Crystal Umbrella

The new coalition Government published its programme last week, giving an abbreviated preview of the issues which the Chancellor will be addressing more fully in his Emergency Budget on 22nd June. The devil, of course, will be in the detail but it’s nonetheless possible to glimpse some key points. Here are some of the more prominent ones.

Whither IR35?

The notorious tax regulations embodied in IR35 came into force in 2000, when the previous government wanted to close a tax loophole. Prior to IR35, a number of individual contractors were paying appreciably less tax and national insurance simply by offering their services through a limited company. In effect, they were working full-time for a single employer but keeping much more of their income than an official employee doing identical work on PAYE. The aim of IR35 was to prevent contractors from setting up as a limited company whilst working long-term for the same employer.

However, the legislation soon ran into controversy, seemingly unable to distinguish accurately and consistently between bona fide contractors and those who were ducking and diving through the loophole. John Brazier, Managing Director of the Private Contractor’s Group (PCG), has condemned it as “a dreadful piece of legislation” which crudely caught everyone in the same net and encouraged HMRC to view every legitimate freelancer as a potential tax evader.

The new government’s published programme signals its intention to “review” IR35 and replace it with “simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility.” The news was quickly welcomed by PCG and many contractors will approve of the government’s plan to set up an Office of Tax Simplification. Whilst further details may become clearer in the June Emergency Budget, the issue is likely to go through a lengthy consultation process before decisions are finalised. Even so, proposals aimed at simplifying taxation matters for the self-employed should be cautiously welcomed at this stage, especially if they lead to the creation of better defined and fairer guidelines to avoid being deemed ‘employed’ when legitimately contracting.

Other issues of interest to many of our customers include the following.

Spending Cuts

By now it’s no secret that the coalition plans to curtail government spending by £6.2 billion within the financial year 2010 – 2011. The cuts will, the coalition insists, be directed at ‘non-front-line services’. Again, the Chancellor’s Emergency Budget will spell out rather more clearly just what this means.

Changes to Setting Up Limited Companies

The government’s bureaucratic simplification mission extends to this area, too. A new ‘one click’ method for registering companies is proposed, a measure which is likely to include all the labyrinthine tax aspects associated with new registration. On the topic of setting up and sustaining viable small businesses, there is also a commitment to devise assured means of keeping their life blood – the ready supply of credit from the banks – flowing efficiently.  To help facilitate this, a major new loan guarantee scheme will be considered.

Corporation Tax

Specifics are as yet still thin on the ground, but corporation tax rates are set to be reduced and the processes around corporation tax reformed.

Review of Capital Gains Tax

This one might cause a few sharp intakes of breath: a fairly hefty increase looks likely, but it’s not clear yet precisely how this will impact on different classes of investment or asset. What we do know is that the government plans to tax non-business capital gains at rates resembling those currently applied to income and that it believes there will be substantial exemptions for entrepreneurial business activities. Capital distributions made on the winding up of Limited Companies may well be affected by this.

Changes to National Insurance

The Conservative Party in opposition advocated an increase in employee National Insurance thresholds as a means of preventing the previous government’s proposed “jobs tax” and the new government is set to adopt this measure. National Insurance rates are also to be revised.

Increases to Personal Allowance Threshold

Lower and middle income earners are intended to be the chief beneficiaries of this measure. A generous increase in the personal allowance is planned for April 2011, paid from two sources: the extra revenues generated by increases in Capital Gains Tax for non-business assets, and the money that would have been used to fund the increase in employee National Insurance contributions. In the longer term, the government has set a target of £10,000 for the Personal Allowance.

VAT

Even though this isn’t specifically mentioned in the programme, it would be premature to suppose that no action will follow. Predictions from financial commentators are almost unanimous that VAT will rise to 20%, with some even expecting it to rise to 22%. The timing of any increase is unclear at present but as a rise in inflation is feared presently, some suggest that this may not be immediate. Others, however, expect the rise to be immediate – we’re simply going to have to wait and see on this one.

Bank Charges

A proposal which will be welcomed by millions is the government’s promise to implement much more robust consumer protections vis-à-vis the banks, including the abolition of egregiously unfair bank and transaction charges.

Equal Pay

Amongst a raft of measures aimed at actively promoting equal pay and removing workplace discrimination is a promise to extend to all employees the right to request flexible working arrangements. Business will be consulted on the best way of proceeding with this.

Watch This Space for News of the Emergency Budget

Readers can rest assured that Crystal Umbrella will be keeping a close eye on all Budget-related news, ensuring that you’re fully up-to-date with all the developments. As soon as it’s released, we’ll be sending you a summary of the Budget’s key points.

As we begin to slowly move out of the recession, all eyes are on the jobs market for signs of continued improvement. The Recruitment and Employment Confederation (REC) has just released their latest Jobs Outlook report and it signals that employers’ hiring intentions are once again on the increase.

Data contained within the report shows that ten per cent of the employers that the REC spoke to believed that their permanent staff quota would rise in the next three months. In the report released at the end of the last month only five per cent of employers were predicting an increase in permanent staff. Similarly, looking over the year ahead, sixteen per cent of employers believe that their permanent staff will increase over the twelve months, which is an increase of three per cent from last month.

However, with regards to temporary staff, seventy two per cent of employers believe that the number of staff they use will stay the same over the next year. Only five percent of employers expect an increase in temporary staff over the next quarter.

Rather startling was the disclosure by forty per cent of employers that the recession had not affected their staff at all. Of course, redundancies do continue and twenty two per cent of employers are planning redundancies, although this was a reduction of two per cent from the previous month. However, as the recession continues to loom large, employers are still required to take action to cope in these difficult financial times and as such, three per cent are planning to cut employee working hours and introduce pay reductions.

Director of research at REC, Roger Tweedy says: “It is encouraging that employer confidence is slowly but surely starting to manifest itself in terms of hiring intentions. However, it is very early days and a number of employers are still making redundancies or cutting working hours. Regular data on how employers are reacting to subtle changes in the jobs market is essential and will help recruiters to plan ahead over the coming months.”

Today was the original deadline for those sheltering money offshore to disclose the details to HMRC to receive a reduced penalty in return. However, the deadline has now been extended to 4^th January 2010. Take up of the New Disclosure scheme has been really slow so while the official reason provided for the extension is “fairness”, it has been suggested by many tax advisers that HMRC are hoping that more time will result in more people taking up the amnesty offer. Anyone who comes forward prior to 4^th January will receive a ten per cent reduced penalty providing they have not already been requested by HMRC to make the disclosure.

Dave Hartnett, HMRC’s permanent secretary said: “Some bank customers will not be contacted by their banks in good time for the original deadline of 30 November so in the interests of fairness we have decided to extend our deadline by a month to 4 January.”

He continued: “I strongly urge anyone who has been hiding taxable assets offshore to go on line and register. The NDO is voluntary but from the start of the New Year we will begin to investigate those who were eligible to use the NDO but instead buried their heads in the sand.”

Those who do not disclose prior to the deadline will face penalties between “30% rising to 100% of the tax evaded” according to HMRC. They could also risk prosecution.

Following on from the speech delivered by the Financial Secretary to the Treasury, Stephen Timms, earlier this week, HMRC have unveiled a new Internet service which can be used to blow the whistle on tax evaders. The website – www.hmrc.gov.uk/tax-evasion – will enable members of the public to raise any concerns regarding the non-payment of taxes directly with HMRC. They have recently introduced a new penalty system that allows them to charge 100% penalties to individuals or businesses found to be evading tax.

Timms said: “We are committed to ensuring the tax system operates fairly and efficiently, and encourage anyone to share their information on activities they think may be unlawful. Reporting your concerns online is quick and easy. By doing so you will be helping us to catch people who are unfairly competing with honest businesses and denying funding for essential public services. Being able to report potential tax evasion online is just the latest step in demonstrating that for tax cheats the game is up. Information provided by the public is important and HMRC takes all allegations seriously.”

On their website, HMRC commented: “Clamping down on those who try to cheat the system through evading taxes is a key priority for HMRC and since 2005 over £42 million has been recovered as a result of information received directly from members of the public through the taxman’s confidential hotlines. The money is put back into the system to fund vital public services.”

CWJobs has compiled research on behalf of CUK which shows that permanent IT staff are more likely to feel the need to retrain or enhance their skills than their contracting counterparts. The recession has forced all workers to think about their skills but this research shows that nearly two-thirds of permanent techies felt ‘forced’ to retrain during the economic downturn while only 53 per cent of IT contractors felt the same pressure.

However, the research did show that many IT contractors are still choosing to retrain to give themselves the best chance of competing in the market which is saturated with highly skilled freelancers. The research also found that permanent IT staff were more likely to complain about the effects of the recession than contract IT workers. However, nearly 75 per cent of IT contractors said that they did not feel that their skills set matched the current market requirements.

Richard Nott, CWJobs site director said: “IT professionals need to take control of their careers and understand the importance of developing and showcasing their skills correctly. This in turn, will allow them to have a competitive advantage against their peers and increase their opportunity to negotiate with prospective employers.”

Nott also explained that as permanent and contract IT job-seekers were placing more focus on their individual skills and expertise, candidates would be under more pressure to display the core skills they possess. According to the research, IT contractors stated that the skills which are currently in high demand are SQL, .Net and Java.
IT contractors also stated that if they were to invest in re-training they would be most likely to opt for SAP, even though they acknowledged that Linux would be in demand between now and 2011.

New research by Clydesdale Bank has shown that confidence is rising amongst employers and contractors. This fresh belief that the economy can recover comes at a time when figures suggest that employment is growing for the first time since the recession hit.

Data received from the Clydesdale Bank research showed that ninety per cent of those polled expressed optimism for the future, while one thirds of businesses believed that they could survive in these tough economic times.

Mike Williams, Clydesale Bank Executive said of the research: “This is a positive sign: where confidence exists, growth often follows. It has clearly been a challenging time for businesses, but these figures show there are signs of stability creeping into the market but it is still important to retain a grounded and cautious perspective as the market changes.”

Further evidence that things are improving comes from data compiled by the Recruitment and Employment Confederation (REC) and KPMG. According to these statistics, permanent employment grew in the month of August for the first time in nearly a year and a half. There was also a growth in the number of contractor positions for the first time in over a year. August also recorded less salary reductions than previous months.

Despite the positive connotations of this data, Bernard Brown, partner and head of business services at KPMG warned that it is “too early to speculate”.

He continued: “Given that employment costs are a substantial element of public sector spending, you would expect significant pressure on those costs going forward. This is likely to have a significant impact on the UK jobs market.”

The rate of VAT was reduced to 15% at the height of the country’s economic downturn. At the time, the chancellor warned that it would revert back to 17.5% as soon as the economy showed signs of recovery. HMRC have now confirmed that this will happen on 1^st January 2010. This will affect the majority of businesses from the stroke of midnight at New Year. The only exception will be pubs and clubs who operate through the night. However, tax experts have said that such businesses can only expect a few hours grace period from HMRC before they will have to apply the full rate.

HMRC have issued guidance to support businesses through the transition of reverting back to the original VAT rate. It is expected that the change will cost businesses in the region of £125m.

Choosing to increase VAT on New Years’ Day has been met with criticism from business groups and economists alike.

George Bull, from accountancy group Baker Tilly, spoke to the Financial Times about the impending increase. He said that he believed that the VAT cut had failed to achieve an increase in consumer spending as had been hoped. He believes this is the reason why the reduction looks set to be cancelled at the turn of the year.

For many, it’s hardly surprising as recent indications suggest that the decrease barely impacted upon consumer spending. Although for campaigners wanting to postpone the imminent VAT rise, the refusal to prolong the period is seen as a significant disappointment.

HM Revenue and Customs brief 50/09 stated that non-compliant umbrella companies were due to come under close scrutiny. Speaking to Contractor UK, Bob Jones, an independent tax expert who previously worked as an inspector of taxes for HMRC, has said that we must look to the past when umbrella companies existed alongside composite companies to fully understand this brief.

Jones reminds us that both composite and umbrella companies allowed travel expenses for tax purposes. Composite companies, however, also had to use dividends in order to avoid the necessity for payment of employers national insurance contributions and they had to ensure they worked outside of IR35. Of course, the introduction of MSC legislation was supposed to deal with this issue but the MSC legislation did not include umbrella companies. Jones states, “I knew from my time at HMRC that there was serious concern over the travel expense effect of umbrellas”.

The fact remains that a person needs to be required to move between workplaces during a period of employment for travel expenses to be permitted for tax purposes. It is the continuity of an overarching contract through an umbrella company provides that allows someone to claim travel expense, even when working at only one specific location for each specific employer. This is only the case if the overarching contracts meet the specifications laid down by HMRC and many of them do. This, however, was not the aim of the legislation and, therefore, Jones comments that the HMRC have been faced with the difficulty of how to deal with this situation.

The granting of dispensations has, perhaps, occurred on occasions when the appropriate checks have not been made. Jones says, “…there was a time a few years ago when the staff dealing with dispensations would be unaware of exactly the nature of an umbrella company. In fact, the term ‘overarching contract’ had probably not been thought of and consequently any umbrella companies at that time would have been granted a dispensation with the minimum of effort. It follows, therefore, that there are perhaps umbrella companies out there who do not have overarching contracts and/or whose dispensations are of doubtful validity.”

Jones states that HMRC will exploit any flaws or discrepancies in day-to-day bookkeeping. He also states, “have no doubt that HMRC will scratch beneath the surface to see whether overarching contracts are applied correctly in practice.”

Brief 50/09 also refers to umbrella companies who may be flouting minimum wage legislation. £5.73 is the minimum wage but some employers may include expenses within that figure, therefore reducing the actual minimum wage and applying tax and national insurance to the net figure.

Jones comments that HMRC do not know how many umbrella companies there are, which makes it difficult to know which they should be investigating. This is the reason why HMRC have now asked workers and end users to contact them with any cause for concern.

Umbrella companies who are not operating correctly face a huge financial implication. Jones gives the example: “Say an umbrella has not been operating its dispensation correctly as a result of which there is then the tax loss of £100 per employee per year. If there are £500 employees and five years that is a quarter of a million pounds – add interest and a hefty penalty – and, well you can work it out yourselves.”

Brief 50/09 should only be of concern to those umbrella companies who have given their workers, end users or HMRC reason to believe that they are not operating as they should be.