The Fizz! Blog

Can my limited company pay for my counselling or therapy sessions?

As ever with these questions, the "can" is a red herring that tempts a literal but unhelpful answer.  Your company can pay for anything, the real question is whether there will be knock-on tax consequences that make it a bad idea.

In this case, perhaps surprisingly, there probably aren't any adverse consequences.  The rules, HMRC's guidance about them and HMRC's internal manuals are clear - an employer can pay for counselling for employees with no tax consequences for the employee, and though HMRC say the exemption is tightly drawn it actually covers a lot of areas.

Now, this exemption is plainly not intended for owner-managed businesses.  For a big employer, claiming that they're only providing the therapy because of their needs as an employer, and that long-term personal benefit to the employee may well be created as well but it's not the reason for their footing the bill, is a reasonable assertion.  If it's your own business, then that dividing line between employer and employee is not so clear.  But HMRC are pretty unambiguous about it, so if you’re comfortable that the counselling you’re contemplating falls within HMRC's guidance as tax-free, then you should feel confident going ahead.  Your company must provide the therapy, so should contract with the therapist itself - it's no good arranging it yourself and claiming the costs back if you want the setup to be robust.

If you're a sole trader or a partner in a partnership, then this doesn't apply; these are employment tax rules.  A sole trader or partner will probably find it difficult to impossible to sustain the argument that the cost is tax-deductible - it's have to be incurred wholly and exclusively for the purpose of their trade.

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Which umbrella company should I choose?

An umbrella company offers a simple service.

A business is going to pay an individual to do some work for it. The business judges that the individual’s role amounts to that of an employee, who should properly be paid via PAYE. The business doesn’t want the admin of doing that themselves. The umbrella company offers to employ the individual instead, and invoice the employer for the salary and the other associated employment costs (NI, pension).

Or, a business is going to pay an individual to do some work for it. The business, considering it to be an employment role but being unwilling to put the person on PAYE, tells the individual that they must invoice them via some other entity, most commonly a limited company set up by the individual themselves for that purpose. The individual can’t be bothered doing that, or knows that in the hands of her own company the income will fall under IR35 and be subject to full employment taxes anyway. Instead she decides to sign up with an umbrella company, who will receive the fees, operate PAYE on them, and pay her the net.

What’s in it for the umbrella company? A fee (most commonly suffered by the employee, even if the business insisted upon the arrangement, naturally!).

They’ve had a chequered history. You can see that in theory they’re simply a vessel to get fees from A to B, with the appropriate employment taxes paid. So they should all end up with more or less the same split of money between the worker and HMRC, with their commission being the only variable.

However, market forces meant that they began to compete with one another, to try and offer a bigger share of the split to the worker and less to HMRC. This was never achieved by legitimate means. A favourite trick was based on a wilful misunderstanding of the rules on something called dispensations. A dispensation was an arrangement with HMRC, where HMRC said - for example - “If you reimburse an employee for legitimately incurred and legitimately tax deductible travel costs of up to £30, don’t bother telling us about it, we don’t want to record it as both income and deduction for the individual, it’s a waste of time as it ends up at zero”. Then, regardless of whether any such costs were actually incurred or not (they weren’t) the umbrella company would include a tax deduction of £150 on every week’s payslip, with a consequential suppression of the tax deduction truly due.

Eventually, HMRC got wise to this. Those schemes were exposed and shut down. Any time you read anything promising you materially greater take-home pay than similar providers, it should always have been clear that this could not be achieved legitimately, but now - crossed fingers - we’re back to an acceptance that umbrella companies are machines that process the same inputs in the same way and should, consequently, churn out the same outputs.

A rather long-winded way of saying - it shouldn’t matter, they should all be pretty much the same!

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I’m about to hire someone - what are the additional costs I need to budget for?

Clients frequently ask how much they need to budget for additional employment costs (by which they generally mean National Insurance and pension contributions) above and beyond the gross salary they’re going to be paying an employee. When creating financial projections, we tend (depending on the purpose of the projections and the level of accuracy merited) to default to 10%. In real life, though, it does depend upon how your workforce is made up.

With your first employee, the best answer is often “very little - it needn’t inform any decision making”. That’s because, at present, the Employment Allowance means that almost all employers are excused from paying the first £4,000 of Employer’s National Insurance. If you make your first hire, and they’re paid £35,000, say - the NI is covered in full, nothing for you to pay on top. You’ll end up needing to operate a pension scheme in due course, but annual employer contributions will be less than £1,000 under a standard setup. There’s going to be a bit of cost in getting the payroll processed and the pension set up of course, and you’d be wise to pay someone to help you get the HR and contracts side of things set up properly, but the additional costs at this point shouldn’t really make any difference to a sensible business owner.

Once the Employment Allowance is used up, the costs are more meaningful. Because National Insurance only kicks in on income over £9,000, and pension contributions are generally only calculated on income over £6,000, for relatively low-paid part-time staff, additional costs are minimal - for someone on £10,000, NI and pension contributions add less than 3%. But if someone is on £20,000 the additional costs are about 10%. By the time they’re on £40,000 the additional costs are just under 14%. They don’t get any higher than that. So if you wanted a “worst case” number, go with 14%. But you can see how important the make-up of the workforce is, and why 10% is generally fine for projections.

None of this is intended to deter anyone from employing staff! The extra costs are a fact of life, and generally a robust and successful business will take them in its stride, and won’t try to play fast and loose with employment law and pretend that employees aren’t really employees in order to avoid them - if a business can’t be successful within the rules that’s generally a problem with the business, not the rules. At the same time, though, it’s a really smart thing to think about and budget for.

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Are staff flu jabs tax-free for them? It depends

Many employers pay for their employees to have a flu jab each year.  They figure that the expense will be worth it for a combination of a) reducing sickness absence and b) being kind to their team.

Historically, they’ve most commonly done it by giving the employees vouchers that they can take to a provider to cash in for a jab, or arranged for the jabs to be done at the workplace.  There’s no tax bill for the employee (the voucher or jab will have cost less than £50 and will be covered by the “Trival Benefits” exemption).  

Apparently, in the last year or so demand has increased and vouchers have been harder to get, and many people haven’t been in their workplace to get it done there.  Consequently, many employers have asked the staff to arrange the jab and reclaim the cost on expenses.  That, however, *is* a taxable benefit, and the employee is supposed to be taxed on it - expense claims lie outside the Trivial Benefit rules.

Think about how you’re doing things, not just what you’re doing!

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Working from home allowances and PAYE codes

It’s long been the case that, if an employer requires an employee to work from home, they can pay them a small tax-free amount to reflect the extra costs that the employee might incur as a result. It’s also long been the case that, if the employer doesn’t do that, the employee can at least ask HMRC for tax relief on the allowance they could be receiving but are not.

Until 2020-21 it didn’t happen very often, but of course last Spring the number of employees working from home increased exponentially. Many (probably most) employers didn’t pay the allowance (£312 for the whole year) - apart from anything else, the employees were generally financially better off anyway as a result of not having to commute. So lots of employees claimed tax relief on the £312 instead, which meant HMRC adjusted their PAYE code to collect a little bit less tax each month.

With most PAYE code adjustments, HMRC automatically roll it forward year-on-year, on the assumption that the situation will persist. However, they’ve confirmed that they’re *not* rolling forward the home working adjustments, and a fresh claim must be made each year. This is more good than bad, as it avoids the risk of an inappropriate tax deduction being given for many years and then having to be clawed back by HMRC later when they realise. If you or your employees need to make fresh claims for 2021-22, here’s some more guidance:

https://www.gov.uk/tax-relief-for-employees/working-at-home

The extended Coronavirus Job Retention Scheme and a trap to look out for

In the Budget, the JRS was extended until 30 September 2021, from its previously scheduled end date of 30 April 2021.  Hopefully by the autumn relatively few employers will still need to use it, but it's there if they do.

In the first version of the scheme, claims could be made in respect of furloughed employees who'd been reported to HMRC prior to 19 February 2020 as being on the employer's payroll.  In the second phase, they had to have been reported to HMRC prior to 30 October 2020.  For this (fingers crossed) final stage, they need to have been reported to HMRC prior to 2 March 2021 as being on payroll.

So, that means that anyone who was on your February 2021 payroll can now be furloughed (if necessary) and a claim made from the government towards their wages, right?  Not so fast.  For a staff member who didn't meet the conditions for the first two phases, a claim can only be made for pay periods beginning 1 May 2021 onwards.  For March and April, the final two months of the current/second phase of the scheme, they're still excluded.  It seems quite likely a bunch of employers could miss that condition if they're not careful, and furlough recent starters in the mistaken expectation of being able to claim from the government towards their wages - this wrinkle has not been highly publicised.

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More furlough winners and losers

Many people were wondering what basis would be used for working out the appropriate furlough claims for March and April 2021 for staff on variable hours.  Up until that point, part of the process has involved looking back to the same month a year earlier, and using the higher of that month’s pay or average 2019-20 monthly pay.  But that process would start to fall apart from March, because if you looked back a year you’d be looking at a month that could itself already involve furlough pay, and then you may be starting to work with 80% of something that’s already been reduced to 80%, which is hardly fair.

The new rules have now been published, and they dictate that for those months, you’ll look back two years, to March 2019 and April 2019, for the single-month element of the "higher of" comparison.  That’s going to be great news for some people.  Somewhere out there, there will be someone on furlough who was paid on average £500 a month in 2019-20, but had a really big April 2019 when they were paid £3,000.  That means they’ll have had a furlough bonanza in April 2020, when the system looked back to April 2019 and based their pay on that big month.  And now they’re going to have another big furlough month in April 2021, getting a second chunk based on that same April 2019 pay.

On the other hand, this “look back” system produces losers too, even before the new March/April wrinkle.  Anyone with fixed hours who has increased those hours in 2020-21 and is now furloughed is going to be paid based on a similar look back to 2019-20.  Imagine someone was working three days a week back in January 2020, but within the last 12 months they’ve gone up to four days.  Now their employer has furloughed them for one of those four days a week.  They’re going to get no pay for that day, unfortunately.  The system will look at their usual hours back in January 2020, then look at their actual hours worked in January 2021.  There’s no difference, and that means there’s no claim.

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IR35 isn’t being introduced in April

IR35 was introduced in 2000, so it's going to be 21 this year.  In a nutshell, IR35 says that, insofar as your limited company’s revenue comes from you really being a pseudo-employee of an end-client, you can’t use the tax and National Insurance efficiencies of dividends – the company’s got to pay more or less all of that revenue out to you under PAYE.

Simple in theory, a complete failure in practice.  A company’s director had to make the call on whether IR35 applied and whether far more tax and NI should be paid, so there was a big financial incentive to argue they were outside it, and HMRC lacked the resources to police the rules in any meaningful way at all.  And, in any case, the question of what represents an employee-esque relationship is often impossible to answer with certainty.  In the modern world, countless people sit in that grey area somewhere between employment and self-employment.

So, IR35 was to all intents and purposes a failure.  In 2017, the government changed it a little.  If your customer was a public body – an NHS Trust, for example – then the decision was taken out of your hands, and the public body would decide if IR35 applied.  If they decided it did, they’d effectively take your company’s invoice, work out and deduct full employment taxes, and pay whatever remained, to put you more or less on a par with a PAYE employee.  This was effective in one sense – a lot of public bodies did apply the rules in that way – but had the unintended consequence that many of the better contractors just decided to move into the private sector and work there instead.

As a result, the government had a second idea.  From April 2020, those same rules would apply to big private sector companies too – they’d have to make the IR35 call themselves, at their own risk, and if they paid pseudo-employees via a limited company gross then the risk of employment taxes not being paid would be their own risk, not that of the contractor.  This was actually quite effective, and a bunch of big companies stopped using contractors entirely, either putting the workers on to PAYE or just outsourcing that PAYE processing to an umbrella company (technically they could go down that previously described route of deducting employment taxes from your company’s invoice, but there’s no real point, PAYE is an easier way of achieving the same result).

Then COVID happened, and the April 2020 introduction was postponed by a year.  The big companies who’d played ball and got ready for the new world found they could have got away with another 12 months of using contractors.  The big companies who buried their heads in the sand did get away with it.

But the change is still due to come in this April instead, so hopefully those latter companies have removed their heads from the sand and are getting ready to engage with it.  There’s a chance it could be postponed again, of course (the government have form over the last couple of years of very short-notice postponements of changes that businesses have spent a lot of time and money preparing for, even prior to COVID), but it seems unlikely, and it’s clear that it’s being talked about more this time round.  However, what that means is that you do hear a lot of things being said about it that aren’t accurate at all, such as:

• “IR35 is being introduced in April”.  No it’s not.  IR35 has been around for more than two decades.  All that’s happening is the responsibility of non-compliance is being shifted from the contractor’s company to its customer, if the customer is big.
• “You can’t take on a contract if it’s under IR35”.  IR35 has never had anything to say about whether a contractor’s company can accept an engagement or not.  It’s legislation about how a contractor must get paid by their own company.
• Crucially – “It’s more risky to be a contractor from April”.  There might be fewer contracts around, that’s true, with more of those gigs being offered on a PAYE basis instead.  But if you’re a contractor working for a big company, and they’re content to continue paying your company’s invoices in full, there’s *less* risk than before, as the customer now bears the burden of non-compliance.  There may well be some ultra-cautious contractors who decide to declare under IR35 anyway, even if their customer is happy to pay gross, but HMRC are going to be going after the end user in the first instance, not the contractor.  Anyone in that situation will clearly be at less risk than they were before, not more.
• End users of contractors telling contractors “there are some changes coming in April, you should look into them.”  Er, no, *you* should look into them.  This is a transfer of risk *from* contractors *to* end users.  The end users are the ones who need to understand what’s happening.

What is certainly true is that some contractors are going to find themselves taking PAYE jobs instead.  And what’s also true is that many of those people will find themselves earning less money than they used to.  Some of them will be able to ask for, and get, a bigger daily rate in order to make up for it, if they have particular bargaining power for some reason, but many won’t, as their fundamental value to their client/employer hasn’t changed.

There are two ways of looking at it, really.  Some contractors will be phlegmatic about it, considering they’ve done well for a while, and that now finding themselves with a tax burden on a par with that of an employee isn’t the end of the world.  And some contractors will not be phlegmatic about it at all, especially if their life involves overheads more or less equal to their present net income.  But it is what it is, and even if the change is postponed for a second time, it will come.  The tax system isn’t fit for 2021 in many respects, and the vast number of contractors using limited companies simply wasn’t contemplated when the fundamental levers of corporation tax, income tax and National Insurance were first created. 

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The Job Retention Scheme and the £2,500 monthly cap

January is the tenth month of the Coronavirus Job Retention Scheme.  It’s now been in place for so long that it’s easy to start to forget the basics that you became familiar with in Spring 2020.  In particular, we’re seeing quite a few businesses understandably confused about the £2,500 monthly cap on the claim for an employee.

The confusion comes where someone is only furloughed for part of the month.  If that’s the case, then the £2,500 cap is reduced accordingly.  So, if someone was furloughed on 13 January, and remained furloughed for the remaining 19 days of the month, the cap for them is 19/31 x £2,500, which is £1,532.

It’s easy to see why that’s necessary and appropriate if you stretch it to its logical conclusion.  If there was no such cap, someone could be furloughed for a single day in January and, provided their salary was £37,500 a year or greater, £2,500 could be claimed for them for just that one day!  Instead, £80.65 is the most that can be claimed.

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Winners and losers in the extended Job Retention Scheme

So, after accountants and employers spent a lot of time getting to grips with the first (fairly pointless) and second (somewhat more attractive) iterations of the proposed Job Support Scheme, it's been scrapped.  Instead, the existing Job Retention Scheme has been extended until at least March.  The scheme mostly continues as before, but since it's designed to admit new starters who didn't qualify first time around, there are some quirks.  Some people will do well, others badly.

• Anyone who was on the payroll back when the scheme first came into play has their furlough pay entitlement worked out on the same basis - by looking back to their 2019-20 pay.  That means that if they've had a pay rise or started to work more hours in 2020-21 and now get furloughed, they lose out.  Their entitlement will be based on their old, lower pay.
• However, it also works the other way round - if their hours have been decreased in 2020-21, their furlough pay will still be based upon their old, higher pay.  Lucky them.
• You might have two people doing the exact same job, at the exact same pay rate.  But if one of them started during 2020-21, whilst the other was on the books back in 2019-20, they could have different entitlements to furlough pay.  The newer starter's will be based on their September 2020 salary (if they're on a fixed salary).  The longer-standing employee's will be based on their pay back in February.  If they've had a pay rise since then, they lose out - it's not going to be reflected in their furlough pay.  And you could have an employee on variable hours who averaged 30 hours a week in 2019-20, and a colleague who averaged 10 hours a week.  In 2020-21, they might be averaging 20 hours a week each - but the first employee is entitled to three times as much furlough pay as the second.
• In the first phase of the scheme, an employee had to be furloughed for at least a solid three-week period in order to be eligible for the scheme.  That requirement has gone now, so employers experiencing some COVID-related decline in demand, but not enough to send anyone home for weeks at a time, will be able to get a bit of support previously unavailable to them.
• A lot of company directors missed out on furlough pay last time round, on the technicality that their payroll was filed annually, at year-end, so missed the cut-off date for the scheme (none of those directors were clients of this firm - we've always filed director payrolls on a monthly basis).  This time round, they're in.

Despite the oddities of the rules, some employers will choose to top the pay up of those employees who lose out because of the new scheme. This is not something all employers will be able to do though, and in all of these schemes there will be unavoidable unfairness.

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