Reply to: Self-employed can set mortgage costs against tax, says HMRC

[THEPUMA]

I think in all likelihood it would be 95% of £50K. The only deductions that can be made from the £50K other than the 5% are those that could have been claimed by an employee providing the services (typically travel, pension, PII).

I don't know of any employees who have successfully claimed the expense of paying a self-employed subcontractor to do their work for them. The expense would have to be wholly (probably OK), exclusivley (probably OK) and necessarily (no chance) incurred in the course of your duties.

[ASB]

OK then, to clarify.

It is possible for someone to have a self-employed relationship with a company they control. In these circumstances, HMRC could have 2 grounds on which to challenge.

Firstly, it may be the case that the individual in question should have been employed by their own company. Indeed, we had a case of exactly these circumstances. Against our advice, the client treated himself as self-employed. HMRC challenged and eventually conceded.

Secondly, the individual may be deemed to be an employee of the end client company via the IR35 legislation. The fact that the individual is self-employed rather than employed by his company is irrelevant here.

Going back to the context of the original point, it is unlikely that someone would choose to be self-employed rather than employed by their own company, unless they were able to use the more generous expenses regime available to self-employeds to bring their self-employed profits down below the NI thresholds.

Otherwise, they will be paying a big chunk of class 4 NI at 8% which would probably outweigh the tax saving.

PUMA

Hi PUMA,

Ok, so hypothetical:-

Mr ASB is s/e with ASB Ltd and I bill them 10k
ASB ltd bills client co 50k and the 40k happens to be retained (but I hold all the shares etc so it is a potential intermediary).

Along comes HMIT and they decide that IR35 applies. They haven't done a status enquiry (and even if they did let's assume I'd pass because of the actual arrangements between me and ASB Ltd).

Now, the time comes to work out the deemed payment.

Is it based on 95% of 50k less the PAYE and NI personally paid by ASB (which would seem possibly extraordinarily unfair given I am genuinely self employed in terms of the 10k)

Is it based on 95% of 40k (which would seem reasonable given that is the potential non paye income I personally could receive as a result of my shareholding)

Or is it something else entirely. ?

[THEPUMA]

OK then, to clarify.

It is possible for someone to have a self-employed relationship with a company they control. In these circumstances, HMRC could have 2 grounds on which to challenge.

Firstly, it may be the case that the individual in question should have been employed by their own company. Indeed, we had a case of exactly these circumstances. Against our advice, the client treated himself as self-employed. HMRC challenged and eventually conceded.

Secondly, the individual may be deemed to be an employee of the end client company via the IR35 legislation. The fact that the individual is self-employed rather than employed by his company is irrelevant here.

Going back to the context of the original point, it is unlikely that someone would choose to be self-employed rather than employed by their own company, unless they were able to use the more generous expenses regime available to self-employeds to bring their self-employed profits down below the NI thresholds.

Otherwise, they will be paying a big chunk of class 4 NI at 8% which would probably outweigh the tax saving.

PUMA

[expat]

I was not intending to say it is an IR35 get out. In terms of any retained income then Expat Ltd is almost certainly a relevant intermediary, and this could then become a deemed payment to Mr Expat.

Neither was I. But if there is any advantage to being self-employed, then being self-employed contracting to Expat Ltd would get around the usualk problem of ClientCo refusing to take on an SE. Theye wouldn't even know.

[ASB]

Err, no I don't think so. The HMRC inspector "sees through" the contracts and enforces a notional contract between Mr Expat and Client Co PLC. Mr Expat is therefore caught

<malvolio mode>Errm no........</malvolio mode>

Or trying to be helpful. I think you are simply wrong. [Edit: no you're not. I am]

The revenue have always had - and continue to do so - recourse here by a different manner. This is a status enquiry. This has two possible results.

1) You are self employed.
2) You are an actual employee of the person you are nominally self employed to. The same IR56 tests are used.

This is one of the major reasons that end clients are reluctant to use SE people. In the event of a status enquiry then any downside falls on them. [Agencys have to deduct PAYE under what was s134 of the taxes act 1988].

I would be interested in a qualified view (hello THEPUMA ).

I think we are, however, somewhat at cross purposes - because we have divereged from Mr Expats question.

I was not intending to say it is an IR35 get out. In terms of any retained income then Expat Ltd is almost certainly a relevant intermediary, and this could then become a deemed payment to Mr Expat. [Edit: whilst the above regarding the status is true, it would appear that any IR35 attack would still assess the self employed income to the deemed payment]

[slackbloke]

Is this new? I thought you could claim all sorts for a home office if you were working from home - heating, furniture, electricity, broadband etc etc - as well as a proportion of the mortgage interest.

Or are they saying you can claim tax relief against all your mortgage interest and council tax payments, just because you're self-employed? Don't think so.

This was previously identified in another thread :

http://forums.contractoruk.com/busin...link-beeb.html

And yes, you can claim tax relief on mortgage interest and council tax payments if you have a dedicated office/business area in your home and use it on a regular basis. The mortgage interest part is new.

[xoggoth]

Not just self employed AFAIK but any small business

http://www.hmrc.gov.uk/manuals/bimmanual/BIM47825.htm

According to www.tax.indicator.co.uk you can also do it via a rental agreement.

[The Lone Gunman]

Let me guess. You got that wrong on purpose? Or you were answering a different question? Or were you acting as the character Malvolio, whose objective in life is to make people think carefully about the question they've asked by answering them in an unusual way?

That is not very helpful is it!
If he is wrong then please tell him and us why he is wrong.
I would be interested to know how we could do this and, if it is an IR35 get out, why we aren't doing it already.

[malvolio]

OK, and given the above, which bit of "ermm... No" are people having trouble with.

[zathras]

http://www.independent.co.uk/news/bu...rc-856994.html

HM Revenue & Customs has started allowing self-employed workers to offset their mortgage interest and council tax against their annual income tax bill; an expense that accountants have historically believed to be off-limits.

New guidance issued by HMRC clarifies the validity of writing off mortgage payments, council tax and even home insurance against income tax for the first time. The move is likely to be welcomed by Britain's 3.6 million self-employed at a time when food and fuel costs are rising, and the economy is slowing.

Angela Beech, a partner at the accountancy firm Blick Rothenburg, said her company had been given the impression in the past that offsetting mortgage payments against income tax could have detrimental knock-on effects for the self-employed. "Historically, we steered clear of it," she said. "There was a fear that if you took mortgage interest as an expense, it could put your house in jeopardy of being free of Capital Gains Tax (CGT)."

Currently, taxpayers do not pay CGT on profits made on the sale of their primary residence, but if the residence was considered to be mainly used for business purposes, there was a risk that it could be deemed liable.

Ms Beech said the new guidance by HMRC had also usefully clarified the amounts that people can claim as expenses – not just for mortgage interest, but for other expenses such as heating and electricity. "These examples, which appear on the Revenue's website, are the ones which the inspectors use, so they're very useful," she added.

A spokesman for the HMRC said that in the Revenue's eyes, the self-employed had always been able to offset mortgage interest against income tax. However, he conceded that this was the first time it had been formally clarified in HMRC guidance documents. He added that the guidance had been released several weeks ago, but accountants had only begun to notice now.

"When there's good news on things that you can claim against, they always tend to just slip it into the manuals," said Ms Beech. "They only shout about it when they're announcing a crackdown."

Trouble is most contractors are not self-employed. They are in full-time employment with ContractorCo. You could write yourself a self-employed contract with ContractorCo and then watch them hit you for IR35 with ContractorCo's client (since ContractorCo is a relevent intermediary under the Ir35 regulations). Failing that they then prove that you are an employee of ContractorCo.

Since you would therefore be in full time employment the concession is unavailable to you

Cynic? Moi?

[dang65]

If you are running a Ltd. you shouldn't claim mortgage interest as part of home office expenses. Not according to my accountants anyway. HMRC take a dim view of this, apparently.

What if you had to buy a bigger house in order to have space for an office? I mean, if you rented an office round the corner then I presume you'd be able to offset the costs for that. I don't know anything about this sort of thing though, and I don't claim any of those sort of expenses myself.

[Fred Bloggs]

In terms of an IR35 investigation it could get to be fun and games, lord knows how that could pan out since Mt Expat could only be either an actual employee of Expat Ltd or self employed as a result of a status investigation and IR35 doesn't come into it.

Err, no I don't think so. The HMRC inspector "sees through" the contracts and enforces a notional contract between Mr Expat and Client Co PLC. Mr Expat is therefore caught

[ASB]

Yes you can.

Mal seems to diasgree but the following is perfectly possible:-

Mr Expat as an individual enters into a contract for services with Expat Ltd.
Mr Expat declares all this income through the normal sole trader type mechanism.

Expat Ltd enters into contract to supply services to various entities - presumably DodgyAgency ltd.

In terms of an IR35 investigation it could get to be fun and games, lord knows how that could pan out since Mt Expat could only be either an actual employee of Expat Ltd or self employed as a result of a status investigation and IR35 doesn't come into it.

[THEPUMA]

ermm... no.

Let me guess. You got that wrong on purpose? Or you were answering a different question? Or were you acting as the character Malvolio, whose objective in life is to make people think carefully about the question they've asked by answering them in an unusual way?

[malvolio]

Can't I work self-employed on a contract for MyCo Ltd? Agents may refuse to work with self-employed people, but I don't believe that MyCo Ltd will refuse.

ermm... no.