TAXANGLES- March Edition

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TAXANGLES A newsletter for proactive planning... Client Focus- Featuring The Jane Austen House In this edition... March 2021 Issue IR35 and off-payroll working – what to do from 6 April 2021 www.compassaccountants.co.uk Business interruption insurance – Are pay-outs taxable? National Insurance contributions for 2021/22 Claim expenses for additional costs of working from home Gift aid – Beware if your income falls Client Focus- An interview with Lizzie Dunford from The Jane Austen House 10 Questions With... New Compass staff member, Sue Elliott Tax Diary- Dates for March 2021

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COMPASS ACCOUNTANTS

PAGE 2 IR35 and off-payroll working – What to do from 6 April 2021 if you provide services through an intermediary Prior to 6 April 2021, workers who provide their services to a private sector organisation through an intermediary, such as a personal service company, need to consider whether the IR35 rules apply to them. This will be the case if the nature of the engagement is such that if they provided their services directly to the client rather than through their personal service company, they would be an employee of the client. Where an arrangement falls within the scope of the IR35 rules, the worker’s intermediary needs to determine the deemed employment payment on 5 April at the end of the tax year. The intermediary must account for tax and National Insurance (employee’s and employer’s) and pay it over to HMRC. Since 6 April 2017, workers providing services to a public sector body through an intermediary have not needed to consider IR35. Instead, under the off-payroll working rules, responsibility for determining whether the worker would be an employee if the services were supplied directly falls on the public sector body. If the worker would be classed as an employee were this the case, tax and National Insurance must be deducted from payments to the worker’s intermediary, and paid over to HMRC, together with the associated employer’s National Insurance. From 6 April 2021, the off-payroll working rules, as they apply where the end client is a public sector body, are being extended. From that date, they will also apply where the end client is a medium or large private sector organisation. The changes will affect workers providing their services through an intermediary. When agreeing an engagement from 6 April 2021 onwards, the worker should check the size of the end client so that they know which set of rules are in point. End client is a medium or large private sector organisation Where the end client is a medium or large private sector client, from 6 April 2021, the worker no longer needs to consider the IR35 rules. Instead, under the extended off-payroll working rules, the end client must determine whether the worker would be an employee if they provided their services directly to the end client, rather than via an intermediary. The end client must provide the worker with a copy of the determination (the status determination statement). The worker should check this. If they don’t agree with it, they should tell the end client. The client must then reassess the status determination and let the worker know within 45 days whether the original determination stands, or issue a new one. If the nature of the engagement is such that the worker would be an employee if the services were provided directly, the fee payer will adjust the invoice from the worker’s intermediary to exclude VAT and the cost of any recharged materials to arrive at the deemed employment payment, and deduct tax and National Insurance from the payment to the worker’s intermediary. This will have a cash flow implication – the worker’s intermediary will no longer receive payments gross. The worker will receive credit for the tax and National Insurance paid against that due on payments made by the worker’s intermediary to the worker. Cont on pg 3

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COMPASS ACCOUNTANTS

PAGE 3 End client is a small private sector organisation The extended off-payroll working rules do not apply to small private sector organisations. Consequently, the position is the same on or after 6 April 2021 as it is now. The worker’s intermediary must continue to consider whether the IR35 rules apply, and operate them if they do. End client is a public sector organisation There is also no change from 6 April 2021 where the end client is a public sector body. As now, the public sector body must assess whether the off-payroll working rules apply and issue a status determination to the worker. If the engagement falls within the rules, they must deduct tax and National Insurance from payments to the worker’s intermediary. Business interruption insurance provides cover for losses as a result of events that close or severely disrupt the business. Policies may cover a loss of profits that arise as a result of the ‘interruption’. They may also meet fixed costs that the business has to continue to meet despite being closed. Many businesses who had been forced to close as a result of the Covid-19 pandemic and associated lockdown measures and who attempted to make a claim on policies that they believed provided cover for the associated loss of profits found that their insurers did not agree. The sticking point was the wording of the policy where this excluded diseases unless specifically named. To provide clarification for policyholder and insurers, the Financial Conduct Authority (FCA) took a test case. The high court found mostly in favour of the policyholders. On appeal, the Supreme Court ruling in January furthered strengthened the policyholders’ position. As a result of the Supreme Court ruling, around 370,000 small businesses may receive a payout. Tax implications HMRC’s general stance is that if the premium was tax deductible, any insurance receipts are taxable. Businesses would have been able to deduct the cost of business interruption insurance premiums as long as the cost was incurred wholly and exclusively for the purposes of the business. Where a policy pays out an amount to cover the loss of profits during the period when the business was shut, the receipt is treated as trading income. Payments to cover costs are also taxable if a deduction is allowable for the cost. Where accounts are prepared on the cash basis, the insurance receipt is taken into account in the accounting period in which it is received. However, if the accounts are prepared on the accruals basis (as would be the case for a company), the receipt should be matched to the period to which it relates, for example, the accounting period in which the lockdown giving rise to claim fell. However, where there was doubt as to whether a payment would be made, as was often the case in relation to Covid-19 claims, the critical time would be the time when it became clear that a payment would be made. This may be the period in which the date of the Supreme Court ruling occurred.

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COMPASS ACCOUNTANTS

PAGE 4 PAGE 3 National Insurance contributions for 2021/22 The 2020/21 tax year starts on 6 April 2021. From that date, new thresholds apply for National Insurance purposes. Employees and Employers Employees pay primary Class 1 National Insurance contributions on their earnings, while secondary Class 1 contributions are payable by their employees. Employees come within the ambit of Class 1 National Insurance contributions once their earnings reach the lower earnings threshold. This remains at £120 per week for 2021/22 (£520 per month; £6,240 per year). However, contributions are paid at a notional zero rate between the lower earnings limit and the primary threshold. While this does not cost the employee anything, it ensures that the year is a qualifying year for state pension and contributory benefit purposes. Once an employee’s earnings reach the primary threshold, they must start paying employee Class 1 National Insurance contributions. For 2021/22, the primary threshold is set at £184 per week (£797 per month; £9,568 a year). Contributions are payable on earnings between the primary threshold and the upper earnings limit at the main primary rate of 12%. For 2021/22, the upper earnings limit is set at £967 per week (£4,189 per month; £50,270 per year). Contributions on earnings above the upper earnings limit are payable at the additional rate of 2%. Employer contributions are payable at the secondary rate of 13.8% on all earnings above the secondary threshold. There are three thresholds. The main threshold is the secondary threshold, which applies to employees aged 21 and over who are not apprentices under the age of 25. As for 2020/21, the secondary threshold and the primary threshold are not aligned – for 2021/22 the secondary threshold is set at £170 per week (£737 per month; £8,840 per year). A higher secondary threshold applies to employees under the age of 21 and apprentices under the age of 25, and secondary contributions are only payable on earnings in excess of the threshold. For 2021/22 both thresholds are set at £967 per week (£4,189 per month; £50,270 per year) – the same as the upper earnings limit applying for employee contributions. Employees and apprentices in these categories pay employee contributions on earnings above the primary threshold, as for other employees. The rate of employer only Class 1A contributions (on benefits in kind and taxable termination payments and sporting testimonials) and Class 1B contributions (on items included within a PAYE Settlement Agreement) remains at 13.8% for 2021/22. Self-employed The self-employed pay two classes of contributions – Class 2 and Class 4 – if their profits exceed the relevant thresholds. Class 2 contributions are payable at £3.05 per week for 2021/22 (unchanged from 2020/21) on earnings in excess of the small profits threshold, set at £6,515 for 2021/22. Where earnings are below the small profits threshold, Class 2 contributions can be paid voluntarily to maintain the earner’s contribution record. Class 4 contributions are payable at the main rate of 9% on profits between the lower profits limit, set at £9,568 for 2021/22, and the upper profits limit, set at £50,270 for 2021, and at the additional rate of 2% on earnings in excess of the upper profits threshold. Voluntary contributions Individuals can make voluntary contributions Class 3 to maintain their contributions record. These are payable at a weekly rate of £15.40 for 2021/22. Where the option is available to pay Class 2 voluntarily, this is a much cheaper option.

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COMPASS ACCOUNTANTS

PAGE 5 Claim expenses for additional costs of working from home As the 2020/21 tax year draws to a close, many employees will have spent much if not all of the last year working from home. While the tax system enables employers to pay employees a tax-free allowance of £6 per week (£26 per month) to cover the additional household costs of working from home, employees with less generous employers can also benefit to a degree by claiming tax relief for the extra household costs that they incur as a result of working from home. How much? Employees can make a claim for £6 per week (£26 per month) without the need to provide evidence to prove that they have incurred additional costs of working at home. However, if the actual additional household costs are higher (and the employee is able to provide evidence to substantiate this if asked), they can claim the higher actual amount. Relief is given at the taxpayer’s marginal rate of tax. Thus, an employee making a claim for a full year of £312 (12 x £26) will receive tax relief of £62.40 if they are a basic rate taxpayer, £124.80 if they are a higher rate taxpayer and £140.40 if they are an additional rate taxpayer. How to claim There are various ways in which a claim can be made. If the taxpayer completes a self-assessment tax return, a claim can be made in their tax return. HMRC have also set up an online claim site, which is available on the Gov.uk website. Claims can also be made on form P87. This too is available on the Gov.uk website.

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Gift aid – Beware if your income falls Where a Gift Aid declaration is made, the recipient charity or community amateur sports club can claim back basic rate tax on the donation. The donation is treated as made net of basic rate tax, meaning that for every £1 donated, the charity can claim back 25p, or to put it another way, a donation of £80 is worth £100 to the charity. There is good news for higher and additional rate taxpayers too – they can claim the difference between the rate at which they pay tax and the basic rate of tax, either through their self-assessment tax return, or if they do not complete a tax return, by asking HMRC to amend their tax code. For example, if a higher rate taxpayer made a donation of £100, the charity will claim back £25 – so the donation is worth £125 to the charity. The taxpayer receives relief at 40% on the gross donation of £125, i.e. £50, of which £25 is given at source (the taxpayer pays £100 for a £125 donation). The remaining £25 is claimed back by the taxpayer. Funded by tax paid The tax that is claimed back by the charity is funded by the tax paid by the donor. This is fine where the donor has paid more tax in the year than is claimed back by charities and community amateur sports clubs on donations. However, a problem can arise if the donor’s income falls, such that they are not a taxpayer or pay less tax than is claimed back on the donation. Where this is the case, HMRC can seek to recover the tax reclaimed by the charity from the donor. Example Amy is self-employed hairdresser. She makes a donation of £20 each month to an animal rescue charity. She makes a Gift Aid declaration so the charity can reclaim tax at the basic rate on the donation. Due to the Covid-19 pandemic, Amy was unable to work for much of 2020/21. She was unable to claim support under the SEIS scheme as she only started her business in January 2020. Her earnings for 2020/21 fell to £8,000. Previously, she had always earned around £20,000. As her earnings for 2020/21 are less than the personal allowance of £12,500, she does not pay any tax for 2020/21. Therefore, there is no tax to fund the tax claimed back by the charity of £60 (25% (£20 x 12). HMRC could seek to recover this from Amy. Tip: Where regular donations are covered by a Gift Aid declaration review these and cancel the Gift Aid declaration if it looks as if income may fall below the personal allowance. For one-off donations, only complete the Gift aid declaration if income is such that sufficient tax will be paid to cover that claimed on the donation.

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COMPASS ACCOUNTANTS

PAGE 7 Client Focus : Jane Austen’s House In this Month’s ‘Client Focus’ we chat to Lizzie Dunford, Director of Jane Austen’s House- a Compass client- and learn about the impact Covid-19 has had on one of the most important literary heritage sites in the world… It was within the walls of the Grade I listed building in Chawton, that Jane Austen wrote and revised all of her highly acclaimed novels, Sense and Sensibility, Pride and Prejudice, Mansfield Park, Emma, Northanger Abbey and Persuasion. Since 1949, the 17th century Hampshire building has been open to the public, offering visitors the opportunity to see the collection of objects associated with Jane Austen, including her letters, jewellery, first editions of her books, furniture, textiles and the table at which she wrote her much loved novels. However, like many museums and heritage sites, Jane Austen’s House faced a challenging and worrying year following the outbreak of Covid 19 in the early months of 2020. Lizzie Dunford, the Director of Jane Austen’s House explains, “As a charity, up until the pandemic, we were almost entirely dependent on footfall revenue, so when that income stream suddenly stopped it was extremely worrying.” Jane Austen’s House received an emergency grant from the National Lottery Heritage Fund, which was vitalCont on pg 8

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following its temporary closure, but even after the first lockdown when some restrictions were dropped, social distancing measures meant visitor numbers were reduced significantly. The charity was, therefore, reliant on its own crowd funding campaigns. “We were very lucky to have received an astonishing response in the form of donations, both nationally and globally.” adds Lizzie. “We saw donations come in from South America, Europe, China, Japan and Scandinavia. We were able to raise over £100k through crowd fundraising. These donations and the National Lottery Heritage Fund have been at the core of our resilience. If it wasn’t for those, we would be in a very different position today.” Adapting to change The difficulties of the pandemic forced the team at Jane Austen’s House to reconsider new ways of making the house accessible to visitors, during a time that imposed difficult and unusual restrictions. “2020 was a challenge, but it was also a time of opportunity and so we fast-tracked a lot of our ambitions.” said Lizzie. “For example, in June we launched an online shop and in November, during the second lockdown, we introduced virtual guided tours, which gave us a new way of interacting with visitors remotely, showing them around the house, whilst also enabling us to generate a new stream of income. We have since provided virtual tours in Spain, tours for libraries in the United States, and we now have tours lined up in Brazil and South America. Through this virtual offering, we now plan to maintain global engagement and interaction post- pandemic.” The years ahead Whilst in the third national lockdown, planning for the next few years is always a challenge, although Lizzie believes it will be a while before the footfall of Jane Austen’s House returns to the numbers it was used to. She said, “We expect that we won’t be back to our pre-pandemic levels of visitors for quite some time – so our development of the virtual aspect of the house will really help. We have budgeted cautiously to protect the financial entity of the charity and have adapted our business model. We will also continue to be as innovative as we can.” “Whilst it will take a few years to recover, there are positive and negative aspects of the pandemic. For example, we have an augmented reality app coming out soon, and we are further investing in our virtual tours and we will reap the rewards for those. Cont on pg 9

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PAGE 9 We are also continuing with our campaign to fix the roof of the house - which we have already had a fantastic public response to.” Lizzie concludes, “Despite having a tough year and having more grey hairs that I had one year agoit’s still a great privilege to be involved with an author so revered, so beloved and so funny. Working for Jane Austen’s House is always a joy. My team have also been incredible, I am very lucky to have such an innovative, driven, passionate and skilled group, who have adapted and excelled. They have been extraordinary.” You can support Jane Austen’s House in many ways, from sharing its social media content, to browsing the website, visiting the online shop, booking a virtual tour or simply reading a Jane Austen book. If you would like to sponsor a roof tile to help save the roof, or you would like to consider a corporate sponsorship or business partnership- head to the website: www.janeaustens.house

COMPASS ACCOUNTANTS



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