Crystal Umbrella

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.

David Gauke, Exchequer Secretary to the Treasury, has released nine separate documents which relate to tax. These documents are for discussion and consultation with the aim of providing individuals and businesses with the opportunity to have their say on the proposed tax reforms being initiated by the new government.

In the Budget back in June, the Chancellor laid out plans to reform taxation in the UK, making it simpler, more predictable and more stable. The nine documents which have now been published relate individually to PAYE reform, Pensions Tax Relief, Disclosure of Inheritance Tax avoidance, Controlled Foreign Company interim improvements, National Minimum Wage regulations, Furnished Holiday Lettings, Associated company rules, Foreign branch taxation and Modernisation of Investment Trust Company rules.

Mr Gauke said: “We want to make the tax system simpler and work better for the taxpayer. By reducing burdens, making the right choices and involving taxpayers, we are sending a very clear signal that Britain is open for business.

“We are committed to a more considered and open approach to tax policymaking. That is why consultation and scrutiny of our tax policies will be the cornerstone of our tax policymaking process. I want to encourage relevant parties to provide their feedback on the tax consultations we have published.”

These consultation documents have been welcomed by the CIOT. Their president Vincent Oratore commented: “We welcome the new Government’s commitment to meaningful consultation on tax issues. This is more evidence of the willingness of the administration to listen to the concerns and suggestions of the tax profession and work with us to produce a more efficient tax system.”

He concluded: “The Government’s objective of simplifying the system and reducing burdens on business and individual taxpayers is one that the CIOT shares. The more comprehensible the tax system the more likely it is to command public and business confidence and the more likely taxpayers are to get their tax right.

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.”

Back in January, HMRC launched the ‘Tax Health Plan’ which would provide workers in particular sectors a time-limited opportunity to disclose undeclared taxes for a reduced penalty. The medical profession were the first to be offered the opportunity to take advantage of this offer. However, it is now understood that only 1,500 professionals in this sector have made disclosures to HMRC. Information was obtained by Revenue and Customs prior to the launch of this scheme which will allow them to pursue individuals who they believe have undeclared tax liabilities and who have not taken the opportunity to disclose them. Those individuals will face tougher penalties on top of repayment of the tax owed plus interest

The Chairman of the Chartered Institute of Taxation’s Management of Taxes committee commented on his surprise at the low take-up of this disclosure opportunity: “We understand that HMRC’s data suggested there were some 30,000 medical professionals who might have undisclosed tax liabilities. If only 1,500 have come forward, that is a considerable surprise and suggests that either many professionals are not taking this seriously – or of course that HMRC have failed to get their message across properly.”

Mr Ashford continued: “We have been told that HMRC will start using the full powers available to them for non-compliance in this area from August1st. Any medical professional with undisclosed tax liabilities really should take advantage of this brief window to take advice and start getting their affairs in order. It’s clear to us that HMRC are intending to come down hard on defaulters.”

We reported earlier this week on the Office of Tax Simplifications IR35 Review which will make recommendations to the Chancellor George Osbourne in time for next year’s Budget. However, this is not the only task at hand for the OTS.

The body is also charged with reviewing tax reliefs which could also have a knock on effect for contractors. The Office will be looking at all personal and business tax reliefs, exemptions and allowances which are currently permissible by HMRC and deciding if any should be repealed. They will also be looking to simplify many of the tax reliefs since the overall aim of the government in reviewing the country’s taxation systems is to make them simpler.

The top priority for the OTS will be the reliefs which have been in existence for a really long time and those which are infrequently used. It is likely that some of the reliefs which will be come under scrutiny during this process are the travel and subsistence breaks. Any changes to these reliefs would have a knock-on effect on umbrella contractors. This has already attracted opposition from the Freelancer and Contractor Services Association (FCSA) who feel that such changes would undermine the strength of the flexible workforce.

FCSA chairman, Stuart Davis, commented: “The FCSA hopes that the OTS is not just Government window dressing or an excuse to remove important tax reliefs, but is independent of Treasury and will have real teeth in simplifying tax for the different labour markets in the UK.”

IT Recruiter CV Screen has confirmed that the second quarter of this year has seen a dramatic rise in the number of IT vacancies registered with them. They have made a comparison between this period and the same period in 2009 and have found the rise equates to a 47% increase. There has also been a 36% drop in the number of applicants per vacancy during this same period, down from 295 to 187. CV Screen has attributed this to individuals choosing to leave their current positions for new challenges rather than being forced to look for work thorough redundancies.

In a press release Matthew Iveson from CV Screen said: “We believe that the affect the recession had on the IT Jobs market is beginning to diminish. Companies are growing in confidence and in turn looking to recruit more staff. They are now able to plan for the future with more certainty. The drop in applications per role could well be a sign that IT professionals are being more selective in the roles they apply for. We have seen them place more importance on career prospects and training that a role offers, rather than just the financial rewards”

Mr Iveson concluded: “We have also seen that more candidates are leaving their roles out of choice, rather than due to reasons such as redundancy. This is a sure sign that the IT Jobs market is heading back towards pre-recession levels”

The new director of the Office of Tax Simplification has confirmed that new measures to replace the contentious IR35 tax legislation will not be prepared and proposed until the Budget next year. Speaking to Contractor UK, John Whiting said that any new measures may have to take into account the amount each individual contractor earns. This could work in a similar manner to Australia’s former 80-20 rule.

Mr Whiting has accepted the unpaid tax director role for the OTS and his first port of call is to review tax relief and exemptions. At present many of the roles have not been filled within the OTS but when they are up to full complement a complete review of small business taxation will be conducted which will, of course, include the IR5 legislation.

Mr Whiting told Contractor UK: “”[IR35 is] a complex area – so I can’t promise immediate change or abolition. If [either were] easy to do, they would have been done already. We may have to go for more of the ’80/20′ approach but let’s see where we get to. What I want…is a thoroughgoing review – not just another bit of sticking plaster.”

He confirmed that in reviewing IR35 he would need to look at why it was introduced, whether that need still remains and how it could be addressed more effectively. He will be reporting directly to the Chancellor of the Exchequer or the Exchequer secretary David Gaude.

He continued: “They will be able to accept or reject our reports because ultimately they have the responsibility for the tax system,” said Mr Whiting, pointing to the two ministers. But I would hope that if we do our job properly, our recommendations will be easy to follow; and if they do reject unreasonably, they will get lots of questions as to why.”

The Recruitment and Employment Confederation has stated their case for a fresh approach to criminal vetting. The REC are responding to concerns raised by their members which shows the current system is neither efficient nor workable when you consider the flexible nature of the work of freelance and contract staff. This calls for a criminal vetting system which is as portable as the individuals’ working practices.

Members of the professional body REC have pointed to the often costly checks which recruitment agencies must conduct for each job that individual is offered which means the process is repeated time and time again, often within a very short time-scale.

REC’s Anne Fairweather used locum doctors, supply teachers and agency nurses as an example. Individuals working in these fields will often register with several agencies in order to increase their chances of being offered work. However, they will be subject tot he same criminal disclosure checks at each agency.

It is also true that the current system can often prevent people from being able to start work as quickly as the client would require. The benefit of such a flexible workforce should be the ability to respond quickly but these CRB disclosure, while necessary, are often time consuming and hold up the process.

Ms Fairweather believes that recruiting safely means that the CRB checks sit alongside a more robust system of interviews, identity checks and verifying qualifications. While the coalition government had announced a remodelled service for vetting and barring through registration with the Independent Safeguarding Authority. Due to go live next week, this service has now been suspended.