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Tax Guide For Self-employed Electricians

Tax guideSelf-employed (sole trader) and owner-managed limited company electricians are part of the sector known as the “trades” and are among the non-white collar industries where individuals can be quite high earners if they work tax efficiently.

Along with the other trades and black cab drivers for instance, electricians are on HMRC’s radar as a group that potentially contains individuals who declare all of their income.

As if being on HMRC’s radar for undeclared income weren’t bad enough, all the trades, electricians included can also fall foul of three sorts of tax legislation: the construction industry scheme (CIS) and IR35 and off-payroll legislation.

Below is a tax guide of sorts, which we hope offers electricians some useful information, helps them mitigate risk of falling foul of tax legislation, and encourages them to pay just the right amount of tax in the correct way by hiring an accountant.

Undeclared income
If you’re not declaring all income the odds are that at some point you will be investigated. Be warned that the penalties and fines can amount to a large sum. HMRC uses benchmarking, super snooper legal powers, and sophisticated technology to catch out tax dodgers. If you’re tempted to do “cash jobs” where you don’t declare income, think again, and read about what HMRC can do these days to catch people who aren’t declaring all their income from self-employed work, rent on property, online sales, or any other income not already taxed at source.

Do you fall within IR35 or “off-payroll” legislation or the CIS legislation?
No one could blame freelance/self-employed or limited company contractor electricians for feeling their under attack from all sides, not only are HMRC watching closely for possible tax avoidance, but there is also the possibility that IR35 or “off-payroll” legislation could snare them or if they fall outside that then the construction industry scheme (CIS) might apply!

You’ll fall inside IR35 if:
o    You earn a regular wage from the same client;
o    Receive holiday pay, sick pay, or are part of a company pension scheme;
o    Have tools and equipment supplied;
o    Have a person in “control” of you, a boss;
o    Do not take financial risk, e.g. for late running or cancelled jobs or under-estimations;
o    Cannot send a substitute to continue a contracted project.

Read more about IR35 here and make sure you know the rules. Be absolutely certain that you have a contract for every job you take on, even if it’s for the same client, and make sure you have more than one client. You should ideally have every contract checked over by someone with knowledge or expertise in IR35, because if you are caught up in IR35 it will hurt: not least, you will end up paying tax and national insurance retrospectively on what you earned and you will be fined.

Off payroll legislation
You probably won’t fall within “off-payroll” legislation unless you work for the public sector, but that includes a huge number of organisations, including courts, local authorities, government departments, hospitals, schools, etc. You could fall within “off payroll” legislation and one day be confronted by an immediate choice to go on the payroll (read my article about contractors working within the NHS). Then again, you might be subject to the legislation without realising it at first. The list above for IR35 applies here as well. So know the rules and stick within them.

Are you a CIS contractor?
You probably won’t be classed as a CIS contractor unless you work for an architect, developer, Construction Company, or a company whose turnover is more than £1million. You might work some or all of the time as a sub-contractor within the construction industry.

The Construction industry scheme (CIS) applies to contracts between businesses in the construction industry: e.g. if an electrician carries out electrical work for a builder-developer firm or a construction company or architect, or another company earning over £1million a year, then probably they are a CIS contractor. But if an electrician carries out a job for a haulage contractor or does a rewiring job for a private client she or he will not be a CIS contractor.

As if this wasn’t complex enough, there are three classes of CIS contractors:
•    Directly employed: with tax and NI deducted at source via PAYE you are considered an employee of the contractor.
•    Self-employed: paid net at a flat-rate deduction of 20% for tax and national insurance you are not considered an employee of the contractor, and you will complete your own self-assessment tax return or company accounts each year and pay the difference between 20% and the actual tax/NI liability. A higher deduction of 30% applies for sub-contractors who are not registered for self-assessment with HMRC, or who can’t be verified by a contractor.
•    Self-employed: you invoice for each job, and are paid gross without deductions and are not considered an employee of the contractor. You will complete your own tax return or company accounts each year and pay tax/NI liability as it applies.

Pay attention to your status if you want to retain your self-employed status:
•    Make sure you have a contract with the contractor or client;
•    The contract should be between the business (freelance business or limited company) and the contractor, not the worker and the contractor;
•    Renew contracts for every new project and have each contract reviewed by someone with the appropriate knowledge or expertise.

Reporting CIS contractors
When making monthly returns to HMRC, the contractor has to declare that they have considered the employment status of each sub-contractor listed on the return they are filing. This is very similar to the “off-payroll” legislation in this respect, as the contractor must state that they are happy that each sub-contractor listed is classified as self-employed. If the contractor gets this wrong there is potential for a £3,000 penalty.

CIS status causes as much confusion as the recently introduced (2017) “off-payroll” legislation is causing. And CIS has been a contentious issue in the construction industry since it was brought in April 2007:

CIS is very similar to IR35 and off-payroll legislation:
•    Personal service – is the subcontractor obliged to work personally or can she or he send a substitute (you should be able to send a substitute if you’re self-employed);
•    Control – is there detailed control over how the work is done (this doesn’t mean the drawings or the brief) (there should be no control if you’re self-employed);
•    Mutuality of obligation – this means the contractor is obliged to offer work and the sub-contractor will be obliged to accept work (there should be no obligation to offer or to accept work),

Providing you pay attention to the above then you should cement your status by also running a well-managed organisation:

On headed paper from the business of the electrician to the client; you should invoice the client for the work done and be paid against the invoices you have submitted.

If you run a bone fide business, you will be keen to generate new business. To that end, advertise in the local press, online, in a shop window and keep all receipts and invoices and copies of the adverts you have placed.

Business profile
A business card and letterhead, a website regularly updated, livery on your work van, all of this demonstrates a business profile. A business phone line, broadband, and mobile phone should also be part of the infrastructure.

An accountant and professional indemnity insurance
An accountant, who will protect you from falling foul of IR35 and “off-payroll” legislation and CIS and advise about VAT and ensure you’re taking advantage of all your allowable and capital expenses and benefits and allowances. Accountant’s fees are a tax deductable expense and another way to show HMRC you are serious about running and growing your business as well.

Professional indemnity insurance
All electricians should have professional indemnity insurance, another fully tax deductable expense. All freelancers and contractors should take out tax investigation insurance as well.

Take on several jobs
Showing you have several jobs you’re working on at the same time for a number of clients, even sub-contracting to someone else to manage all the work, is a very good demonstration that you are running a bone fide business.

Pricing work and sending out estimates
Submitting tenders for jobs, working out prices, sending out estimates, all of this is evidence that you’re running a business and not a disguised employee or full time CIS contractor.

How you pay tax

As a sole trader
You’ll declare income on a self-assessment tax return every year by 31 January, and pay tax and national insurance on all your profits. As someone supplying services and probably with some sizeable expense attached for goods, you may be VAT registered as well.
•    Remember you must keep your accounts and all receipts and invoices and bank statement for a minimum of six years.
•    Accurate record keeping is key and you should make sure you know the expenses rules and what allowances and benefits you can claim.

Self-employed/Owner-managed limited company
Ideally, electricians set up a limited company, because then they only pay tax and national insurance on what they take from the company as salary, and pay corporation tax on the company profits at 20% (reducing to 18% by 2020), and they do not pay tax on dividends up to the £5,000 allowance.

Capital Allowances
A limited company structure means you are more likely to take advantage of all your capital allowances, because the chances are you will have more money in the business to buy assets for business purposes, a work vehicle or plant and equipment for instance. Certain items attract a 100% allowance.

And another thing, assets you owned as a sole trader before you started the business can be claimed, providing you still make use of them in your limited company.

author sumit agarwalAbout Author: Sumit Agarwal - A specialist accountant and tax adviser for freelancers, contractors and small businesses since 2005, He is an expert in business growth and development strategies. A renowned tax expert for owner managed businesses and contractors, He won the British Business Forum’s Young Entrepreneur Award in September 2012, presented at the House of Commons by MP Vrinder Sharma.