The Happy Accountant

A tax code is the short alphanumeric (eg. 543L) code that an employer uses to work out the correct tax to deduct from an employee’s gross pay.

Also, called the “carrying value”, the net book value is the value of an asset in the accounts at any given point, calculated by: original value less accumulated depreciation OR previous year’s value less current year’s depreciation.  (Ignoring, for the time being, revaluations and so on)

In yesterday’s examples, the net book values would be as follows:

Straight Line Method
At the end of year 1: £10,000 - £1,000 = £9,000
At the end of year 2: £10,000 - £1,000 - £1,000 = £8,000 OR 9,000 - £1,000 = £8,000
At the end of year 3: £10,000 - £1,000 - £1,000 - £1,0000 = £7,000 OR 8,000 - £1,000 = £7,000
etc…

Reducing Balance Method
At the end of year 1: £10,000 - £2,500 = £7,500
At the end of year 2: £10,000 - £2,500 - £1,875 = £5,625 OR £7,500 - £1,875 = £5,625
At the end of year 3: £10,000 - £2,500 - £1,875 - £1,406.25 = £4,218.75 OR £5,625 - £1,406.25 = £4,218.75

There are several ways of calculating depreciation.  Two of the most popular are:

Straight line method
If an asset is bought for £10,000 and it’s useful life is estimated at 10 years (with no residual value at the end of the ten years), then the annual depreciation charge is £10,000 ÷ 10 = £1,000 per year.

Reducing balance method
If an asset is bought for £10,000 and it is estimated that it reduces in value by 25% each year, the annual depreciation charge at the end of year 1 would be £10,000 x 25% = £2,500.
At the end of year 2, it would be (£10,000 - £2,500) x 25% = £1,875
At the end of year 3, it would be (£10,000 - £2,500 - £1,875) x 25% = £1,406.25

Depreciation is the decrease in value of an asset.  It reflects the use of the asset and the passage of time.  It spreads the cost of the asset across the years (or more correctly, accounting periods) of it’s useful life.

Capital expenditure is quite simply expenditure on buying or improving an asset (whether that asset be a physical one or not which “provides future benefits” over more than one accounting period).

It is commonly abbreviated to Capex.

For anyone frustrated by automated call-centres and endless “touch-tone” menu options, this great site, GetHuman.com, shows you how to get through to a proper human being.

The financial consequences of being inside IR35 are mainly (there are other consequences) you lose the tax-avoidance facility of dividends. 

Essentially, if you are within IR35, you must calculate a “deemed payment” and pay NICs and PAYE (tax) on that deemed payment.

The tax-deductible amounts that you can claim in travel and expenses will also be affected.

HMRC publishes an introduction and a list of guiding questions to help you to decide whether you fall inside or outside IR35.

You will need to examine whether IR35 applies on a “contract by contract” basis.  It is possible to have some contracts within IR35 and some outside IR35

The circumstances of your “intermediary” is also a factor.  For example, if the intermediary is a limited company - who owns the shares and in what proportion?

The wording of your contract and your working practises are also factors.  Although, it is worth knowing that there is no such thing as an “IR35-proof” contract.  In the event of an enquiry, HMRC would examine the reality of your situation, not just your written contract.

If you are a “borderline” case, it may be worthwhile consulting an employment law specialist to examine your contract, working practises

(”Inside IR35″ - IR35 legislation applies to your circumstances
“Outside IR35″ - IR35 legislation does not apply to your circumstances)

Although, traditionally IR35 affected IT contractors and engineers, the legislation is not actually limited to a particular trade, occupation or business sector.

If you personally perform services for your customer, through an intermediary, but you could be deemed an employee of your customer if it were not for the existence of the intermediary, you could fall within IR35.

IR35 was first propsed in 1999 and was introduced into UK legislation in 2000. The primary aim has been to prevent the avoidance of tax and national insurance by trading through an intermediary (commonly a limited company) rather than being an employee.

Prior to IR35, individuals could form a limited company and invoice their “client”/”employer” and then have their own limited company pay them a minimum salary and take the remainder as dividends. This avoided national insurance and tax through PAYE on the dividend element.