Lecture 9

Question 1

What are self employed people responsible for paying

Answer 1

As a self-employed person, you’re responsible for paying Income Tax and National Insurance Contributions (NICs)

Question 2

What is income tax based on

Answer 2

Income Tax is based on your profits

Question 3

What are NICs calculated on

Answer 3

NICs are calculated on your earnings

Question 4

What can reducing your taxable profit through allowable expenses lower

Answer 4

Reducing your taxable profit through allowable expenses can lower your tax bill

Question 5

What are some common allowable expenses

Answer 5

Common allowable expenses include:
- Office supplies and equipment
- Business travel and vehicle expenses
- Professional fees and subscriptions
- Marketing and advertising costs
- Home office expenses

Question 6

Why is it good to contribute to a pension scheme

Answer 6

Contributing to a pension scheme not only secures your retirement but also offers tax advantages

Question 7

What can pension payments be deducted from

Answer 7

Pension contributions can be deducted from your taxable income

Question 8

How do self employed individuals typically pay tax

Answer 8

Self-employed individuals typically pay tax through the Self Assessment system

Question 9

When are the two payments for the self assessment system due

Answer 9

• First payment on account: Due by 31 January during the tax year
• Second payment on account: Due by 31 July following the end of the tax year

Question 10

What is IR35

Answer 10

UK tax legislation designed to ensure that individuals working through intermediaries, such as personal service companies (PSCs), pay the same Income Tax and National Insurance Contributions (NICs) as employees

Question 11

What’s the purpose of IR35

Answer 11

Prevent tax avoidance by individuals who, while operating through intermediaries, function similarly to employees

Question 12

When does IR35 apply

Answer 12

Applies when a worker provides services to a client through an intermediary and would be considered an employee if engaged directly

Question 13

What does applying IR35 depend on

Answer 13

The responsibility for determining whether IR35 applies depends on the client’s sector

Question 14

Who is responsible for determining the worker’s employment status in the public sector

Answer 14

The client is responsible for determining the worker’s employment status

Question 15

Who is responsible for determining the worker’s employment status in the private sector

Answer 15

The client is responsible unless the client is a small business; in such cases, the worker’s intermediary is responsible

Question 16

What must workers apply if IR35 applies

Answer 16

If IR35 applies, the worker’s intermediary must pay:
- Income Tax
- Employee NICs
- Employer NICs

Question 17

What are some tax planning considerations with IR35

Answer 17

Tax Planning Considerations:
- Regularly evaluate whether your contracts fall inside or outside IR35 to understand your tax obligations
- Ensure that clients provide a Status Determination Statement (SDS) for each contract, outlining the reasons for their decision
- Keep detailed records of contracts, communications, and working practices to support your status determination

Question 18

What is taxation like for sole traders

Answer 18

Sole Trader:
- Income Tax: Profits are taxed as personal income at rates ranging from 20% to 45%, depending on your income level
- National Insurance Contributions (NICs): Class 2 and Class 4 NICs apply to profits

Question 19

What is taxation like for limited companies

Answer 19

Limited Company:
- Corporation Tax: Profits are taxed at a flat rate of 25%
- Dividends: Shareholders can receive dividends, which are taxed at lower rates than income tax

Question 20

What is the tax efficiency like for sole traders

Answer 20

• Limited opportunities for tax planning
• All profits are subject to income tax and NICs

Question 21

What is the tax efficiency like for limited companies

Answer 21

• Potential for tax savings, especially if profits exceed the higher-rate income tax threshold
• Ability to draw dividends, which can be more tax-efficient than salary payments

Question 22

What is the liability like for sole traders

Answer 22

Unlimited liability; personal assets are at risk if the business incurs debt

Question 23

What is liability like for limited companies

Answer 23

Limited liability; personal assets are generally protected from business debts

Question 24

What are the administrative requirements for sole traders

Answer 24

• Simpler setup and fewer ongoing administrative tasks
• Only one self-assessment tax return is required annually

Question 25

What are the administrative requirements for limited companies

Answer 25

• More complex setup and ongoing compliance obligations
• Requires annual accounts, corporation tax returns, and confirmation statements

Question 26

When should you consider switching from sole trader to limited company

Answer 26

Transitioning to a limited company may be advantageous when your annual profits exceed approximately £50,000

Question 27

Why is effective remuneration planning essential for businesses

Answer 27

Effective remuneration planning is essential for UK businesses to attract and retain talent while managing tax liabilities

Question 28

What are some key strategies for remuneration

Answer 28

key strategies to consider:
1. Salary and Bonuses
2. Benefits in Kind
3. Share Schemes

Question 29

What are some key tax considerations for international expansion

Answer 29

Key Tax Considerations for International Expansion:
- Double Taxation Agreements (DTAs)
- Transfer Pricing
- Permanent Establishment (PE)
- Indirect Taxes
- Repatriation of Profits
- Local Tax Incentives

Question 30

What’s the point of DTAs

Answer 30

The UK has established DTAs with numerous countries to prevent double taxation

Question 31

What do DTA agreements do

Answer 31

These agreements allocate taxing rights between countries and often provide relief through tax credits or exemptions

Question 32

What do transfer pricing rules ensure

Answer 32

When trading between related entities across borders, transfer pricing rules ensure that transactions are conducted at arm’s length prices

Question 33

What might happen if a company establishes a PE

Answer 33

Establishing a physical presence, such as an office or warehouse, in another country may create a PE, subjecting your business to local taxation

Question 34

What does tax avoidance involve

Answer 34

Tax avoidance involves arranging your financial affairs to minimize tax liabilities within the legal framework

Question 35

What can engaging in aggressive tax avoidance schemes lead to

Answer 35

Engaging in aggressive tax avoidance schemes can lead to significant financial consequences