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Glossary

Business Entity Test

Introduced in 2011 by HMRC to help an individual decide upon their employment status. This test is simply guidance from HMRC and does not change the law or indeed the basis on which IR35 cases are decided. See our guide on IR35 for more information.

Cash accounting scheme

Vat is accounted for at the point of payment rather than when the transaction is created. So vat on sales invoices is accounted for at the time your customer pays you and vat on supplies is accounted for at the time you pay your supplier. More detail can be found at http://www.hmrc.gov.uk/vat/start/schemes/cash.htm

CIS

The construction industry scheme. It applies mainly to contractors and subcontractors involved usually in mainstream construction activities. As a contractor under CIS you will be obliged to submit monthly returns to HMRC and also make appropriate CIS deductions when paying your subcontractors. As a subcontractor you are obliged to register under the scheme and appropriate deductions will be made by your client on any payments for work done. More detail can be found at http://www.hmrc.gov.uk/cis/intro/whatis-cis.htm

Dividends

Distributions of a company’s profits to the shareholders of the company.

Employment Status

This refers to the nature of the relationship between a worker and his/her provider of work. Is the worker operating as business in its own right or is the worker to all intents and purposes an employee?

Flat rate scheme

Introduced to make accounting for VAT simpler for smaller businesses. You pay vat as a fixed percentage of your gross sales (inclusive of vat). The actual percentage depends on which sector your business activities fall into. More information can be found on the HMRC website here http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm

Illegal dividends

Payments to shareholders where the intention is to pay dividends, but the correct procedures have not been followed, eg there has been no account taken of the profits available for dividend, or indeed there are not sufficient funds for a dividend payment.

IR35

This refers to the intermediaries legislation which was introduced on 6th April 2000. The details of the then proposed legislation were first published in the press release numbered IR35 and the name has stuck ever since. The aim of the legislation is to seek out “disguised employees” who are operating as limited companies to avoid paying tax and national insurance. It is not intended to capture genuine businesses, although it can provide uncertainty for smaller limited companies.

Limited Company

Usually a vehicle for which a business may trade, although limited companies can exist in a dormant state. The owners/directors, acting in the best interests of the limited company, are usually protected by limited liability in that they are not personally liable for the company debts as the company exists as a legal entity in its own right. See our guide on directors responsibilities for more information.

Managed Service Companies (MSC)

An MSC is a form of company through which workers provide their services to end clients. The definition in the legislation covers both composites (umbrella) and managed personal service companies. Basically the worker does not exercise control over the company and a scheme provider promotes the use of these companies. Workers caught in an MSC must have PAYE and national insurance contributions deducted from all payments received from the company. In addition where the PAYE and NICs debts of an MSC cannot be recovered from the company HMRC may transfer the debt personally to either the director, the MSC provider or other third parties.

Management accounts

Information about the performance of a business compiled usually by a suitably qualified accountant to assist management in achieving the objectives of an organisation. Information will vary from business to business but could include a detailed profit and loss account, analysis of budget variances, cash flow information, sales and overheads analysis and break even points.

OFTS

The Office For Tax Simplification set up by the government in July 2010 with the purpose of advising the government on how to simplify the tax system.

RTI

Real Time Information system was introduced from April 2013 for most employers. Returns of payments to employees must be filed with HMRC on or before any payments are made. This is the biggest change to the PAYE system since it was first introduced and is intended to help with the administration of the new universal credit.

Self Assessment

Usually taken to mean the system of reporting a tax payers income via a tax return. The burden is on the tax payer themselves to ensure they pay the right amount of taxes due to HMRC.

Take home pay

The amount of money you end up in your pocket after all required taxes have been settled

Tax Credits

A form of benefit payments from the government and not a form of tax relief as the name may suggest. There are different types of tax credits available, the main ones being child tax credit and working tax credits and the amounts payable depend on a whole host of factors such as the number of children you have and how many hours you work. See the link below for more information http://www.hmrc.gov.uk/taxcredits/start/who-qualifies/what-are-taxcredits.htm#2

Tax year

Defined as running from 6th April one year to 5th April the following year. So the tax year 2013/2014 is defined as the period 6th April 2013 to 5th April 2014 inclusive.