The Fizz! Blog

PAYE chaos for high earners

Accountacy Age comments here on an aspect of the Pre-Budget Report that I hadn't really considered until now.

The idea behind the PAYE system is fairly simple.  Every employee has a tax-free personal allowance for the tax year.  A code is issued to their employer that shows they are entitled to that allowance.  An employee who is paid monthly will be given credit for one-twelfth of the allowance each month.  That means that the right amount of tax is collected by the Exchequer, and the employee's net pay remains stable throughout the year.

The PAYE code can be adjusted to smooth out other tax adjustments too - say, tax due on a company car, or tax relief due on pension contributions, but the principle remains the same.

However, from 2010/11, the personal allowance will be tapered away for those earning more than £100,000.  The exact personal allowance you get will depend upon your exact income for the year.

But people's earnings aren't always predictable.  They change jobs, get bonuses, get and change company cars.  That means that under this new system you often won't actually know what a person's personal allowance should be until after the year has finished!  So it's impossible for the taxman to issue a PAYE coding notice that's accurate.  PAYE is almost bound to get it wrong, and the difference will have to be sorted out via the self-assessment system.  That means a) more paperwork and b) more unexpected tax bills for taxpayers.

But, as I've said so often before, this is what happens when legislation is rushed through - especially by people with little or no experience of the real business world.

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VAT change - the practicalities

By far the biggest news for small businesses in yesterday's Pre-Budget report was the decrease in the standard VAT rate from 17.5% to 15%.  There’s both some thinking and admin to be done, and not much time to do it.  The key points as follows:

Selling to consumers
If you’re a VAT-registered business selling to private individuals, then you’ll need to decide what you’re going to do with your prices.  Do you keep your net prices the same and add on the new lower VAT rate, making your products or services cheaper to the consumer?  Or do you increase your net prices slightly and add on the new lower VAT rate, making your prices to the customer exactly the same as they were before, effectively keeping the VAT saving for yourself?  The government is hoping you’ll do the former, but there’s nothing to stop you doing the latter, unless you’re in a highly price-competitive market where your competitors will drop their prices and effectively force you to do the same.  In some cases it could be completely reasonable to not pass the VAT reduction on to the customer.  If I had lots of menus and wine lists printed up for a pub, restaurant or take-away, I’d be highly reluctant to have them all reprinted just because the government want me to reduce sausage and mash from £8.95 to £8.76.  And is the Argos catalogue going to be reprinted?

Incidentally, the rate of duty on petrol, alcohol and tobacco has been simultaneously increased so that the price of those items to the consumer will remain unchanged.  As is often the case, what governments give with one hand they take away with the other.

Selling to other businesses
If you’re a VAT-registered business selling to other VAT-registered businesses, this is obviously an admin change that will make no difference to your income at all.   You pay the VAT on your sale to the taxman, your customer reclaims it from them.  So if you keep your net price the same, you’ll be in the same position financially as before.

Accounting Software
Whether you’re selling to consumers or businesses, from next Monday the invoices you send them obviously have to change, showing and charging VAT at 15% not 17.5%.  If you do your invoicing and recording of transactions in, say, Excel, as many people do, then it should be pretty easy to just change the VAT rate in whatever template you use.  If you’re using accounting software, then you’ll need to change the VAT rate that the software uses – probably by setting up a brand new VAT code on the system.

Flat-Rate Scheme
If you’re on the flat-rate scheme, then the rate for your industry has probably been revised downwards.  The main list of rates on the HMRC site hasn’t been updated yet, but the new rates are in Annex E to this document.

A last thought on the VAT change
Spare a thought for an accounting firm which encourages its clients to pay by a monthly standing order.  All those standing orders have to be revised very, very slightly downwards, in the next seven days, even though it will make no difference to the firm’s income or the cost to its VAT-registered clients.  If you pay Fizz by standing order I’ll be in touch in the next few days to get the amount changed…

The Revenue & Customs page on the changes is here.

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The problem with being a contractor

BT announced today that they're laying off 10,000 people.  Only a minority of those are direct employees - most are agency workers, contractors and the like.

Contracting - essentially, providing your services to a client via your own company, rather than being an employee on their payroll - has two main advantages.  Firstly, it's likely that you'll be paid more - the fact that you're not on the payroll means that a) your "employer" saves National Insurance and b) they can give you the boot pretty much whenever they fancy - you've none of the rights that an employee has.  Secondly, by working via your own company you can often pay far less tax than an employee on a similar level of income would pay - particularly if you're not hit by IR35.

But in return for those benefits, there's a price to pay.  The price is the loss of those employment rights.  If your "job" doesn't need to be done anymore, your "employer" have no obligation to find you an alternative position, and no obligation to provide redundancy pay.  You don't get paid holiday.  You don't get paid sick leave. Because they're not your employer at all.

Radio 5 just broadcast a short exchange with a BT contractor who was given two weeks' notice last week.  He's unhappy because BT's HR department have been of no help to him.  Well, no, I don't expect they have been.  You're not an employee.  In return for the extra pay and lower tax burden of contracting, you gave up any employment rights.

On top of that, you can be 99% sure that the contractor, when assessing whether or not IR35 - and its associated higher tax bill - applied to him, will have argued until he was blue in the face that he wasn't an employee, but was instead running a bona fide commercial business that didn't rely on BT in any way.

If you go into contracting, you have to take with the rough with the smooth.  It's no good taking advantage of the benefits while they last, and then whingeing as soon as you're exposed to the disadvantages.

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