Jargon Busters

 Technical jargon is confusing – there’s no two ways about it. Here at your umbrella we don’t want to baffle you with technical terms – we believe that understanding the terminology is half the battle, so we’ve created our own jargon dictionary to explain, in plain English, all the technical terms you may come across in your career as a contractor.

You can read more about the terms we’ve listed in the various guides that we’ve included in our free stuff section– and of course, we’re very fond of talking, so you can contact us any time.

If there’s anything else that you need more information on then just let us know.

24 Month Rule

As a Contractor you are permitted to claim expenses, providing your workplace meets HMRC’s definition of a temporary site; whereby your attendance lasts no longer than 24 months. As soon as you know  that your contract will last beyond 24 months, you must stop claiming expenses. If for example, you agree a 36 month contract from the outset, no expenses at all can be claimed against the contract.

After 24 months, if you spend 40% or more of your time at the same site, any expenses incurred whilst travelling between home and that place, or any accommodation expenses are no longer permitted.

If you continue working for the same client but change site after 24 months, the new workplace must be geographically different to the previous workplace or there must be a significant change to your daily commute to be entitled to claim travel and accommodation expenses. For example, if the new workplace is a different building within the same road, then no expenses are permitted to this site. If daily mileage to one workplace is 15 miles and the new workplace is 12 miles albeit in the opposite direction, there is no significant change to the daily commute and therefore no expenses are permitted to be claimed.

If you have previously claimed expenses to the same site under a different arrangement, this must also be taken into account against the 24 month rule. Simply moving Umbrella Company won’t allow you to continue claiming expenses, as the rule applies to the site you are working at rather than the company you use.

AWR – Agency Worker’s Directive

These new regulations have been introduced following a European Union Directive, and they intend to ensure that low paid agency workers are given the same basic rights as their permanent colleagues when it comes to pay, holiday and working hours as soon as they’ve been doing the job for 12 weeks.

The nice thing for us all is, put simply, if you’re a freelancer in business on your own account (judged by similar tests to IR35) and not using an umbrella company you don’t need to worry, you’re exempt from the regulations by the nature of your business to business relationship with the client.  And if you are using your umbrella then although the legislation doesn’t exclude you, we’ll take care of it.

Business Insurances

Whether you’re employed, a director of your own limited company, or a sole trader, you’ll need to be covered by the appropriate insurances to protect you whilst providing your services. Now we will do all of the hard work on this, including getting the best deal out of the insurers (because we know how much everyone loves speaking to their insurance company!).

For further information on business insurances including Employer’s Liability Insurance, Public Liability Insurance and Professional Indemnity Insurance just take a look at our Contractor Insurance Guide.

Capital Gains Tax

Capital Gains Tax is a tax on the profit or gain you make when you sell or ‘dispose of’ an asset.

You usually dispose of an asset when you cease to own it – for example if you:

  • sell it
  • give it away as a gift
  • transfer it to someone else
  • exchange it for something else
  • receive compensation for it – for example you receive an insurance payout when an asset’s been destroyed

It’s the gain you make – not the amount of money you receive for the asset that’s taxed.

Childcare Vouchers

A salary sacrifice is when an employee gives-up part of their gross income for an alternative non-cash benefit. A salary sacrifice is often offered to employees as part of a flexible benefit package provided by their employer.

A salary sacrifice provides tax savings. By deducting an amount of money from an employee’s earnings using a salary sacrifice in order to pay for childcare using childcare vouchers for example, means that the amount of money sacrificed is free from income tax and National Insurance contributions (NIC’s).

Essentially, a proportion of a parents income to pay for day care, nurseries and other forms of registered childcare are not classed as a ‘benefit in kind’. Childcare vouchers can therefore become an excellent benefit for employees. Different tax rules apply to different types of earners and as such you should always get some advice from an expert prior to taking part in a scheme.

CIS – Construction Industry Scheme

The Construction Industry Scheme (CIS) applies to people involved in mainstream construction work.

If this applies to you, your cis will carry out all of the admin required for your assignment, and you will find the assignments and decide the rates. You need to register with HMRC for CIS status, and once you have your reference number, we’ll pay you, having already deducted the taxes that HMRC require(usually 20%).  We’ll also help you with your National Insurance registration and payments.

As a self-employed contractor, you will still be able to offset your business expenses against this tax, but you’ll do it at the end of the year and may receive a rebate.

To see how much better off you could be using your cIS NB: Should this be a link?, take a look at our construction industry self-employed tax calculator.

Composite Company

Since 2007, composite companies have ceased to be a legal option for contractors. However, prior to this, composite companies were the typical way that a contractor would run his business.

Although there is no legal definition of the phrase composite company, it is specifically used to describe companies which employ several contractors, give them a small share in the business and pay them a combination of minimum wage salary (subject to PAYE and National Insurance) and dividends (only subject to corporation tax). Although some contractors still receive their income as these two components, the difference now is that they have to be responsible for owning and managing their own limited company, or personal service company.

Contractors should be wary of working with any providers who are operating companies where multiple contractors are receiving dividends through one company, or where dividends are being paid without the contractor being solely responsible for the management of that company.

Contractor Accountant

An accountant will often have many different types of customers, and will offer different services to each of those customers. A contractor accountant will be an expert in the field of contracting, and will be able to provide advice on the various ways a contractor can operate and manage his finances.

When choosing a contractor accountant, you should always ensure that the accountant holds an accountancy qualification and that he is accredited by a contractor industry auditor.

Contractor Calculator

Here at the cps group we our contractor calculators to provide you with an idea of net returns you will be likely to receive based on your own personal circumstances. As well as the circumstances relating to your contract, we think it’s important to make a decision based on the numbers and how they work for you.

We provide different contractor tax calculators that are kept completely up to date with all tax rates and comply with all government guidance on calculations, to ensure that we provide you with the most accurate indication of what returns you can expect from each of our services.

You can read about our range of services in the various sections on our website, and you can apply online once you’ve made a decision on which service suits you best – or if you prefer, you can give us a call and we can help talk you through the options.

Try our Contractor Tax Calculators to compare how much better off you could be by using an option provided by the cps group.

Contractor Limited Company

Limited Liability Companies are owned by  shareholders and is often a safer way to run a business without the risk of losing your personal assets should things go wrong.

Many small businesses operate via private limited companies. There are around 1.15 million limited companies operating in the UK currently, compared to around 2.8 million sole traders and 500,000 partnerships

Setting up a limited company is the most popular option for contractors, because it’s often the most profitable. For example, you may pay significantly less in National Insurance contributions and in Income Tax as most of your money is taxed as company revenue through the corporation tax system.

By working through a Limited Company through your psc from the cps group you get a full limited company accounting service designed for independent freelance contractors who want to maximise their take home pay.

Contractor PSC – Personal Service Company

A Personal Service Company, known as a Limited Liability Company is owned by its shareholders and is safer way to run a business without the risk of losing your personal assets should things go wrong.

Many small businesses operate via private limited companies. There are around 1.15 million limited companies operating in the UK currently, compared to around 2.8m sole traders and 500,000 partnerships

Setting up a limited company is the most popular option for contractors, because it’s often the most profitable. For example, you may pay significantly less in National Insurance contributions and in Income Tax as most of your money is taxed as company revenue through the corporation tax system.

By working through a Limited Company through your psc from the cps group you get a full limited company accounting service designed for independent freelance contractors just like you who want to maximise their take home pay.

Contractor Tax

You’ve probably noticed by now that with the cps group you get straightforward explanations and access to a service that best suits your needs. All of our services are designed to make sure that as a contractor you are not paying too much tax unnecessarily.

You can forget about tax worries and choose to work as an employee through a PAYE Umbrella company and claim your temporary workplace expenses. You could select our Contractor Personal Service Company (your psc), and have our accountants walk you through running your own company and enjoying the benefits of doing so. Alternatively, if you would like to be self-employed, our Sole Trader (your sole trader) or CIS services (your cis) would be perfect for you.

With our contractor Umbrella Company employment service, your umbrella, all PAYE and National Insurance contributions are deducted at source from your salary meaning you have no reason to do anything relating to tax at all. With our other services, our specialist advisors and accountants ensure that you’re given the full amount of support and guidance, keeping you compliant with everything, including all Contractor Tax.

See how much better off you could be by trying our Contractor Tax Calculators.

Contractor Umbrella Company

A contractor umbrella company acts as an employer to contractors who work under temporary contracts in the UK. Usually, these contractors work through recruitment agencies, who only issue contracts to a limited company and not to individuals. At this point the umbrella company becomes the limited company that the recruitment agency contracts with.

The introduction of the Managed Service Company legislation in 2007 meant that a contractor cannot benefit from dividend payments unless they incorporate their own limited company, called a PersonalService Company. This has made employment by contractor umbrella companies popular.

With your umbrella from the cps group, you could benefit from a higher net income than working as direct employee of your client or agency. You will also be fully covered by comprehensive employers liability, public liability and professional indemnity insurance – we want to make sure you’re protected, and we are too.

Dispensation

A dispensation is an agreement reached between an employer and HMRC which reduces the volume of administration and paperwork that an employer has to complete relating to expenses.

Ordinarily, employers have to list all benefits and expenses on a P11 (D) for each employee at the end of the tax year. A dispensation is a notice from HMRC confirming that for certain expenses, this is not required. It can also mean that employees do not have to include details relating to expenses on their own tax returns.

What a dispensation does not do is take away the responsibility for the employee to ensure that they only claim genuine expenses, or to keep receipts for those expenses. A company who holds a dispensation must have a procedure to audit expenses, and the employee must be aware that at any time, receipts can be requested as proof of an expense that has been incurred.

Employee Benefit Trust

Have you heard about services where your income is loaned to you by an Employee Benefit Trust or EBT?  Have you been guaranteed a percentage return in the 80% bracket? Then RUN!

An Employee Benefit Trust (EBT) is a trust set up by an employer for the benefit of its employees. The EBT is normally funded by a payment from the employing company out of your wages to an offshore trust, usually based in the Isle of Man or Channel Islands.

The Trustees of the EBT are then able to make loans at their discretion to the employees (called beneficiaries) in the form of employment related interest-free loans, which can be recalled by the Trust at any time.

You will often be told that leading tax counsel and clever QCs have endorsed these products, but as they’re offshore, most of the leading contractor audit services wont touch them with a barge pole.

Yes, these schemes have been popular for those looking for a quick win, but they are now illegal, and have been since 2010. Have a look at what HMRC have to say about them:   http://www.hmrc.gov.uk/budgetupdates/autumn-tax/tiin2675.htm.  

Employer’s Liability Insurance

The Employer’s Liability (Compulsory Insurance) Act 1969 says that all employers who have employees working in the UK have to have at least £5,000,000 employer’s liability cover. This is to ensure that there are always funds available, whether the employer can afford it or not, to compensate an employee for a genuine work related claim.

So what is the insurance?  Basically, if you have a work related illness or injury and your employer is held responsible for it, then this insurance protects the employer against such a claim.  It could be that a claim arises up to 40 years in the future – for example if an employee has an asbestos related illness due to their time in a workplace, the employer could be held responsible for up to 40 years, and they have to keep their certificates for that amount of time.

Flat Rate VAT

The flat rate VAT scheme has been running since 2002 and the main aim is to reduce the cost of having to comply with your VAT obligations.

Instead of paying HMRC the total VAT charges on invoices minus the VAT you are reclaiming, you are charged a fixed percentage of your gross turnover. The benefit of this scheme is that is can simplify your accounting and also potentially increase your profit.  However, the flat rate VAT percentage varies according to what type of business you run.

Give us a call and we can go through it all with you in more detail on 0844 854 5225.

Holiday Pay

Most workers have the right to take a minimum amount of paid holiday. This is called statutory holiday.  This includes people who work full-time, part-time, agency workers and casual workers. Only people who are self-employed and a few other exceptions will not be entitled to statutory paid holiday.  The rules about statutory holiday apply regardless of how long you have worked for your employer and regardless of how old you are. However, you don’t have the right to statutory holiday if you’re a child under school leaving age.

You have the right to take 5.6 weeks’ paid holiday a year. Your contract of employment may give you the right to take more than the statutory amount of paid holiday, however, it cannot give you less. If your contract gives you the right to take more than the statutory amount of paid holiday, this is called contractual holiday. The law doesn’t say how much contractual holiday you should get, or whether or not it should be paid.

IR35

IR35, or the Intermediaries Legislation, is tax legislation introduced by the government in 1999 aimed to capture any contractors who are receiving income in a way that is not employment related income, meaning that they pay less tax.  The legislation specifically targets those who are actually ‘disguised employees’ of their client, and therefore should be taxed as employees.

We will help any contractor who has concerns about IR35 to understand whether it impacts them, and all of the services offered by the cps group are fully compliant with HMRC’s procedures, in this area and every other.

And if you are caught by the legislation, your umbrella could be the ideal service for you.  Check out our IR35 Legislation Guide for a more detailed explanation.

IR35 Tax Calculator

Here at the cps group, we use an IR35 Tax Calculator to calculate quickly and accurately, how much of your contract value you will take home after tax, N.I and costs have been deducted across the range of services we offer.

We will help you identify the best service for you to help you maximise your income whilst using the service that best suits your circumstances, and this applies throughout the life time of your contracting career – we’ll review your circumstances and our services regularly.

Our IR35 calculator is fully up to date with current tax rates and all the legal requirements so why not try our IR35 Tax Calculator to see how much you could be making by running your own limited company, or any of our other services.

Limited Company Calculator

Here at the cps group, we use a Limited Company Calculator to calculate quickly and accurately, how much of your contract value you will take home after tax, N.I and costs have been deducted across the range of services we offer.

We will help you identify the best service to ensure you maximise your income whilst using the service that best suits your circumstances, and this applies throughout the life time of your contracting career – we’ll review your circumstances and our services regularly.

If you would like a fully tailored quote which is based on current tax rates and all the legal requirements are in place, then give your psc a call and we’ll tell you how much extra you can make by running your own Limited Company.

Limited Company Contracting

A Limited Company (known as a Limited Liability Company) is owned by its shareholders and is the safest way to run a business without the risk of losing your personal assets should things go wrong.

Many small businesses operate via private limited companies. There are around 1.15 million limited companies operating in the UK currently, compared to around 2.8million sole traders and 500,000 partnerships

Setting up a limited company is the most popular option for contractors, because it’s often the most profitable. For example, you may pay significantly less in National Insurance contributions and in Income Tax as most of your money is taxed as company revenue through the corporation tax system.

By working through a Limited Company through your psc from the cps group you get a full limited company accounting service designed for independent freelance contractors just like you who want to maximise their take home pay.

Limited Liability Partnership

A Limited Liability Partnership (LLP) shares many of the features of a normal partnership – but it also offers reduced personal responsibility for business debts.

Unlike members of ordinary partnerships, the LLP itself is responsible for any debts that it runs up, not the individual partners.  The partnership is registered with Companies House and each year must complete a Partnership Tax Return which includes a statement showing how profits and losses are divided between the partners, as well as submitting an annual return to Companies House.

MSC Legislation

Announced in December 2006, the Treasury’s document Tackling Managed Service Companies  introduced suggestions to HMRC to help tackle the common place use before this time of contractors receiving payment via dividends from a company rather than as employment income under deduction of PAYE, without the responsibilities of managing and running a company – these companies are widely referred to as Composite Companies and are now illegal.

In Budget 2007 the UK Government introduced legislation relating to this way of working, now called Managed Service Companies (MSCs).  It’s the newest legislation designed to restrict contractors in their potential to gain increased take home pay through limited companies. 

Take a look at our Guide to MSC Legislation for more information on this piece of law.

National Insurance

You pay National Insurance contributions to build up your entitlement to certain state benefits, including the State Pension. The contributions you pay depends on how much you earn and whether you’re employed or self-employed. You stop paying National Insurance contributions when you reach State Pension age.

State Pension age is 65 for men born before 6 April 1959 and 60 for women born before 6 April 1950. But it will gradually increase to 65 for women between 2010 and 2020.

Some people also pay voluntary National Insurance contributions. For example, you might choose to pay them if you:

  • aren’t working and are not claiming state benefits
  • haven’t paid enough National Insurance contributions in a year to count for the State Pension or other long term state benefits
  • live abroad and want to maintain your state benefits entitlement

National Minimum Wage

Who is Eligible and How Much is it?

National Minimum Wage (NMW) is in place for the majority of workers over school age in the UK and your employer legally must pay you that rate as a minimum no matter how you are paid.

The rates do vary according to age and whether you are an apprentice. For full details, refer to the Legislation GuideNMW.

Offshore Tax Scheme

An offshore tax scheme is best described as a tax avoidance scheme as that is primarily what it is intended to do! Be warned though that any work carried out in the UK, whether you are a UK national or not, is subject to UK Taxation Laws.

The temptation to pay as little tax and National Insurance as possible is huge and there are many legitimate UK based schemes that enable you to do this without the need to take the risk with offshore schemes.

You may have researched these and learned of recent cases involving BN66, and the IT contractor who has been ordered to repay taxes because the offshore scheme he was using, which was fully supported by expert opinion, has been deemed to be illegal.  HMRC can go all the way back to 1987, for both tax and interest, so it really is a very risky business.

The best thing to do is to consider all of your options, and make a decision based on whether something is likely to attract HMRC’s criticism.  Sometimes it takes time, but HMRC’s job is to collect taxes of UK tax payers, and that’s exactly what they’ll do, and eventually that will mean passing laws to close down such schemes.

The other point to consider is your recruitment agency.  Most will now go no-where near companies registered anywhere other than England and Wales, and so if you elect to use a scheme offshore, your recruitment options will be severely limited.  There are schemes out there that use a UK based ‘front’ company and tell the recruitment company there is no offshore involvement, but we look at like this – if they’re prepared to lie to a recruitment company in that way, what else are they prepared to lie to you about?

Get a good night’s sleep, use the cps group and stick with our UK based services.

Partnership

Partnership involves a contract between the partners to engage in a business in order to make a profit. Assets and responsibilities are shared by the partnership. Unlike a company, a partnership is not a separate legal entity, even though the number of partners may be large. A partnership is, however, required to file tax returns.

In general, each partner contributes property, skill or labour, although a partner may contribute nothing and still have the rights of a partner. A partner that contributes property but no labour is usually referred to as a “sleeping partner”.

The term “firm” is used to refer collectively to the individuals who make up the partnership.

The PARTNERSHIP ACT 1908 sets out much of the law about partnerships, although it may be overridden on particular matters by the particulars of the partnership agreement.

PAYE

PAYE or Pay as You Earn, is the system under which an employer is required by law to deduct income tax from an employee’s taxable wages or salary.  The amount is paid directly to HMRC, usually 14 days after collection.

The amount of PAYE that you pay depends on your tax code and your total salary.  Your tax code tells you how much you can earn before you start to pay tax.  Your total salary tells you what percentage of income tax you will pay.

Here at the cps group we are specialists and will take time to explain to you how this affects you personally.

PAYE Umbrella

your umbrella is the umbrella company solution provided by the cps group for those people working under PAYE. In the UK, a PAYE umbrella company acts as an employer to contractors working on temporary contracts. These are usually through employment agencies that will only contract with limited companies.

With the restrictions imposed by the IR35 legislation, working through a PAYE umbrella is an attractive and straight forward option for many temporary contractors.

The your umbrella service is fully compliant with all legislation, registered with HMRC for PAYE and VAT and comes with comprehensive inclusive business insurance for complete peace of mind.

Compare how much better off you could be by trying our Umbrella Company Tax Calculator against the PAYE Calculator.


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