Crystal Umbrella

On the 28^th January, the High Court ruled that HMRC’s retrospective tax recovery is lawful.  Now, contractor services provider Giant Group has spoken to the Recruiter about the effect of this decision on thousands of contractors.

Any contractor who has signed up to an offshore scheme to cut tax liability now faces this scheme become illegal retrospectively. The tax liability can be backdated as far as 1987 and contractors would be liable.

This recent ruling centred around a contractor who must now pay £80,000 in retrospective tax due to legislative measures introduced in the Finance Act 2008. It has been predicted that many contractors could face bankruptcy as a result of this rule.

Managing director of Giant Group, Matthew Brown, commented: “This ruling sends a clear signal that if tax arrangements are blatantly artificial, they can be taxed retrospectively. Even if a tax scheme exploits a loophole in the current law there are still risks using it. If a tax scheme sounds too good to be true, it probably is. Numerous providers of tax services to contractors operate offshore. Contractors and recruiters need to be wary about dealing with these providers as the risk of retrospective measures from HMRC has significantly increased.”

He continued: “Contractors could try to persuade the HMRC to collect outstanding tax from scheme promoters, but this may not be possible, in which case recruitment agencies could also be in the firing line. HMRC has already shown its willingness to include debt transfer provisions in anti-avoidance legislation, so in cases where it believes debts will be unrecoverable from contractors, recruiters could be targeted if schemes are deemed to be managed service companies (MSCs).”

Adding to the anxiety around offshore schemes, many contractors who have signed up to the Mirasol Holdings scheme are concerned this week following the news that the Albany UK has gone into administration.

Umbrella company Albany went into administration yesterday following days of speculation. It is now hoped that Albany’s creditors, including many IT contractors, may actually receive some of the money which is owed to them.

It is believed that Albany got into difficulty when clients were unable to pay their bills thus resulting in a shortage of cash for Albany. Administrators Carter Backer Winter (CBW) said this led to a “knock-on effect” on contractors. Several Albany companies are involved: Albany EMEA and Albany Holdings are in administration. CBW are also acting as liquidators of Albany Employment Services and Albany Management. There has been no mention of Albany Technologies (UK).

John Alexander, CBW partner and joint administrator commented in a press release: ““We have only just been appointed so it is too early to be definitive. However, we are hopeful that there will be at least some dividend to creditors, including former employees who may also be entitled to additional amounts from the government’s redundancy fund where they have unpaid salaries.”

He also spoke of joint administrator, Melvyn Carter’s role to “ascertain the exact situation”. He confirmed that Carter would be contacting each individual creditor “within the next couple of days”.

Speaking about Albany’s foreign subsidiaries, Alexander commented: ““Albany has a number of foreign subsidiaries, particularly in the USA, Brazil, Canada, the Netherlands and also Asia-Pacific. These businesses are independent, stand alone, profitable and sound.

He concluded: “It will continue to be business as normal for them, although I am keen to hear from trade purchasers or anyone else interested in acquiring them. I can emphasise that this is not a ‘pre pack’ insolvency.”

Just this week the Conservative Party set out their plans for a fairer taxation system if they were to win this year’s general election. Now, the Federation of Small Business (FSB) is requesting all of the main political parties to make clear their plans for small firms before the General Election takes place.

The FSB is due to have its annual conference in March this year. They have lined up speakers from all of the major political parties to speak at the event in Aberdeen. Speaking at the conference will be Tory Leader David Cameron, Nick Clegg, Leader of the Liberal Democrats and Business Secretary Lord Mandelson. Since the General Election is likely to take place shortly after this even, it will be interesting to hear the plans that each party puts forward.

In a FSB press release, National Chairman, John Wright, said: “The FSB’s Annual Conference is set to give small businesses the information they need to survive the year ahead as the country gets ready to go to the polls, and we look to an incoming Government to continue to move us forward on the road to recovery. The event will give small businesses the chance to hear exactly what politicians will do for them before the General Election.”

He concluded: “Small businesses truly are the lifeblood of the economy and are doing all they can to ensure the country fully recovers from the recession this year. The FSB Annual Conference 2010 in Aberdeen will give small firms the chance to debate the issues that really matter to them.”

The Conservative party has announced plans to reform tax systems for the self employed. One option which they are currently considering is to give those individuals who work via a one person company, the right to opt out of employment. In real terms this means that those individuals would lose their entitlement to maternity pay, statutory redundancy pay and jobseeekrs allowance. They  also be liable for Class 2 NICs at £2.40 per week as opposed to Class 1 NICs.

Shadow Business Minister, Mark Prisk, spoke to The Telegraph about the current tax system, stating that it was unfair for people who worked outwith the traditional employment model. In particular he made reference to IR35. This legislation required contractors to prove their  independence and if they are unable to, they are required to pay NICs alongside their ‘employer’.

Mr Prisk said: “The current government has treated the self-employed disgracefully. More often than not they have treated them as if they are on the fiddle, which is wholly unacceptable. We want to reform the system.”

As the Tories set out plans for reform, they have been working alongside the PCG. Their head of public affairs, Simon McVicker, said: “”We have been talking to them about reforms and getting rid of IR35 and have been looking at some options. All we know is that they are sympathetic to the position, as are the Lib Dems. Opting out of NICs would be a large step.”

He concluded: “We are not trying to avoid taxation, we are looking for a fairer, more transparent system.”

SThree are one of the industry’s leading recruitment agencies. They have reported a sharp fall in their 2009 revenues in comparison with previous years. However, it is good news for contractors as they have announced that the contracts section has continued to do well despite difficult conditions.

In their Preliminary Results report they stated: “2009 was by any standards an extraordinary year and was without question one of the most difficult the Group has faced in its twenty three year history. The impact of the global crisis on demand for specialist staff was as tough, if not worse than the dot com crash.”

In actual fact, during 2009, SThree’s contract margin actually increased to 22.1%, up from 21.5% in 2008. You can actually see the difference between the effect on permanent placements, which were down 40.8% and contracts placements which were down 27.6%. It is inevitable that temporary placements are stronger during tough economic times.

With regards to the future, SThree are staying positive: “Towards the end of the year there were signs that certain markets were improving and that others were at the least stable and, so far, this has continued into 2010. Compared with what the Group has been used to in recent times, this was a welcome positive trend which was reflected in the Group’s return to headcount growth. Whilst there are indications that confidence is gradually returning to the market and this above all else is what is needed for a full recovery to gain traction, it remains true that in overall terms market conditions have yet to recover to anything close to normal.”

The recession has caused problems across industry over the past eighteen months. Not only have businesses been faced with the prospect of their own insolvency but they have also had to prepare for the prospects of their customers becoming insolvent and the subsequent knock-on effect on their finances.

Concept Information Technology, a recruiter for IT services, has spoken out about the steps they have taken to protect themselves against bad debt. They have admitted to using a debtor protection policy courtesy of Lloyds TSB Commercial Finance.

Concept have admitted that they are glad they took such a step as they have actually had to use the policy protection over the past couple of years. Back in 2008 one of their customers became insolvent. However, due to their protection policy they actually received payment within 30 days of the customer filing for administration.

Speaking to The Recruiter, managing director of Concept IT Chris Short, said: “Taking out a debtor protection policy has provided us with long-term peace of mind and has ensured that we’ve been safeguarded against bad debts. Knowing that our working capital is protected has enabled us to continue our growth strategy and expand our client base further without fear of future failures – something that has helped us to achieve record turnover despite the tough economic climate.”

Speaking for Lloyds TSB Commercial Finance, client manager Alex Fiddian, commented: “It takes only one bad debt to significantly impact a business’ cash flow. We are seeing more and more of our customers use debtor protection policies as a safety net to protect themselves from defaults.”

As borrowing continues to be problematic this year, it is predicted that small business owners with financial difficulties may find themselves looking for financial assistance from their family and friends, not to mention borrowing on personal finance such as credit cards. This information comes courtesy of a survey conducted by Graydon UK, a commercial credit reference agency, and the Forum of Private Businesses. The information was based on 2009 but with these issues still prevalent in 2010 it is likely that the same pattern will continue.

The survey showed that 28 per cent of business owners felt that they had no option but to turn to loved ones for financial help due to the lending conditions adopted by the banks. A further 8 per cent admitted to using their personal credit cards.

The survey also looked at those who ad attempted to access funding from the banks. 40 per cent who applied for finance in the second half of 2009 were refused. 52 per cent were refused business loans and 28 per cent asked for an overdraft extension and were refused.

Discussing the results of their survey, Graydon UK said this move towards accessing personal finance is having a direct impact on the growing number of insolvencies during the latter half of 2009.

Phil Orford, chief executive of FPB, said: “The continuing credit drought means more entrepreneurs are being forced to seek alternative sources of finance – including family, friends and personal loans. The latest insolvency figures show that this level of personal risk is unsustainable. The danger is that the UK will become increasingly uncompetitive as fewer people are encouraged to start their own businesses.”

PCG, who represent contractors and freelancers in the UK, have now given their response to the landmark BN66 ruling at the High Court. The case centred around IT consultant Robert Huitson making a challenge against HMRC’s right to claim taxes retrospectively. Mr Huitson’s lawyer had argued that the retrospective tax levy was a breach of his human rights. Mr Justice Parker, presiding, disagreed stating that HMRC were within their rights to challenge users of artificial schemes and such individuals were given warning that this could be the case. There has since been widespread concern throughout the industry that this decision will open the doors for further retrospective tax liability.

On their website, PCG chairman Chris Bryce responded: “Whilst we recognise that the High Court Judge has clearly set out his reasons for upholding the 2008 Finance Act which allowed the Revenue to claim back this tax retrospectively in this particular instance we share a common concern with all taxpayers that this judgement may be seen as opening the door to retrospection.”

He continued: “For a seven year period up to 2008 HMRC failed to take any action before the law was changed, despite being well aware of these arrangements.  Whilst PCG in no way encourages off-shore tax arrangements we object in the strongest terms to taxpayers being retrospectively penalised for arranging their tax affairs in a way which was entirely legal and proper at the time they undertook to do so.”

Mr Bryce concluded: “I note our concern with retrospective taxation is widely shared.  PCG will continue to watch this area very closely. HMRC must not feel this is a green light to retrospectively challenge other, entirely legitimate behaviour.”

The industry as a whole is still digesting the BN66 ruling which was handed down at the High Court last week. Mr Justice Parker ruled that HMRC could retrospectively claim tax back as far as 1987.

Speaking to Contractor UK, Chartered Institute of Taxation’s John Whiting, said: “ think all tax practitioners will worry a bit about this judgement if it is seen as opening the door to retrospection. [This judgement is] of concern to all because tax systems should aim to give certainty. Retrospection is inherently unfair, creates uncertainty and risks damaging trust in the system.”

Meanwhile Simon Dolan from SJD Accountancy placed doubts on Mr Justice Parker’s claims that HMRC would be considering an individual’s financial position before making the decision to pursue tax from them.

Dolan stated: “Despite the judge’s warm words about the Revenue’s sympathetic approach to taxpayers suffering financial hardship, I’m sure that going forward the taxman will have no hesitation in approaching them for the tax owed. This is obviously a disappointing result for lots of contractors who have been caught out by the promises of the scheme provider, resulting in uncertainty and worse for many of the provider’s customers.”
He continued: “What will happen now is that the tax demands will now become payable, up to the point that an appeal to yesterday’s ruling overturns them [But] this is not taxpayers falling upon hard times, rather HMRC will see it as taxpayers choosing to get involved in a complex, anti-avoidance offshore scheme that, for some, saved hundreds of thousands of pounds”.

Back in July we reported the news that contractor Andrew Tilson had been taken to an employment tribunal by Alstom Transport and the tribunal had determined that his relationship with the company was tantamount to an employer-employee relationship. This ruling was based on a clause within his contract which stated that “the individual was not subject to Alstom’s direction, supervision or control” even though this was somewhat different to the day-to-day working practices. The tribunal decision meant that Tilson was able to claim employee rights.

However, unhappy with the decision, Alstom has since taken the case to an Employment Appeal Tribunal (EAT) and they have judged the case differently. According to the EAT it was wrong of the initial tribunal to nullify the original contract based on one clause. Tilson himself also strongly defended his position as a contractor rather than an employee.

Martin Hesketh of accountancy firm Brookson, in their newsletter stated: “The final ruling [by the EAT] provided the correct result. The original verdict given by the employment tribunal neglected to examine the relationship between the contractor and employer and failed to look at the bigger picture”.

If the first ruling had not been appealed it could have paved the way for contractors to gain certain tax benefits while working on a contract and then claim employment rights if the contract was terminated before the agreed end date. It would also have left the door wide open for HMRC to make tax demands based on the employment status of the contractor during that working period.