Now more so than ever, HMRC are clamping down on businesses, contractors and service providers who are often seen as avoiding paying the correct amount of tax. The odds of facing an inquiry are now higher than ever. Working as a contractor comes with many advantages and but also with significant responsibilities. One of these is to ensure that you pay the correct levels of tax because choosing to work in this way means you will face a higher risk of investigation.
Here are some tips to help you stay on the right side of HMRC...
1. Operate through an accountant
Filing your tax return late or with errors will always attract HMRC's attention. To the tax man, errors in your current Return can indicate that you may have made mistakes in your Returns in the past and that earlier years also need investigation.
An accountant will help you lighten this burden by advising you of the correct form of records to keep, how to take care of the paperwork and ensuring your tax returns are submitted both on time and accurately.
PayStream's Tax Team offer a Personal Tax Return service which is available for both non-PayStream and PayStream customers.
2. Examine your tax returns
Having an accountant prepare and submit your tax returns on your behalf provides peace of mind that they will be done correctly. However, ultimately you are responsible for any forms submitted so it is important that you review the documentation prepared on your behalf to ensure that there are no errors or omissions.
For a small fee, our Tax Team provide a Tax Investigation Protection Service which is designed to help you through an HMRC investigation and when you think that the costs associated with a typical investigation are in excess of £3000, this kind of service could prove invaluable.
3. Explain any fluctuations in figures
HMRC uses advanced resources to analyse tax returns and pinpoint anything out of the ordinary. Therefore if there has been a large increase or decrease in expenses or profits, make HMRC aware by additional disclosures on your accounts or Tax Returns.
4. Ensure business costs and expenses are reasonable
HMRC have created an industry average financial performance index based on data that has been collected from tax returns.
If a business's profits or expenses are much greater than these industry averages, it could arouse suspicion with HMRC.
5. Don't set up a new limited company before you close your current one
Contractors who frequently start up a new limited companies before closing their current ones are referred to as running a series of 'phoenix' arrangements. They are seen by HMRC as being provocative tax planning arrangements and anti-avoidance measures are applied to reverse the tax advantages gained.
HMRC can easily identify directors and their tax records from their own database and pinpoint if you fall into this category, which can again arouse suspicion with HMRC.
6. Make sure you are aware of your IR35 status
Understanding whether you fall inside or outside IR35 is essential for any limited company contractor.
If you fall inside IR35 your earnings are wholly subject to PAYE, as well as income tax and national insurance deductions. However if you fall outside and you work as a limited company contractor than you are able to withdraw funds as dividends which are not subject to national insurance contributions.
In order to make sure you are working compliantly as a limited company contractor you must always make sure you operate outside IR35. More information on what helps and hinders your IR35 status can be seen here, however if you're still unsure PayStream offer an IR35 review service which is again available to both non-PayStream and PayStream customers.
As a limited company contractor, it is essential that you are always on the right side of HMRC by ensuring that you are always operating compliantly. Choosing not to do so can mean that if you did ever become the subject of a tax investigation, it could not only cost you in excess of £3000 in accountancy fees to get you through an investigation but you would also be expected to pay back to HMRC any underpaid tax as well as interest and penalties.
PayStream's Tax Investigation Protection Service provides professional representation, expert knowledge and will cover your fees*, should you ever become the subject of a tax investigation. For more information on how our service can help you please click here.