Crystal Umbrella

Happily, for contractors working through umbrella companies, the frustrating issue of tax calculation is taken care of by the agency. But PAYE umbrella freelancers might spare a thought for those poor souls who have to wade through self-assessment tax returns every year; new evidence suggests that by being unaware of tax efficiency measures, Britons are handing HMRC an astonishing $13.5 billion each year in unnecessary payments.

The findings come from a study by the financial advisory service, unbiased.co.uk, and reveal that many UK workers are nowhere near as tax efficient as they might believe. Women emerge as the most susceptible to what the organisation calls “tax apathy”, with 91 per cent of those polled failing to take any steps at all to lower their tax liability. Possibly more worrying are the 45 per cent of respondents who believe they already are being as tax efficient as possible, when the figures strongly suggest otherwise.

According to unbiased.co.uk’s Chief Executive Karen Barrett, large amounts of money are being blithely handed over needlessly to HMRC across all tax categories. A little tax planning is all it would take to prevent this. Ms Barrett noted that while more and more consumers will save money by using online moneysaving websites or by switching utilities provider, they appear to be relatively indifferent about losing money through excess tax. In fact, they are likely to save more money annually through tax efficiency awareness than by these other measures.

The study coincides with comments by the Conservative MP John Redwood, about the previous government’s tax policies. Writing in his online diary, he claimed that thirteen years of punitive clampdowns and increasingly complex legislation by Labour had blurred the distinction between tax evasion, which is illegal, and tax avoidance, which isn’t.

One of the major issues influencing whether prospective contractors chose to operate through umbrella companies or their own limited companies is the thorny issue of IR35 legislation. Introduced by the previous Labour administration in 1999, it was created in an attempt to prevent tax avoidance. In reality, because of the complex and ambiguous ways in which the distinction between employed and self-employed statuses are cast in the legislation, many freelancers have been subject to distressing and time-consuming IR35 investigations by HMRC, with the prospect of facing heavy penalties if deemed to be in disguised employment.

PAYE umbrella contractors have largely been spared these ordeals, with their status clear and their tax calculations handled by the agency. As is well known, however, the Office of Tax Simplification (OTS) was set up by the incoming Coalition government last year to consider reform of all areas of tax pertaining to UK businesses. Reform of IR35 was, from the outset, one of its principal targets.

OTS Director John Whiting has just announced that his organisation will provide a report on its review of UK taxation ahead of the March 23^rd Budget. However, he warned that contractors seeking an immediate reform of IR35 will need to be patient – proposals for a successor to the widely disliked legislation will need “bottoming out” time after the budget to assess their implications.

The OTS final report is due in the summer, and Mr Whiting was clear that he wishes to come up with true improvements by then on what is broadly considered to be an excessively burdensome regime.

Whilst contractors working for umbrella companies will have had their tax automatically calculated and paid, those who file self assessment returns should be on the lookout for a new e-mail scam, according to a warning issued recently by HMRC.

There has been an increase in the use of phoney emails disguised as official HMRC communications in recent weeks, this time advising people that they are entitled to a tax rebate.  But the first thing to note is that the real HMRC would never use email to inform taxpayers of matters such as this.

The fake emails contain a range of ruses aimed at getting people to divulge sensitive personal information.  One invites individuals to visit a webpage to verify their banking details; another claims that lottery winnings, seized goods or inheritance money will be paid as soon as the necessary personal banking data is supplied. Yet another invites people to download an attachment which ostensibly requests a refund through PayPal. In addition, HMRC warns, several such scams have emerged via SMS – recipients of these messages are asked to call a number in order to “claim” their “refunds.”

All are phishing exercises and should be avoided at all costs. If anyone receives such a message, HMRC requests that they forward it immediately to phishing@hmrc.gov.uk and then delete it without delay.

The timing isn’t accidental – the self assessment system inevitably results in many freelancers completing their returns at the eleventh hour (or later). Scammers tend to exploit flurries in activity to provide a convenient cloak for their nefarious deeds. Unsuspecting freelancers may be expecting all manner of communications and reminders from HMRC at this time of year, rendering fake tax-related emails more plausible.

HMRC will never contact you via email to request personal information or update you on personal tax matters.

Tax experts are looking ahead to the VAT rise scheduled for January and predicting the effect this will have on businesses who are currently struggling to pay on time. Finance provider Syscap have obtained figures which show that there was a 16% drop in the value of ‘Time to Pay’ agreements over this past quarter.

It would also appear that HMRC are making the terms more difficult for firms applying for ‘Time to Pay’. While many are “simply being refused”, HMRC are also responding with shorter repayment terms – gone are the twelve month plans of 2009 – and HMRC are even going as far as suggesting alternative credit as a means of settling the bill before agreeing to a repayment plan. All of these signs point towards the ‘Time to Pay’ scheme effectively being wound down by HMRC.

Speaking to Contractor UK, Syscap’s Phillip White commented: “The winding down of the ‘Time to pay’ scheme is clearly bad news for businesses that need to keep as much cash back for day-to-day working capital purposes as possible. If businesses are worried that they may not have the cash to pay their tax bill they can longer rely on HMRC being flexible – they need to make alternative arrangements.”

Mr White concluded: “The worst thing that could happen is that a business applies under ‘Time to pay’, gets rejected, and is left in the lurch. We suspect that is now going to happen more frequently.”

A good deal of anxiety has been circulating in recent years about the prospects of an HMRC clampdown on umbrella companies – fears which, if anything, have gathered momentum in the wake of the austerity measures announced by the Chancellor to tackle the UK’s eyewatering budgetary deficit. However, according to a leading tax expert from the international law firm Osborne Clarke, such worries are almost certainly far in excess of the reality.

Kevin Barrow, a partner in the law firm, was addressing the Association of Professional Staffing Companies when he made his remarks. He added that PAYE umbrella servicer providers don’t simply support large numbers of contractors in the UK’s freelance community, they “perform a valuable, practical function” for HMRC, too.

Were it not for the efforts of umbrella companies, Mr Barrow continued, tax revenue which is now efficiently collected by them for HMRC might simply disappear into the black economy. Any freelancer who chooses to work for a PAYE umbrella company will pay income tax and will also be protected against IR35 liability. HMRC benefits from a guaranteed source of revenue and simultaneously avoids the necessity for convoluted and expensive IR35 investigations.

HMRC may decide to tighten the screw, however, in specific areas such as overarching contracts of employment and “artificial” employment contracts. For most contractors working for well-run, bone-fide umbrella companies such as Crystal Umbrella, however, any clampdown in these practises will be of no relevance.

Contractors have been vocal for many years now regarding the IR35 tax rule and their wish for its abolition. Now the Institute of Directors have joined the campaign for the intermediaries legislation to be repealed.

Handing a paper to the Office for Tax Simplification (OTS), the IoD referred to IR35 as “a serious problem”. They pointed to investigations which find contractors to be inside IR35 and the subsequent effect on organisations who have hired them, when the taxman comes knocking for PAYE and NICs. It is the belief of the IoD that tIR35 should be replaced with a specific test for contractors based on their working practices. They also believe an initial screening test should be introduced.

Speaking to Contractor UK, Richard Baron, head of tax at IoD commented:
“We want to take as many businesses as possible out of the scope of the replacement for IR35 in order to minimise the hassle for businesses. If a large number of businesses could take one look at an initial screening test and know straight away that they do not need to worry [about the contractor’s IR35 status], that would be very helpful.”

Speaking about the introduction of a test for contractors, the group told OTS: “The test would however need to be one that would allow most contractors to be confident of their likely status for a tax year, or for an engagement, while the year was in progress or before starting the engagement. Otherwise they might not put enough money by to cover tax and national insurance (NI) liabilities.”

IoD concluded their submission by stating: “The managed service companies’ legislation, which was necessitated by the impracticality of applying IR35 on any large scale, has tackled the bulk incorporation of whole workforces. There is a case for some replacement for IR35… [but the legislation has] has turned out to be a bad solution to a problem that has shrunk”.

HMRC have been dedicated to tackling tax avoidance and evasion throughout the course of this financial year.  They have already launched amnesties for professionals working in the medical sector and for those individuals who hold funds offshore.  Now, it is expected that they will launch an amnesty on undisclosed earnings for all self-employed individuals.

In the aforementioned amnesties, individuals have been invited to disclose during a specified period of time in order to receive a reduced penalty of ten percent on top of the tax owed.  Individuals will only receive these “preferential terms” if they make a full and accurate disclosure.

Speaking to Contractor UK, Grant Thornton’s Mike Warburton stated: “The Revenue plans to extend this type of disclosure facility to other professions and other categories of people where they think there’s tax to be collected.  One of the areas where there may be scope to extend what HMRC have done with offshore bank account holders, doctors and dentists is the self-employed.”

Mr Warburton also spoke of the previous disclosure facilities, commenting: “HMRC have discovered it’s quite an effective way of collecting money at relatively low effort.”

Mr Warburton said of the disclosure facility model: “Individual tax enquiries take time and resources; what HMRC wants is a quick return [hence] a taxpayer group amnesty, with the threat of ‘heavy boots’ for non-compliance.”

He concluded with his thoughts on the self-employed being the next target group: “It’s always been the case that for a PAYE worker, the normally right amount of tax is paid at source. Whereas for people who have gross earnings, where the tax collection is dependent on the accounts that they submit to HMRC, there is scope for money to be diverted. HMRC wants to target the black economy, and that includes those self-employed people who fail to properly disclose all their receipts.”

The Recruitment and Employment Confederation has approached the government to ask for support in setting up a scheme which would name and shame those responsible for running illegitimate travel and subsistence schemes.

The government have just announced the new National Minimum Wage rates. As part of this announcement they also set in motion plans to name and shame those who flout the minimum wage legislation. This scheme will give employers a maximum period of three months to “put their house in order” before being publically named and shamed. It is the belief of the REC that this practice should be extended to illegitimately run travel and subsistence schemes.

Recruitment and Confederation Industrial’s chair, Sally Hewick, commented: “Through travel and subsistence schemes, National Minimum Wage rates have a direct impact on our sector. In the current climate, a lawfully operated scheme is above all linked to the fair treatment of an already hard pressed workforce, rather than just the way we run our businesses.”

She continued: “Despite increased policing by the GLA and HMRC, we still continue to see cases where these schemes are not operated correctly. Publicity in the fight against employers who try to exploit their workers can be a very useful weapon.”
Ms Hewick concluded: “The Government’s plans to expose employers who don’t follow the rules, should be extended to travel and subsistence schemes if we want to ensure high standards and services valued for by our clients. We had called for facts and figures by the HMRC on providers examined and the levels of revenue collected through compliance before.”

The Office of Tax Simplification has announced that its first two reviews are progressing well. They released a press statement to this effect while also announcing the recruitment of four tax experts to the team. It will fall upon these experts to furnish OTS with their public and private sector expertise and experience. Their role will be an advisory one. Kate Cottrell, of Bauer and Cottrell, is amongst those taking up position with OTS.

Tax director, John Whiting, stated: “I am delighted to have such an experienced team with their wide range of tax backgrounds in place, and I am very grateful to the firms that have released them. We are now getting going on our challenging task of helping to simplify Britain’s tax system.”

The Office of Tax Simplification was founded back in July. Its purpose is to advise the Chancellor George Osborne on matters directly relating to taxation. When this government came to power it pledged to simplify the country’s taxation systems and the reviews tasked to OTS are the first step in this process. They are currently reviewing small business taxation and tax reliefs, exemptions and allowances.

A published list of tax reliefs will be made available in the next couple of weeks and OTS will identify their planned review criteria. They are anticipating and welcoming comments on this which will inform the report which follows. The interim report on the small business taxation review is due to be published in time for the Budget 2011.

Launching their latest investigation into underpayments of tax, HMRC have announced they are to target a number of contractors working in television. Thousands of TV freelancers who have their accountancy needs met through Christopher Lunn & Company will find themselves under scrutiny in the coming months. Those whose tax affairs are coming under scrutiny have received letters from , dated 17th September, which outline the reason for the investigation as “tax returns submitted to HMRC may not be correct for a number of reasons”.

HMRC detail a list of concerns which fall into two main categories. The first area of concern is excessive expenses claims including subsistence and travel. They also cited charges for accountancy services. The other area for concern, according to HMRC’s letter was that certain people represented by Christopher Lunn & Company were “routinely, and apparently falsely, claiming self-employment status by directors”.

John Cassidy of PKF accountancy firm addressed this issue in an article for www.taxation.co.uk. It is Mr Cassidy’s belief that the latter area of concern has provided the impetus for this full scale investigation as he believes that any other concerns relating to expenses would have been dealt with as a matter of course on a claim by claim basis.

The Individuals who have received letters from HMRC have been given a disclosure opportunity. They have until 30th November 2010 to disclose any unpaid tax liability, After this date, any irregularities uncovered by the HMRC investigation “will be dealt with either by criminal or civil procedures…depending on the nature of those irregularities.”