Crystal Umbrella

HMRC are continuing their campaign to track funds held offshore in a bid to reclaim any unpaid taxes. This month alone, HMRC have issued letters to 600 taxpayers who have taken up the Offshore Disclosure Facility in a bid to understand how the accounts operate. They have asked the taxpayers to provide them with information regarding how the accounts were set up and how they operate.

HMRC are also planning to follow these initial investigative letters up by telephoning the individuals. They have stated, however, that the information gleamed from these conversations will not be used when assessing an individual’s tax liability but will be treated in the strictest confidence.

However, despite the promises, former tax inspector Phil Berwick has issued a stark warning to taxpayers about such informal chats with HMRC. He points out the risks of volunteering to provide the taxman with information which could be used against them in the future if the answers they provide are in any way incriminating. Mr Berwick advised that questions should really be answered via an accountant.

The aim of its current programme of investigations is to obtain information regarding particular banks and advisers who are operating schemes that are unofficial. However, there are many legitimate schemes, such as the Liechtenstein Disclosure Facilities that has seen 700 contractors and independent taxpayers declare their offshore savings with more and more people disclosing every month. With further Liechtenstein legislation expected in September, the number of disclosures are expected to rise even further since this legislation will place a responsibility on all Liechtenstein banks to make contact with any clients suspected of holding undeclared sums of money offshore.

We all know HMRC are dedicated to collecting unpaid taxes and legally challenging anyone who misinterprets the law. This has been proven once again in a s660A case. This may seem of little relevance to many contractors since it relates to ‘husband and wife’ businesses but, if nothing else, it shows there is nowhere to hide from HMRC when they believe you owe money.

Speaking about the case of Patmore v The Commissioners for HM Revenue & Customs, co-founder of Bauer & Cottrell, Kate Cottrell, stated that HMRC are “still considering and trying to apply the Settlements legislation (s660A) despite their defeat in the Arctic Systems case.”

She continued: We must not forget that it is still open to HMRC to simply change the law where the law does not adequately deal with perceived tax advantages.”

HMRC valued Mr Patmore’s tax advantages at £20,000, which they believe, occurred as dividends were taxed at Mrs Patmore’s lower rate instead of his higher rate.

Speaking to Contractor UK Paul Spindler from Kingston Smith LLP commented: “The tribunal concluded there had actually been a gift of income,” the chartered accountant said. [Even then] the actual amount of the gift of income was much lower than HMRC had contended because Mrs Patmore was jointly liable for a loan, which had been secured on the family home and used to buy ordinary shares. Mrs Patmore had not received 50% of these shares, as most were acquired by Mr Patmore, so the tribunal considered this a constructive trust in favour of Mrs Patmore.”

He continued: “The tribunal did criticise HMRC, though it is clear that individuals who would like to split their income and take advantage of the exemptions [to s660A] must ensure that they have taken professional advice before creating new shares or altering the rights of existing shares.”

Ms Cottrell concluded: “With the recent creation of the new Office of Tax Simplification, Section 660 could now be back in the spotlight as part of the Small Business Tax Simplification Review. Contractors who have entered into such arrangements should remain vigilant.”

There has been a feeling of ‘at last’ amongst the contracting community following the news that IR35 will be reviewed as part of the coalition government’s review of small business taxation systems. This is to be the responsibility of the Office of Tax Simplification which is newly formed. There is a fear, however, that contractors are labouring under the misapprehension that IR35 is set to be abolished.

The newly appointed tax director at the Office of Tax Simplification, John Whiting, has been talking to Taxation magazine with the aim of correcting some of these myths which are flying about. Mr Whiting confirmed to the magazine that no decisions have been made at this juncture and they were keeping all of their options open. He did confirm, however, that the analysis of the wider taxation system will be the first step for the OTS.

This, of course, is not to suggest that there is no hope for the abolition of this contentious tax rule. Mr Whiting has acknowledged that the intermediaries legislation has been ineffective to date. He will be looking at the reasons why it did not work as expected, since its introduction was as a result of severe abuses of the previous taxation system. The fear is that these loopholes and subsequent abuse of the system would resurface if the rule was abolished without appropriate replacement legislation.

Mr Whiting has promised an all encompassing review of IR35 but contractors will have to wait until next year’s Budget for the conclusion to his analysis.

Despite the absence of a formal announcement so far, accountants have been informed by government officials that all businesses will be required to file their VAT returns online as of 1^st April 2012.

Larger businesses with annual turnovers of £100,000 or over have already been introduced to the electronic VAT-filing. These firms must submit their returns online by July 31^st or they incur a penalty. The only exception to this is individuals who have a “conscientious objection to using a computer”.

The electronic filing will now be rolled out to businesses who are below the VAT-registration threshold. The CIOT have already stated their belief that the same exception should apply but another should be added – “people who have disabilities that make it difficult, if not impossible, to use a computer.”

The CIOT are already anticipating these forthcoming changes by consulting and informing small businesses about the new process. They have been particularly dedicated to offering their advice to those small businesses who do not employ the services of an accountant. However, they are also looking for information from these individuals. They want to know about any difficulties which these taxpayers experience when using the electronic system.

CIOT have set up a dedicated email account and they are asking taxpayers to answer questions such as: “Have any businesses had to appoint agents where they had not done so before because the owner/proprietor/partners could not cope with online filing?”

They would hope to share this information with HMRC to improve the service for everyone.

HMRC have publicised details of a telephone scam which could be targeted at contractors and small business owners. The fraudsters have been calling taxpayers posing as members of HMRC staff. HMRC have received several reports about this scam where taxpayers were asked to provide the caller with their bank account details in .order that a tax rebate could be paid in.

HMRC also stated that taxpayers have been receiving an increasing number of phishing emails. These emails claim to be from HMRC and often they have been sent from a plausible-looking email but  their sole purposes to obtain personal info, mainly bank details. These are then used to empty victim’s bank accounts. Despite 180 websites responsible for these emails having been shut down by the relevant authorities over the past quarter, more keep appearing.

Director of customer contact at HMRC, Chris Hopson, confirmed that they would only ever confirm a tax refund by post – never by email or telephone. He concluded: “We only ever contact customers who are due a tax refund in writing by post. We never use telephone calls, emails or external companies in these circumstances. We strongly urge anyone receiving such a phone call not to give any information to the caller, but report it to the police straight away. If customers receive an email claiming to be from HMRC, we recommend they send it to us for investigation before deleting it permanently.”

HMRC have confirmed that they will be employing the services of four debt collection agencies over the coming year as part of their programme to recover £140 million of debt from both companies and individuals.

This is something which has been considered by Revenue and Customs for some time now. They eventually piloted the project and have branded this pilot “successful”. As such they have gone ahead and signed up with four debt collection agencies. These are iQor Recovery Services, Fairfax Solicitors Ltd, Credit Solutions Ltd and Commercial Collection Services Ltd. They have all been described by HMRC as ‘modernising debt collection’. These agencies, while working on the HMRC contracts, will be operating under “industry and HMRC standards”. There have, however, been concerns that  these four collection agencies will not operate by these same standards since they are only applicable to HMRC and not their contracted agencies. Most concerns were raised by accountants and referred to such issues as the security of the debtor’s personal information once passed over to the collection agencies.

The four agencies will be charged with collecting the lower value debts which are currently owed to HMRC. Debtors will receive a letter from HMRC with a final opportunity to settle the debt before it is passed over.

HMRC’s director of debt management and banking commented: “Some businesses and individuals are not in a position to pay what they owe and we have put procedures in place to help those who are genuinely struggling. But those who simply refuse to pay have to be pursued, and our partnership with the debt collection agencies ensures they will be.”

HMRC are currently tackling tax avoidance by a variety of measures. They are also working their way through the 18 million cases where the incorrect amount of tax has been paid – some under and some over. It is estimated that overall taxpayers have overpaid more than £3bn to HMRC. It is expected that umbrella contractors, limited company contractors and freelancers are amongst those who will be due money back.

National Audit Office chief, Amyas Morse, commented that many of these cases date as far back as pre-2007 and while it is a challenging task for HMRC to sort through them all, they have not yet made appropriate progress with this task.

HMRC has tried to put systems in place to ensure that money is not paid out erroneously. For example, in tax year 2009-2010 it is estimated that between £1.95bn and £2.27bn of the £27.3bn paid out in tax credits was paid either by error or through fraudulent claims. Their new strategies have prevented a further £569m from being paid out erroneously.

However, despite making inroads to deal with errors in paying money out, HMRC has yet to employ appropriate strategies to deal with recovery. They prioritise recovery of tax debts of a higher value but this year alone tax credits debts have risen to £4.5bn.

An HMRC spokesperson has confirmed that a new computer system currently being installed will calculate tax deductions in a more accurate manner. He also stated that most tax refunds are processed and paid back in a matter of weeks but sometimes individual cases are held up because of required security checks.

Crystal Umbrella welcome the proposed changes to NMW regulations as of January 2011.

Obviously, any increase in NMW is a good thing for the temporary labour market.  Not only will it go a long way in protecting the vulnerable sectors of the temporary labour market, but it will also allow them to receive full entitlement to state benefits (based on National Insurance Contributions).

For contractors, freelancers and locums currently earning NMW greater clarity is given around the claiming of travel (to temporary workplace) and subsistence expenses as they will not count as pay for NMW purposes. This area has been a concern and one that Crystal has campaigned for a long time.

Crystal Umbrella see this as a step in the right direction and a way of protecting those that need it, whilst providing an environment suitable for providing a level playing field within the contracting and freelance market

The working practices of the chief information officer at HMRC have been called into question. Deepak Singh was employed by Revenue and Custom’s for three years ending

in June 2009. However, at this point he became contracted to HMRC through his personal service company, Orwell Consulting Ltd, to fill the same position. His three month contract was worth approximately £50,000 per month which was equivalent to his previous annual salary.

HMRC’s accounts read: “For the period 19 June 2009 to 18 September 2009, £149,5000 was paid to Orwell Consulting Ltd for the services of Deepak Singh (a director of that company) who held the position of Acting CIO.”

This practice would allow Mr Singh to reduce his tax burden by paying himself in dividends and not paying NICs. Subsequently this would result HMRC reducing their overheads. Mr Singh, due to working through a personal service company, would be liable for corporation tax at the lower rate.

Speaking to Contractor UK, Qdos Consulting’s Seb Maley stated: “The Revenue had for some time been concerned about the hiring of individuals through their own service companies, so as to exploit the ‘fiscal advantages offered by a corporate structure. Employees were being handed their P45 on a Friday only to return to the workplace on the following Monday to do exactly the same job but, hey presto, as a contractor this time.”

He continued: “Consequently the contractor could now pay themselves dividends and, by so doing, avoid NIC [for both employer and worker] and reduce the [overall] tax burden.”

In a statement provided to Contractor UK, a former tax inspector commented: “The circumstances here appear to be a so-called ‘Friday to Monday’ (employee on Friday – limited company supplier on Monday) scenario, which was the main reason for the introduction of IR35 by the tax authority in the first place.”

As HMRC increase the number of investigations into those contractors operating through limited companies or as sole traders, it is recommended that such individuals seek specialist accountancy advice. HMRC have pledged to seize an extra £4 billion through investigations. UHY Hacker Young have predicted that £16.1 billion will be seized overall due to HMRC’s “more aggressive stance” throughout this tax year.

UHY Hacker Young believe that in order to seize such large sums of money, HMRC will be looking to “widen the scope” of its investigations including investigations of cases considered ‘marginal’.

UHY Hacker Young’s John Lerston commented: “£4 billion more tax is a massive increase that shows how urgently the Budget deficit needs to reduced. To achieve such an extreme target, HMRC will be forced to come down hard on legal tax avoidance and illegal evasion.”

Martin Hesketh from contractor accountancy firm Brookson, responded: “This news is further evidence of HMRC’s commitment to target tax evasion generally. At Brookson, we have always held the view that strong enforcement action is required by HMRC if they are to drive up levels of compliance across all tax legislation.”

He concluded: “It is now more important than ever for contractors to seek professional advice from specialist accountants and lawyers to ensure they are working compliantly and their financial and tax affairs are in order.”