Crystal Umbrella

Contractors working through umbrella companies may be interested to hear that HMRC is to go ahead with a “real time” reform of the PAYE system.

From October 2013, it will become mandatory for employers to supply HMRC with information concerning income tax, national insurance contributions (NICs) and student loan payments every payroll day, rather than in accord with the current annual system. HMRC maintains that the new system will be much more accurate, making it easier for individuals to pay the right amount of tax after changing jobs. The P45/P46 process will ultimately be rendered obsolete under the new system.

Employers would, HMRC claims, benefit from a greatly simplified end-of-year PAYE reconciliation process. The current uncertainty which leads to errors in tax credits would also be largely abolished.

HMRC has announced that a pilot scheme involving software developers and volunteer employers will be launched in April 2012 following a period of consultation. Measures to ensure data quality will be introduced in October this year, with the aim that employers begin using the new system in April 2013 (it becomes compulsory in October of the same year).

The introduction of Real Time information will improve the PAYE system and, according to the Treasury’s Exchequer Secretary, David Gauke, make it “more accurate for taxpayers and easier for employers and HMRC to administer.”

HMRC spokesperson Stephen Banyard insisted that agency payroll providers and employers had been listened to, and plans have already been amended to take account of concerns raised. He urged anyone interested in being involved in the new pilot to contact HMRC.

Contractors working through personal service companies may be intrigued by critical comments from an expert concerning a key proposal in the recent OTS Small Business Tax Review.

The document continues to provoke controversy, with a leading staffing organisation now claiming that one of its central recommendations – the integration of income tax and National Insurance Contributions NICs) – is likely to deter people from considering self-employment or freelancing as a career path.

The Association of Professional Staffing Companies (APSCo) insists that the proposed realignment of income tax and NICs to reduce the present differential between self-employed and employed workers will effectively sabotage the very goal the Government has set so much store by: the encouragement of self-employment. Under present arrangements, self-employed contractors working through limited companies will pay around 15 per cent less tax on their income than employed workers if they pay themselves by dividends. They also pay less in the way of National Insurance Contributions.  The OTS considers this unfair on employees, and thinks the different rates should ultimately be abolished. This would remove the need for IR35 regulations, according to the OTS.

But APSCo considers the proposal to be a retrograde measure which will make contracting considerably less attractive by removing the tax incentive that encourages people to become self-employed in the first place. It would also, the organisation argues, drive employment costs up by millions of pounds.

APSCo’s Chief Executive, Ann Swain, said that limited company contractors were a “vital component” of the UK’s flexible workforce. Changes to IR35 which resulted in deterring people from considering contracting would simply drive up employment costs without generating the economic growth that small businesses are known to deliver.

A petition has been put together by the Federation of Small Businesses (FSB) alongside other recruiters and businesses to request the government to freeze national insurance. The FSB has conducted research which proves that is employers’ national insurance increases by the proposed one per cent, it will result in 57,000 job losses. The increase is also unlikely to reduce the public spending debt. The petition, which can be found at www.no-nics-rise.co.uk, is seeking to reverse the planned rise in contributions. The FSB believe that small businesses taxes should only ever be used as a last resort as small businesses play a vital role in the UK economy.

John Wright, National Chairman, Federation of Small Businesses, said: “This petition – calling for no rise in National Insurance Contributions – will tell Government that real action needs to be taken to really help tackle unemployment. The rise in National Insurance is a tax on jobs and will cost the country in thousands of jobs, as well as prevent small firms from taking on more members of staff at this crucial time in the country’s economic recovery.

“The FSB has been calling on the Government to take steps to make it easier for the country’s 4.8 million small firms to employ staff. The FSB knows that small firms want to recruit over the coming year, but are put off by taxes. The Government can give the economy a real helping hand by freezing National Insurance and helping to encourage small firms to grow and take on additional employees.”

On Monday, Shadow Chancellor George Osborne announced plans to waive employers’ national insurance contributions for any businesses starting up within the first two years of the Conservatives taking office, if they win. This concession will apply only to the first ten members of staff taken on by each of these new companies.

With regards to how this may effect contractors, tax experts have commented that this move is unlikely to be of benefit. As it stands employers’ NI contributions are levied at 12.8% of the employee’s salary. While a contractor working through a limited company must pay these contributions on his own salary and anyone else he employs, questions have been raised as to whether or not said contractor could wind up this limited company and set up a new one.

However, experts have been quick to denounce this idea. Speaking to Contractor UK, Tony Harris from Contractor Money, said: “In reality this will only benefit those contractors who are currently inside of IR35. IN almost all cases, anyone outside of IR35 would be likely to draw a low NI-able salary in the first place so this news will be largely irrelevant for them.”

He continued: “It’s also my understanding that Osborne made no mention of scrapping the planned increased in employers’ NI contributions (which are set to rise by 0.5% from 2011) so current contractors will have little to cheer about from this announcement.”

Meanwhile, PCG policy adviser, George Anastasi stated to Contractor UK: “Our understanding is that this is a measure designed to increase employment and incentivise businesses to take on new staff. Therefore we are not sure this is intended to be of benefit to freelancers, or that it will apply to new freelancers. Naturally, we are seeking further clarification on this, but we don’t at present believe it will apply to our members.”

IT consultancy, Dragonfly Consultancy Ltd, has been defeated in its IR35 appeal at the High Court. The appeal had been funded by the Professional Contractors Group (PCG).
It was back in 2008 that Wiltshire-based Dragonfly Consultancy ltd lost its IR35 case before the Special Commissioners. This left Jon Bessell, co-owner of the company with a tax and NIC bill of £99,000. This decision has now been supported by the High Court.
In January last year, Special Commissioner Charles Hellier had stated that as Mr Bessell was an integral part of his client AA’s business and should therefore be treated as an employee. Mr Bessell had provided his services to AA for three years through agency, DPP International Ltd. He would have had limited rights of substitution but AA had declared that they would have expected to vet or choose any replacement prior to them reporting for work.
Mr Andrew Stafford QC appealed the Special Commissioner’s initial ruling on four grounds:
1)    The right of substitution in notional contracts was wrongly concluded as being inconsistent with employment. Instead his conclusion should have stated that the notional contracts would have been prevented from being full contracts of service due to the provisions which they contained.
2)     That the commissioner incorrectly asserted that the rights of control the AA had over Mr Bessell’s work could have allowed the creation of a contract of service
3)    The incorrect conclusion that the intentions of AA and Mr Bessell were irrelevant.
4)    The service commissioner did not take into account that while a person may be self-employed this does not mean that he is in business for himself. There is a category in-between.
At the High Court, Mr Justice Henderson answered each point in turn.
1)    He considered it unreasonable that the AA would have agreed to unqualified rights of substitution and that the existing rights of substitution were on a par with a relationship of employment.
2)    He concluded that Mr Bessell’s work was subject to control and supervision. He stated that the level of control exercised by the AA was for the Special Commissioner to analyse and he had found the balance tipped towards employment.
3)    He concluded that there had been no error in law on the part of the Special Commissioner.
4)    Mr Stafford, QC had entered the special definition of ‘worker’ pertaining to an intermediate category of people who are neither employed nor self-employed and that the IR35 legislation only applies to [notional] employees. He again reiterated that he ruled with the Special Commissioner that no other categories of worker needed to be considered as Mr Bessell’s position fell “on the employment side of the line”.
On this note the appeal was dismissed, leaving Mr Bessell to pay the £99,000 tax and NIC bill.

HM Revenue and Customs is facing a bit of embarrassment after they incorrectly sent out letters to several taxpayers in Huntingdonshire.  The letters claimed that the taxpayers owed HMRC National Insurance Contributions amounting in most cases to a few hundred pounds.  Several letters were sent out by accident after a failure to properly update the records.  A person that had changed jobs during the course of the year might have had missing information in their records about the switch which could have led to the issue.

One person in the area who received a letter was Stephen Oliver who feared that people received similar letters all over Britain.  He said “I feel like invoicing the Inland Revenue for my time. I have had 60 employees ask me what is going on and I have told them on no account to send off any money.”  Oliver said he expected that a number of people will assume that their employer has not been properly deducting the taxes from their income.

A spokesperson for HMRC said that letters of apology would be sent out to those that received the original letter in error.  It was also pointed out by Oliver that taxpayers had to pay for the incorrect letters to be mailed out by HMRC and now they would be forced to foot the bill for the letters of apology as well.

The HMRC said that they were working hard to make sure their records are updated so that this would not be an issue in the future.

 Source: www.huntspost.co.uk