Crystal Umbrella

Newly released government figures show a yawning annual tax gap which could well result in more freelance contractors switching to umbrella companies to get their tax affairs handled properly.

In fact, the Chartered Institute of Taxation (CIOT), which has participated on the Government’s Compliance Forum, is advising freelancers to consider agency payroll solutions or advice from specialist tax consultants in the wake of the estimated tax shortfall, as HMRC is likely to toughen its procedures to investigate and prosecute those who evade tax payments.

In the tax year ending in April 2010, the Revenue received payments that were £35 billion below the total due in tax liability. A further £6 billion was lost due to taxpayer error and carelessness. The CIOT believes that HMRC clients need advisers such as PAYE umbrella agency services or tax specialists to keep their records in good order and pay their tax accurately.

The CIOT also had some sharp words for HMRC, too, through its spokesperson Gary Ashford, who sits on the Compliance Forum. He said “It is not only taxpayers who make mistakes. As the recent Treasury Committee report illustrated, HMRC’s own systems are prone to error and make the task faced by taxpayers needlessly difficult. If HMRC want to improve compliance and reduce error levels they also need to make it easier for people to contact them and get advice that is prompt, accurate and understandable.”

For its part, HMRC says it is determined to reduce the tax shortfall and will continue its efforts to ensure that people pay “the right tax at the right time”.

McGrigors law firm has recommended that all taxpayers should review their submitted tax returns as they have determined that the results of recent court cases clearly indicate that the HMRC are incorrectly fining ‘wrongdoers’ for what they perceive to be incorrect or late filings.

Although the HMRC has lost only a few cases in recent months, McGrigors believes this to be the “tip of the iceberg” since many who were fined have not appealed the decision or come forward to complain about the fine.

It is of course justifiable that the HMRC fines those who contravene the defined regulations, but should not penalise those with a ‘reasonable excuse’ for late filing, perhaps due to postal strikes or other related delays such as public holidays. However, the HMRC, of late, has been overly strict in the enforcement of their rules.

One of the partners at McGrigors, Jason Collins, said, “In a lot of these cases the courts have taken the completely opposite view to HMRC’s guidance. [It] should revise its guidance because at the moment taxpayers are being misled.” He also added that HMRC instruction should not be blindly accepted and that if people believe they have been unfairly treated during the process, they should immediately make an appeal.

Examples of overturned fines include one taxpayer who was late filing, despite proof of postage four days prior to the deadline. Another was unable to figure out the online filing process and was late with his paper return. The tribunal also excused cases where the taxpayer believed that the accountant would look after it and, perhaps most interestingly, cases where taxpayers relied exclusively on advice provided by the HMRC helpline.

PAYE umbrella contractors waiting for early signs of the tax simplification the coalition promised could be disappointed, according to the Association of Chartered Certified Accountants (ACCA).

Many small entrepreneurs and freelancers, especially those working through their own limited companies, had been optimistic that change was afoot when the coalition took power in May 2010. However, far from simplifying the system, the government has actually made no fewer than 200 additional changes to the tax code in its first twelve months of office, in spite of its electoral pledge to do the opposite. ACCA is not impressed. In an interview with the business news outlet City A.M., it claims that the burgeoning changes have resulted in a “compliance headache for accountants, businesses and individuals.”

The Office of Tax Simplification was launched by Chancellor George Osborne in July 2010 to substantially simplify the tax code. The latter, Mr. Osborne claimed, had become excessively complex thanks to a decade of “meddling and intervening” by Labour.

According to ACCA’s data, however, Mr Osborne has made more changes to the tax code in one year than his predecessor ever Gordon Brown made even at his most “interventionist.” The highest number of changes chalked up by Mr Brown was 130, which came into effect after his 1997 and 1998 Budgets. He also made a slightly less “meddlesome” 120 alterations in two post-election Budgets – 2002 and 2006.

ACCA’s Head of Taxation, Chas Roy-Chowdhury, accused the government of taking two steps backwards for every one step forward through these changes, which appear to be wholly at odds with its expressed commitment to get to grips with the UK’s complicated tax system.

The Government’s decision to retain IR35 has come in for yet further heavy shell fire, this time from a prominent contractor and former external director of the freelance trade group, PCG.

In a letter to the contactor news outlet Shout 99, Phil Ross didn’t mince his words. He claimed that the Coalition has “blown it” as far as seizing an opportunity to IR35 was concerned and expressed his “bitter disappointment” in the government’s failure to act more decisively.

In his outspoken response to the decision, Mr Ross accused both the Conservatives and the Liberal Democrats of doing a U-turn on pre-election promises made in private to contractors and small business leaders. He believes the Coalition should have abolished IR35 within their first 100 days of taking office, a move which would have powerfully signalled that they were trustworthy enough to stick to their promises. Instead of the abolition or reform expected by the UK’s freelance community, they have ended up with “nothing but tepid words about working more closely together with HMRC.”

He argued that the previous Labour administration had declined his suggestion of a limited liability self-employed scheme to compliment the limited liability partnerships it had introduced, chiefly because ministers had not wanted to “deny themselves the huge tax yield that HMRC promised IR35 would deliver.” He believes that Chancellor George Osborne has fallen for the same questionable argument from HMRC as his Labour predecessor.

He urged contractors and the PCG to redouble their efforts to win the social and economic arguments in favour of IR35 abolition.

Umbrella companies and limited companies alike may share the concerns raised by the Chartered Institute of Taxation (CIOT) over HMRC’s decision to begin its enhanced Business Records Checks (BRC) programme earlier than planned.

In response to the news, CIOT Deputy President Anthony Thomas met with officials from the Revenue this week and was reassured that the new development was only a “test and learn pilot” which will run until July. No penalties will be imposed unless evidence is found of loss, deliberate destruction or a complete lack of business records.

Mr Thomas welcomed HMRC’s reassurance of a no penalty trial but added that they “should have made this clear to tax advisers, business organisations and, above all, those tax payers – represented and unrepresented – they are targeting, from the outset.” He sharply criticised the Revenue for giving the impression that they were proceeding with the BRC project prematurely “and without listening to consultees.”

CIOT has held concerns over the BRC scheme from the outset, especially over how it would be implemented and advertised as well as over the legal basis for issuing penalties before tax returns had been submitted. During the consultation period, CIOT made submissions identifying the necessity for HMRC to train the appropriate staff adequately and apply the correct standards in their assessments.

The organisation also insisted that HMRC should ensure that businesses are made fully aware of what’s expected of them vis-à-vis business records and should only issue penalties for the most serious breaches. Mr Thomas also believes that HMRC should not expect the smallest businesses “to have perfect records written up every day.”

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.

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.