Crystal Umbrella

One of the advantages of contracting through umbrella companies is being spared the tedium of keeping abreast of tax affairs; for those who work through limited companies, however, HMRC is attempting to make the task easier with the launch of a new range of mobile apps.

The idea being promoted is this: instead of ploughing through oceans of receipts and invoices while burning the midnight oil after a gruelling day’s work, small businesses and self-employed freelancers can now stay on top of their record keeping while on the hoof. HMRC has been in consultation with the commercial software industry over the new mobile applications, which are designed for small businesses and freelancers below the VAT threshold.

HMRC seems confident that the apps, which contain links to its website offering guidance on record keeping, will turn out to be a big help. For those who are interested, they are free of charge. The companies behind the software are featured on the Revenue’s website and all have advised HMRC that their record-keeping mobile apps are fully compliant with its requirements and specifications.

The website says: “This list is not exhaustive and it is probable that other software houses associated with mobile application development will also be developing applications. The list will be updated as necessary on a regular basis.”

However, the Revenue is also at pains to point out that simply because a trader or trading organisation appears on one of its lists should not be taken to imply that HMRC is supporting, recommending or certifying the software.

Apps or no apps, many contractors prefer to say “Pah!” to paperwork by opting for the PAYE umbrella solution.

Controversy continues to rumble over the unilateral decision by HMRC to post just six of the original 14 questions agreed by the IR35 Forum. The business tests are designed to help contractors working through limited companies to determine whether they are at high, low or medium risk of being ensnared by the legislation.

By restricting the number of tests and deciding the weighting factors themselves, without consultation with Forum members, HMRC appears to have seen to it that most limited company contractors will find themselves in the medium to high risk categories. One can’t help speculating that this apparent obstinacy (HMRC appears unwilling to yield to advice from Forum members at present) hints at another pressure. Does the Treasury have its mighty hand poised ominously over the Revenue’s nether regions, threatening a nasty squeeze if it fails to haul in the massive £17 billion required by Mr Osborne’s department?

At a time when the Government is ostensibly trying to encourage small businesses to flourish, the reasoning seems perverse: hammering small contractors is unlikely to yield much in the way of additional revenue but could result in many intrepid, one-man-band businesses folding. It would not be surprising to see many who currently run personal service companies turning to umbrella companies as a safer option if the tests go ahead as planned.

As things stand, the tests appear to simply add another layer of ambiguity on top of an already notoriously ambiguous system (so much for improving the administration of IR35). The Revenue still has time to listen to the voices of reason on the IR35 Forum. The question is, with that Treasury hand so near, will it?

A startling decrease in the number of IR35 status reviews has occurred over the last few years, according to new data released by HMRC. The amount of tax raised through the investigations has also plummeted dramatically.

The information was disclosed in response to a request to HMRC about the number of IR35 status enquiries it has undertaken over the last five years. The figures show that 158 reviews were undertaken in 2006/7 and only 104 the following year. Subsequently, the number dropped precipitously: only 25 took place in 2008/9 and a mere 12 in 2009/10, rising feebly to 23 in 2010/11.

Tax yields from the reviews don’t always correspond to the year in which the investigations took place, but the money raised has also undoubtedly been declining just as sharply.

The HMRC data also shows that it’s not just the number of IR35 status reviews that has shrunk massively in recent years: the amount of tax yielded as a result has also nose-dived, falling from almost £2 million in 2006/7 to a paltry £155,502 in 2009/10. The sum for 2010/11 was £219,180, almost a tenth of that raised just five years earlier.

The lamentable numbers are likely to undermine any continuing justification for retaining IR35. The PCG’s Managing Director, John Brazier, said that the figures confirm what his organisation has always maintained – the tax yield from IR35 is “minimal” and the damage it has done to the UK’s 1.4 million freelance businesses “is completely unnecessary.”

Brazier believes that it is becoming increasingly difficult for the Treasury to justify the continued existence of “this unwarranted measure.” Is that a death knell tolling in the background?

PAYE umbrella contractors waiting for early signs of the tax simplification the coalition promised could be disappointed, according to the Association of Chartered Certified Accountants (ACCA).

Many small entrepreneurs and freelancers, especially those working through their own limited companies, had been optimistic that change was afoot when the coalition took power in May 2010. However, far from simplifying the system, the government has actually made no fewer than 200 additional changes to the tax code in its first twelve months of office, in spite of its electoral pledge to do the opposite. ACCA is not impressed. In an interview with the business news outlet City A.M., it claims that the burgeoning changes have resulted in a “compliance headache for accountants, businesses and individuals.”

The Office of Tax Simplification was launched by Chancellor George Osborne in July 2010 to substantially simplify the tax code. The latter, Mr. Osborne claimed, had become excessively complex thanks to a decade of “meddling and intervening” by Labour.

According to ACCA’s data, however, Mr Osborne has made more changes to the tax code in one year than his predecessor ever Gordon Brown made even at his most “interventionist.” The highest number of changes chalked up by Mr Brown was 130, which came into effect after his 1997 and 1998 Budgets. He also made a slightly less “meddlesome” 120 alterations in two post-election Budgets – 2002 and 2006.

ACCA’s Head of Taxation, Chas Roy-Chowdhury, accused the government of taking two steps backwards for every one step forward through these changes, which appear to be wholly at odds with its expressed commitment to get to grips with the UK’s complicated tax system.

A prominent Treasury Minister has made it clear to the PCG (formerly known as the Professional Contractors Group) that he is committed to working with contractors and other freelancers to establish genuine improvements in the administration of IR35 rules.

David Gauke MP, who is Exchequer Secretary, described contractors and freelancers as a “significant and important part of the business community.” He acknowledged concerns amongst the contracting community about the willingness and ability of HMRC to make real improvements in its handling of IR35 cases but insisted that he believed the Revenue was genuinely committed to a complete overhaul of its present administration of the regulations.

Mr Gauke went on to express his commitment to getting the administration of IR35 right in order to ensure fairness in the tax system and to enable professional contractors “to provide their services in the most appropriate way.”

PCG Chairman Chris Bryce welcomed Mr. Gauke’s personal commitment to ameliorating the “major difficulties” faced by freelancers over IR35 over the last 11 years. He went on to say that the new IR35 Forum, which meets for the first time today (6th May), offers the prospect of making “a real difference to the uncertainty around IR35 and issues such as the unacceptable length of many IR35 investigations.

He reasserted the PCG’s determination to deliver “clarity, transparency, and consistency” for the freelance community, adding that his organisation takes the challenge very seriously: “We are determined to clean up HMRC’s administration of IR35 once and for all.”

Many freelance contractors, perhaps especially those working through limited companies, may be encouraged by these comments and commitments.

HMRC has decided to offer an amnesty to umbrella companies using Employee Benefits Trusts (EBTs) to boost their clients’ take-home pay, just months after announcing that it would shut the schemes down.

Provisions in the Government’s Finance Bill of 2011 squashed the offshore tax loophole exploited by EBTs, resulting in several major PAYE umbrella firms scrabbling around to restructure their organisations, leaving many of their clients out of pocket in the process. Umbrella companies were not the only firms to use EBTs, of course; several other high-profile businesses used the scheme to provide tax-efficient financial enhancements to their employees. One such – Ranger FC – is currently under investigation following the HMRC clampdown.

In a new press release, however, HM Revenue has announced that it now intends to allow companies an amnesty in order to repay outstanding NICs and tax. The statement said:

“HMRC is inviting employers, companies and other users of these arrangements to settle without recourse to litigation. This will minimise costs to both customers and HMRC. Employers and companies concerned with how their arrangements will be affected by the new legislation can respond to this opportunity to obtain certainty about their tax liabilities.”

HMRC’s Permanent Secretary for Tax, Dave Hartnett, maintained that the revenue would seek to resolve disputes without proceeding to litigation wherever that could be achieved within the law and “without damage to the Exchequer.” He revealed that HMRC was adopting a “proactive approach” to give customers a chance to work in partnership with the revenue and “establish how the facts of their case fit within the proposals.” He encouraged customers to come and discuss their situation.

Umbrella companies and limited companies alike may share the concerns raised by the Chartered Institute of Taxation (CIOT) over HMRC’s decision to begin its enhanced Business Records Checks (BRC) programme earlier than planned.

In response to the news, CIOT Deputy President Anthony Thomas met with officials from the Revenue this week and was reassured that the new development was only a “test and learn pilot” which will run until July. No penalties will be imposed unless evidence is found of loss, deliberate destruction or a complete lack of business records.

Mr Thomas welcomed HMRC’s reassurance of a no penalty trial but added that they “should have made this clear to tax advisers, business organisations and, above all, those tax payers – represented and unrepresented – they are targeting, from the outset.” He sharply criticised the Revenue for giving the impression that they were proceeding with the BRC project prematurely “and without listening to consultees.”

CIOT has held concerns over the BRC scheme from the outset, especially over how it would be implemented and advertised as well as over the legal basis for issuing penalties before tax returns had been submitted. During the consultation period, CIOT made submissions identifying the necessity for HMRC to train the appropriate staff adequately and apply the correct standards in their assessments.

The organisation also insisted that HMRC should ensure that businesses are made fully aware of what’s expected of them vis-à-vis business records and should only issue penalties for the most serious breaches. Mr Thomas also believes that HMRC should not expect the smallest businesses “to have perfect records written up every day.”

We reported last week on the government’s crackdown on a minority of umbrella companies operating Employment Benefit Trust Schemes (EBTS), which it has instructed HMRC to classify as disguised remuneration and prosecute accordingly. However, the clampdown has attracted criticism from the Chartered Institute of Taxation (CIOT), which has dubbed the Government’s approach to the issue as a “blunt instrument.”

Urging further reflection before final legislation is introduced, CIOT’s Colin Ben-Nathan, who chairs the organisation’s Employment Taxes Sub-Committee, expressed his disappointment that the coalition had so far not heeded calls to reconsider its approach. Criticising the current plans for taxing the form (i.e., the involvement of a third party) rather than the substance of the arrangement (the specific kind of loan or reward connected with employment), he said that presently, the proposals were “a very blunt instrument” which would hit employers and employees in unintended ways.

As things stand, the legislation will require meticulous reading by contractors, HMRC and employers alike to determine whether new PAYE/NIC triggers will be activated. This will prove costly and time consuming, affecting smaller owner-managed firms or family businesses especially badly, Mr Ben-Nathan added. Many businesses, he predicted, would need to approach HMRC “to determine whether or not their current arrangements are affected.”

CIOT is concerned that the proposed legislation leaves too much discretion to HMRC to decide which arrangements fall on the right side of the line. This will inevitably lead to uncertainty, Mr Ben-Nathan argues, with the position changing according to shifts in HMRC’s view.

Contractors working through limited companies or umbrella companies may be pleased to hear that the Government is adopting a more novel approach to the issue of tax avoidance.

A paper entitled “Tackling Tax Avoidance” has just been released by HM Treasury and has quickly won approval from a prestigious tax organisation, The Chartered Institute of Taxation (CIOT). CIOT has been campaigning for some time to persuade the coalition to change its stance on retrospective tax changes, which it believes would cause widespread uncertainly and confusion. The proposals contained in the new paper have been hailed as a victory for the organisation, as the retrospective approach to tax has at last been dropped.

Commenting on the development, the CIOT’s President, Vincent Oratore, said that government’s adoption of a new strategic approach will be welcomed by many small businesses and contractors throughout the UK, and will provide “a route towards greater certainty in the tax system.” He praised the decision by government to set out the principles by which it would decide when to announce unscheduled tax changes, which he described as “a good step forward.”

Expressing his pleasure that the Government had listened to his organisation’s concerns about retrospective taxation, he added that the measure would have led to “an impression of an unpredictable tax system.”

There were less favourable comments for the government, however, issuing from the respected think tank, the Adam Smith Institute. Responding to the recent budget, the organisation dismissed many of the measures aimed at encouraging growth as “timid modifications.” The Institute maintains that they fail risibly to tackle the single most important obstacle to economic growth in the UK – excessively high levels of taxation.

With it being so close to the beginning of the new tax year it is no surprise at all that HMRC is once again grabbing headlines as a result of their continual bumbling antics. The latest fiasco pertains to last year’s shock tax demands when around 1.4 million people were sent a letter by HMRC requesting they pay back underpaid tax. The amount totalled a staggering £3.8 billion. Last September a sheepish looking HMRC admitted it had got millions of bills wrong owing to problems (now well documented) with the PAYE system.

At the time, accountants urged those who had been sent tax demands to appeal using A19, the “extra-statutory concession”. As a result of that David Gauke, a treasury minister, has disclosed that 23% of those who used the concession have had their tax debts cancelled. This is despite the fact that Mr. Gauke claimed in parliament last year that it “does not apply that often in practice and I do not want people to build up their hopes that it will offer some kind of panacea”. A further 250,000 pensioners had already had their tax cancelled under the concession.

Under the concession, HMRC will back down if the taxpayer can reasonably prove that their tax affairs are in order. There is also a 12 month rule under which tax can be written off if the victim was told by HMRC more than a year after the end of the tax year that information was provided and there is no limit to the amount of money that can be written off under the concession.

A spokesman for HMRC denied that the tax office had deliberately discouraged those who owed money to appeal under the concession although it would not surprise anyone if they had done this. “All our experience indicated that this concession which we developed will apply only in a small number of cases,” he said. 23% does seem to be the low number they were expecting and once again we’re all asking ourselves if HMRC actually know what they are doing.