Crystal Umbrella

HMRC has decided to offer an amnesty to umbrella companies using Employee Benefits Trusts (EBTs) to boost their clients’ take-home pay, just months after announcing that it would shut the schemes down.

Provisions in the Government’s Finance Bill of 2011 squashed the offshore tax loophole exploited by EBTs, resulting in several major PAYE umbrella firms scrabbling around to restructure their organisations, leaving many of their clients out of pocket in the process. Umbrella companies were not the only firms to use EBTs, of course; several other high-profile businesses used the scheme to provide tax-efficient financial enhancements to their employees. One such – Ranger FC – is currently under investigation following the HMRC clampdown.

In a new press release, however, HM Revenue has announced that it now intends to allow companies an amnesty in order to repay outstanding NICs and tax. The statement said:

“HMRC is inviting employers, companies and other users of these arrangements to settle without recourse to litigation. This will minimise costs to both customers and HMRC. Employers and companies concerned with how their arrangements will be affected by the new legislation can respond to this opportunity to obtain certainty about their tax liabilities.”

HMRC’s Permanent Secretary for Tax, Dave Hartnett, maintained that the revenue would seek to resolve disputes without proceeding to litigation wherever that could be achieved within the law and “without damage to the Exchequer.” He revealed that HMRC was adopting a “proactive approach” to give customers a chance to work in partnership with the revenue and “establish how the facts of their case fit within the proposals.” He encouraged customers to come and discuss their situation.

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.

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.

Although immediate reactions to the OTS review of small business taxation have been negative in some quarters of the UK’s self-employed workforce, especially in relation to IR35 legislation, the report repays a closer reading. It is far from a fudge or a missed opportunity, as some have suggested, and the recommendations have met with a cautious welcome from organisations such as the PCG.

Bearing in mind that the OTS was charged with finding “revenue neutral” solutions, it is impossible to overlook the fact that straightforward abolition of IR35 would cost the Treasury and estimated £200 million a year, the report suggests. It would also “condone the significant underpayment of tax/national insurance contributions (NICs) by some individual,” a move which the report says will be seen as “unfair” by employees.

Either of the two lead options set out in the report – suspension or reform – should be tied to a timetable for integrating income tax and NICs. Unless this structural reform occurs, the OTS insists that “the issues underlying IR35 will continue to exist, and enforcement of legislation to combat this will continue to place burdens on both tax payers and HMRC.”

Using Treasury calculations, the OTS says that aligning income tax with NICs would cost £200 million. However, it would also save HMRC £300 million a year and employers £759 million. Perverse incentives under the current system to seek spurious self-employed status amongst some individuals, who do so in largely in order to evade NICs would also be removed.

This fundamental reform, which of course is bound to take time in order to be fully tested and properly implemented, should result in much greater clarity for individuals over their tax status than exists presently.