Joanne Harris, Technical Commercial Manager at SJD Accountancy, lays out why tax affairs need to be a priority for plumbers post-COVID.
Eighteen months ago, a large number of heating and plumbing businesses saw their work grind to a halt as COVID-19 took hold in the UK, leaving many without a regular source of income for many months.
Fast forward to today, and the picture is looking much more positive for the UK’s 150,000-strong registered plumbing and heating engineers, with the Office of National Statistics reporting a 4.9% increase in repair and maintenance work for the first three months of the year.
Although there are plenty of reasons for plumbers to be positive about the future, it’s clear that the pandemic will continue to impact everyone for some time yet. The government has also recognised this, which is why financial support remains available for those in need.
For the self-employed, the Self Employment Income Support Scheme (SEISS), which provides grants based on annual profits, has been widely utilised. It was introduced following the rollout of the Coronavirus Job Retention Scheme, which allows businesses to furlough employees and claim a grant for up to 80% of their wages.
Take up of SEISS in the trades sector has been significant, with over 884,000 claims made by workers in the sector by July last year. In 2021, it has continued to be an important lifeline for lots of self-employed workers with four rounds of the SEISS grants already completed.
Fifth grant
A fifth SEISS grant will open to claims from late July and cover the months of May, June, July, August, and September. The government intends for this to be the final SEISS grant, however this will be kept under review.
The fifth grant amount will be determined by how much business turnover has reduced in the year April 2020 to April 2021. Claimants will either receive a 30% grant or an 80% grant, depending on their personal circumstances:
As with all previous claims, there will be an online service for applications expected to open in late July and, if eligible, you can expect to be contacted by HMRC in mid-July 2021 to confirm the date you’ll be able to make your claim from.
Further details and support on calculating the effect on your turnover is expected before it launches, so keep an eye on gov.uk and speak to a qualified accountant for bespoke advice on the best move for you.
Eligibility
When making a SEISS claim for the fifth grant, you must first check your eligibility. There have been differences in eligibility for some rounds of the scheme, but each have required the following to claim:
Tax bill impact
If you receive a SEISS grant of any amount, it will be taxable income, and therefore could mean changes to your usual tax bill at the end of the current financial year when it comes to submitting your self-assessment.
For many plumbing and heating subcontractors working with larger contractors, you may be used to working under the Construction Industry Scheme, receiving your invoice payments after tax has been deducted.
This can give rise to a tax rebate at the end of the year, but SEISS could actually wipe this out. Once all the calculations are made, HMRC could instead be sending a larger tax bill than expected, compounded by the fact that expenses are also likely to be much lower.
Trading type
Following the pandemic, as we cautiously enter a phase of recovery, reflecting on how your business operates could also help you ensure your take-home pay and tax affairs are well suited to your circumstances.
For most self-employed plumbing and heating engineers, being a sole trader is the most popular option. The most straightforward way to running a business, this trading type binds you and your company together as one legal entity. You’ll pay tax based on the profits of your business, not on what you’ve drawn from it as payment.
When paying tax, you will need to file a Self-Assessment Tax Return, where you’ll declare your income and expenses, and be taxed accordingly on your trading profits, with any tax withheld under the CIS offset against your tax liability at the end of the year.
As well as income tax, for the 2021/22 tax year you’ll also pay £3.05 a week towards Class 2 National Insurance if your profits are above £6,515, and Class 4 National Insurance worked out at 9% on your profits above £9,569 up to £50,270 (and 2% thereafter).
You must register for VAT if your VAT taxable turnover goes over the threshold, currently £85,000.
However, if your business has enjoyed relative success throughout the pandemic and is beginning to deal with bigger contracts and creditors, becoming a limited company could be a better option.
Registering as a limited company separates your own personal finances and that of the business, making it a distinct legal entity. This can be done online, and involves choosing a company name, registering with Companies House, and for tax payments like VAT and PAYE with HMRC.
As well as paying corporation tax – 19% of any profits made in a financial year – you may need to register for VAT if your turnover is above £85,000. If your salary sits above the threshold of £12,570 per annum, you may also have PAYE income tax as well as National Insurance contributions.
Any dividends paid out of company profits will be taxed at 7.5% at the basic rate, 32.5% at the higher rate, and 38.1% at the additional rate, but there is no National Insurance to pay on dividends.
One note of caution here is the support given by the government to limited company directors, also known as personal service companies, where there is usually a single person in the company.
Throughout the COVID-19 pandemic, limited company directors have had very little support from the government, whereas sole traders have had full access to the SEISS scheme. Although this fifth grant has been publicly declared to be the final one, there is still some uncertainty about what the future holds and this should be kept in mind.
Consider your options
After months of lockdown, plumbers and heating engineers alike are now back on-site and in homes across the UK doing what they do best – getting on with the job.
However, after coming through the toughest period for the industry in living memory, it’s vital to not lose sight of tax affairs and responsibilities for the current year. The impact of the pandemic, albeit delayed, could be seen in both your profits and tax bills, which is why it is so important to consider which kind of company set up works best for you.
Consider visiting the Companies House website for further information, or speak to a qualified accountant for initial expert, and often free, advice on what structure will work best for you to ensure your affairs are in order.
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