay “rewards” and do not pay interest. Check the year end certificate from your bank to see precisely what sort of income you have. Some deduct tax at source, whilst others do not. Different rules, rates and allowances apply to different types of investment income so it’s therefore vital that you provide full and accurate information for every different account and every different type of investment.

Employees and Directors

A copy of form P60 for all roles held as at 5 April.

A copy of form P45 for all roles that ended during the tax year.

Employers are required by law to issue forms P60 by 31 May following the relevant 5 April. Forms P45 are issued when you leave an employer, normally within 7 days of your leaving date.

Student Loan Repayments via Payroll

As the forms P45 and P60 do not always show student loan repayments, we need a copy of every payslip for each employment you had between 6 April last year and 5 April this year. This recent data is not yet on the Student Loan Co statements, hence we need the payslips.

Benefits in Kind and Expense Allowances

If you have a company car or van, or if your salary package includes things like private medical insurance or gym membership, then you will always be issued with a form P11d. These are taxable benefits in kind.

There are a few other cases where forms P11d are issued to employees who receive expense allowances. This is less common than it used to be, because HMRC has introduced more exemptions.

For example, a situation where you have paid for business travel, claimed the exact figure, and were reimbursed the exact figure, is exempt from the P11d reporting rules. However, round sum allowances are reportable. Check with your employer if you are not sure about the expense allowances you received.

We will need a copy of form(s) P11d issued “as at” 5 April for all roles held in the last tax year (whether they were still active on 5 April, or not).

Employers are required by law to issue forms P11d (to relevant employees) by 31 July following the relevant 5 April. However, if a P11d is not relevant to you, the employer is under no obligation to tell you that you’re not going to get one. Check! Ask “am I due a form P11d”?

Receiving an Occupational Pension or a Private Pension Annuity

A copy of the form P60 (or other statement from your pension provider) as at 5 April, showing the gross pension received by you, and the tax deducted.

Pension providers (other than the State Pension) are required by law to issue forms P60 by 31 May following the relevant 5 April.

Receiving a State Pension

Letters detailing State Pension rates and entitlements are normally issued in March and April setting out what your individual rate is. Almost no-one gets the standard rate of State Pension as it is often enhanced by the level of your national insurance contributions. Hence we cannot rely on headline rates, and we need a copy of that letter setting out the rate specific to your case.

Child Benefit

Please let us know how much Child Benefit was received during the tax year. Child Benefit may be restricted in some cases where your income exceeds £50,000 and in all cases where your income exceeds £60,000.

If you (or your spouse/partner) have children aged 18 or younger then,  regardless of whether you receive Child Benefit or have disclaimed it, please let us have a note of each date of birth for those who were aged 18 or below on 5 April just gone. Child Benefit may still be paid in connection with 18 year olds until 30 September following their 18th birthday. Having this information allows us to accurately establish two types of situation:

– Claimants where a claw back becomes due;
– Non-claimants who may now become entitled to claim.

There are complex rules in cases where you or your partner move out or move into the family home part way through a tax year. If this applies to you, please talk to us on a one to one basis.

Self Employed Trades and Partnership

Please consider the Annual Accounts Checklist

Rental Income

Please consider the Lettings Accounts Checklist

Personal Pension Contributions

By “personal pension” we mean a pension policy agreed by you directly with a Pension Provider and paid for using your own private funds.

Personal pensions agreed with a Pension Provider because you are a company director (and your company pays the contributions) are not reportable on a personal tax return – ignore these.

Pension Providers normally issue a certificate PPPC (for each policy) just after 5 April each year.

Please provide a copy of each certificate PPPC or set out an analysis of dates and amounts paid under each separate pension policy, stating whether these were paid gross or paid net.

Auto-enrolment Pension Contributions

Under auto-enrolment in the UK, you may have an employer pension where contributions are taken by deduction at source from your pay. There are four ways of doing this and your employer will have elected for one of them when the pension scheme started.

Check with you payroll office, and tell us which “Pension Contribution Basis” applies to these deductions:

• After tax and NI with basic rate tax relief
• After tax and NI with no tax relief
• Before tax and NI
• Before tax and after NI

Please provide us with copies of all your payslips for the tax year as that’s the only way to see the full pension deductions for the year.

Gift Aid Contributions

Please provide two analyses showing the name of each gift aid scheme, the commencement date, and the amounts paid. One list is for your regular contributions. The second list is for one off payments for the tax year only.

Sundry

Lastly, please consider if any of the following items need looking at more closely:

• New sources of income in that tax year.
• Job Seekers Allowance or other taxable benefits.
• New stock options.
• Qualifying investments in EIS, SEIS, etc.
• Capital gains or losses on shares, securities and other assets.
• Shares acquired under scrip dividends or reinvestment plans.
• Purchases and sales of “second” properties.

If you are unsure about any of these points please feel free to call us.

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.