Crystal Umbrella

Contractors working through umbrella companies or limited companies may well be encouraged by a new poll from the Institute of Directors (IoD).

The post-Budget IoD survey of 620 UK firms recorded a “significant boost” in business confidence. Well over half of the respondents – 58 per cent – said that they felt more confident following the Chancellor’s announcements last week. A mere nine per cent claimed to feel less hopeful.

The rise in confidence may well result in an employment surge, too, which would generate new placement opportunities for PAYE umbrella contractors and many others.

Noting that the economic recovery in the UK is very fragile, the IoD’s Chief Economist and Director of Policy, Graeme Leach, said that the poll provides encouraging news that business leaders “have responded so favourably to the Budget.” He added that confidence in these precarious times could make the difference between recession and recovery. The IoD’s Policy Voice Survey, thankfully, suggests that “the Budget has improved the outlook for business investment.”

The poll contrasts with one published last week by the Federation of Small Businesses (FSB) in the immediate aftermath of the Budget, which suggested that nearly half of FSB members (45 per cent) believed the Chancellor’s plans would have no positive impact on their businesses. Only 31 per cent thought that they would be beneficial.

Even so, FSB’s National Chairman, John Walker, commended the Chancellor for producing a pro-business Budget and listening to his organisation’s concerns. He believed, however, that Mr Osborne missed an opportunity to stimulate the economy by failing to extend the NIC holiday to micro-businesses.

PAYE umbrella contractors may be amongst those to benefit from the new private sector-led “Start-Up Britain” initiative to support prospective entrepreneurs. Aimed at delivering the best possible support and advice from established entrepreneurs to startup companies, the project is a response to the Government’s call for an “enterprise-led recovery.”

Promising to champion the 270,000 new businesses staring up every year in the UK, Start-Up Britain could help generate new work for freelancers on contractor payroll as small firms adopt the growing trend for flexible workers rather than permanent staff. It has received warm endorsements from Prime Minister David Cameron and the Confederation of British Industry (CBI).

The initiative will provide new entrepreneurs with expert support worth £1,500 and is committed to promoting entrepreneurship within every school in England and creating Enterprise Societies in all UK universities. It has attracted the backing of several major international brands so far, including Virgin Media, Microsoft, Intel, Experian, BlackBerry, Barclays and McKinsey and Co.

Talking to the contractor news outlet Shout 99, Mr Cameron said that there were thousands of people in the UK who were entrepreneurs but just didn’t know it yet. There are, he insisted, “millions of success stories that haven’t been written yet.” He urged people who had been turning over good ideas in their minds for years to seize the opportunities offered by Start-Up Britain and “make it happen” to drive the economy forward.

The CBI’s Head of Enterprise and Innovation, Dr Tim Bradshaw, was equally positive, saying that the initiative could encourage more young people to become “business-savvy.” Providing extra support for entrepreneurs could, he believes, “inspire more people to take the plunge and start a new business.”

Contractors working through umbrella companies and limited companies alike may support the PCG’s ringing endorsement of the recent budget.

Acknowledging that the retention of IR35 had disappointed many contractors, PCG’s Managing Director John Brazier was nonetheless upbeat about the Chancellor’s other measures. The PCG has produced a detailed guide identifying those measures which affect contractors in particular. Written by tax expert Ann Redston, Visiting Law Professor at King’s College, the document pinpoints the benefits for contractors contained in the Budget.

These include the 1 per cent reduction in the small profits rate of Corporation Tax, which is likely to help “nanobusinesses” such as freelance contractors to re-invest and expand their capabilities, as well as the increase in mileage allowance by 5p per mile and the cut in fuel duty, which comes with a new stabilizer. Freelancers who work for multiple clients across several locations will experience these reforms as a significant boost, the PCG maintains.

Moreover, the PCG applauds the identification of 10 “Enterprise Zones” across Northern and central England, offering simpler planning rules, superfast broadband and, most significantly, 100 per cent rate reliefs. These are designed to attract freelancers away from the traditional heartlands in London and the South East, encouraging to bring their talents further afield.

The £1,000 increase in Personal Income Tax Allowances also came in for praise, especially as a further £630 rise is scheduled for April next year. The measure, the PCG insists, will lessen the tax burden for many freelancers.

Summing up the report, Mr Brazier said that the budget will “make the business climate more favourable for the UK’s 1.4 million freelancers, whose flexible expertise UK plc relies on for its future growth.”

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.

So, now we know: the Chancellor’s Budget documents make it clear that IR35 is here to stay. However, there is also a clear commitment to improving its administration by HMRC, in accord with one of the options raised by the OTS small business tax review.

A dedicated helpline staffed by tax specialists is to be set up and new guidance will be published clarifying the cases which HMRC consider to be beyond the scope of IR35. Furthermore, target compliance activity will restrict reviews to high risk cases and HMRC’s new approach will be closely monitored by a new IR35 Forum. The government appears to have taken heed of warnings in the OTS review that suspension of IR35 would jeopardise substantial amounts in revenue.

IR35 was introduced by the previous Labour administration in 2000 to prevent “disguised employment” by workers who received payments from clients through their own limited companies. Treated as dividends, these payments were not subject to National Insurance Contributions (NICs). Further evasions could be secured by splitting ownership of limited companies between family members, a tactic designed to reduce tax due by placing the income into lower tax bands. It should be noted that few owners of limited companies took these questionable actions, but many became subject to suspicion when IR35 became law.

Commenting on the decision to retain IR35, Crystal Umbrella’s Director of Service Delivery, Scott Illingworth, said that outright abolition at this stage would have created a policy vacuum, with no regulation at all. “This would almost certainly have led to a significant rise in non-compliance”, he added, resulting in an “even worse predicament than is the case now with an unreformed IR35 in place”.

Contractors working for umbrella companies in the Manchester area will almost certainly endorse recommendations to the Chancellor from a leading industry body in the region, as well as supporting calls for IR35 reform.

George Osborne received a statement issued yesterday by the Greater Manchester Chambers of Commerce, calling on him to ensure that he produces a “robust and convincing” budget capable of generating much-needed economic growth.

In the Greater Manchester area, there is disturbing evidence from the Chamber’s own survey covering the last quarter that domestic economic recovery in the region has, in their terms, “markedly slowed down.” Chris Fletcher, the Chamber’s Chief Executive, urged the Government to do more than repeat rhetoric about delivering pro-growth strategies. The time for talking, he insisted, is over and “the budget must be clear, bold and decisive.”

Businesses have been hampered by uncertainty for too long and this has now seriously eroded confidence since last year’s election, he added, warning the Chancellor to “avoid any temptation to simply tinker with policy.”

Mr Osborne has also received similarly robust warnings on the vexed question of IR35 reform, this time from the Chartered Institute of Taxation (CIOT). CIOT’s President, Andrew Hubbard, urged him to take decisive action on this issue, too. Although Mr Osborne is widely expected to announce the implementation of a key recommendation from the recent OTS review of small business tax – the merger of income tax and national insurance contributions – this will only be achieved in the long term. In the meantime, he must decide whether to suspend or improve the administration of the IR35; to do nothing “is simply not acceptable,” Mr Hubbard added.

The PCG has recently issued a warning to contractors working for umbrella companies who think they may be receiving an employment benefit trust scheme, or EBTS.  The government has instructed HMRC to clamp down forcibly on these schemes, which are now considered to be forms of disguised remuneration.

Even if your umbrella service claims to provide a “safe, secure, fully compliant, HMRC-approved scheme offering over 90 per cent net income retention,” you should beware.  The claim is not only false, it’s now illegal, too.

EBTS and a closely-related product (employer funded retirement benefit schemes, or EFURBS) have been popular amongst high-earning freelancers of all kinds, from football stars to entertainers to high-end consultants contracting in the IT skills market, or the banking and financial sectors. Essentially, they divert some forms of regular income (or large bonuses) into “loans” which are taxed at minimal or zero rates. In our straitened economic circumstances, HMRC has closed these tax loopholes in order to haul in an extra £500 million per year in additional revenues.

A few large corporations and a small number of individuals may comply with new rules and continue to befit from the schemes, but HMRC estimates that upwards of 50,000 “employees” will no longer do so, as from 9^th December last year. To compound matters, the new legislation doesn’t come with a cut-off date, unlike most other tax schemes, which means that it is by no means impossible for EBTS and EFURBS in place before the 9^th December to be included.

The PCG is urging all who suspect that they or a colleague may be directly or indirectly involved in such schemes to seek swift advice from an independent expert.

Umbrella companies supplying the IT skills market may well have noticed a “huge rise” in demand for contractors with digital skills over the last twelve months, according to a new study.

Recently published research from the freelancer’s marketplace PeoplePerHour.com reveals that while the Government’s public spending austerities have caused a surge in unemployment, the resulting shortage of manpower in the public sector has been offset by a flurry of contractor hiring.

In particular, contractors with digital skills such as search engine optimisation, database development and web design have been very much in demand. PeoplePerHour.com recorded a massive 315 per cent rise in postings for contractors with these skills over the last year.

Xenios Thrasyvoulou, the website’s founder, said that the private sector responded rapidly to the recession by shedding permanent staff and turning to freelancers instead. Thousands of businesses in the UK, he added, quickly understood that the best way to survive the new economic realty was to engage freelancers on time-limited contracts. The decision helped them to “stay lean and remain solvent,” he said.

The public sector, it seems, has taken a leaf from the private sector’s survival book. PeoplePerHour.com’s findings lend support to the PCG’s recent endeavours to encourage refugees from the public sector to consider freelance contracting as an alternative. Contrary to popular belief, the organisation cites evidence that many “ex-bureaucrats” can successfully make the transition from the public sector to the private through contracting. The key obstacle identified by recruiters, the PCG insist, is poor self-belief on the part of ex-public sector employees.

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.