Crystal Umbrella

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.

The Office of Tax Simplification’s Small Business Tax Review is published today and contains two key recommendations for reform, which have relevance for contractors working for either umbrella companies or limited companies.

Acknowledging that IR35 legislation proved to be the “thorniest issue” raised by small business representatives across the UK during the OTS roadshows, the review also notes that “no one method of reform currently commands universal support.” Outright abolition would also require “underpinning by a much better quality of data than presently seems to be available.”

The two central pillars of the review are structural reform of the current tax system by integrating National Insurance Contributions and Income Tax, and the introduction of a radical new approach to taxation for the smallest unincorporated businesses.

Prior to structural reform of taxation, which the OTS believes will remove the need for IR35, the review recommends two alternative approaches: suspending the legislation with a view to permanent abolition (using the suspension period to investigate behaviours and costs) and preserving it unchanged but improving its administration by HMRC.  But there is also a third alternative, which may interest the Chancellor – the introduction of a new “business test” aimed at radically reducing the size of the population currently caught by IR35 legislation. The effect would be to exempt large numbers of individual contractors from the worry of an IR35 investigation.

Other areas for reform include simplifying the VAT system for small businesses undertaking international activities, improving the capital allowances regime and improving HMRC administration.

We’ll bring further details of the review in subsequent news reports.

Happily, for contractors working through umbrella companies, the frustrating issue of tax calculation is taken care of by the agency. But PAYE umbrella freelancers might spare a thought for those poor souls who have to wade through self-assessment tax returns every year; new evidence suggests that by being unaware of tax efficiency measures, Britons are handing HMRC an astonishing $13.5 billion each year in unnecessary payments.

The findings come from a study by the financial advisory service, unbiased.co.uk, and reveal that many UK workers are nowhere near as tax efficient as they might believe. Women emerge as the most susceptible to what the organisation calls “tax apathy”, with 91 per cent of those polled failing to take any steps at all to lower their tax liability. Possibly more worrying are the 45 per cent of respondents who believe they already are being as tax efficient as possible, when the figures strongly suggest otherwise.

According to unbiased.co.uk’s Chief Executive Karen Barrett, large amounts of money are being blithely handed over needlessly to HMRC across all tax categories. A little tax planning is all it would take to prevent this. Ms Barrett noted that while more and more consumers will save money by using online moneysaving websites or by switching utilities provider, they appear to be relatively indifferent about losing money through excess tax. In fact, they are likely to save more money annually through tax efficiency awareness than by these other measures.

The study coincides with comments by the Conservative MP John Redwood, about the previous government’s tax policies. Writing in his online diary, he claimed that thirteen years of punitive clampdowns and increasingly complex legislation by Labour had blurred the distinction between tax evasion, which is illegal, and tax avoidance, which isn’t.

Whilst contractors working for umbrella companies will have had their tax automatically calculated and paid, those who file self assessment returns should be on the lookout for a new e-mail scam, according to a warning issued recently by HMRC.

There has been an increase in the use of phoney emails disguised as official HMRC communications in recent weeks, this time advising people that they are entitled to a tax rebate.  But the first thing to note is that the real HMRC would never use email to inform taxpayers of matters such as this.

The fake emails contain a range of ruses aimed at getting people to divulge sensitive personal information.  One invites individuals to visit a webpage to verify their banking details; another claims that lottery winnings, seized goods or inheritance money will be paid as soon as the necessary personal banking data is supplied. Yet another invites people to download an attachment which ostensibly requests a refund through PayPal. In addition, HMRC warns, several such scams have emerged via SMS – recipients of these messages are asked to call a number in order to “claim” their “refunds.”

All are phishing exercises and should be avoided at all costs. If anyone receives such a message, HMRC requests that they forward it immediately to phishing@hmrc.gov.uk and then delete it without delay.

The timing isn’t accidental – the self assessment system inevitably results in many freelancers completing their returns at the eleventh hour (or later). Scammers tend to exploit flurries in activity to provide a convenient cloak for their nefarious deeds. Unsuspecting freelancers may be expecting all manner of communications and reminders from HMRC at this time of year, rendering fake tax-related emails more plausible.

HMRC will never contact you via email to request personal information or update you on personal tax matters.

HMRC have set out fresh plans to uncover tax underpayments sector by sector. This new approach will begin with the medical sector. Medical professionals will have until 31st March this year to make a disclosure in return for a reduced penalty. Following this date, HMRC will investigate individuals based on the records they hold regarding their pay.

Those who do make a disclosure will have until 30^th June 2010 to pay all tax, interest and any penalties due. They can expect to receive a discounted penalty of ten per cent. Anyone not making a disclosure who is later found to have underpaid tax can expect to pay a penalty of 100% on top of the tax and interest owed.

Mike Wells, HMRC’s Director of Risk and Intelligence, said as he launched the campaign: “Our aim is to make it as easy as possible for people to come forward, make a full disclosure and benefit from the certainty of a reduced 10 per cent penalty that HMRC is making available to those who qualify for this opportunity.

He continued: “From April we will be using the information at our disposal to investigate medical professionals who have not declared their full income. I therefore strongly urge any in this group who think they may have outstanding tax liabilities on their income to get in touch with HMRC and get their tax affairs in order simply and on the best available terms.

Mr Wells concluded: “This is the first step in enabling those with undisclosed income or gains to avoid a full tax investigation together with much higher penalties. The message is clear: contact us before we contact you.”

Senders of tax returns will be given a little leeway by Her Majesty’s Revenue and Customs (HMRC) this year due to the nationwide postal strike.

The 31^st October date for returns is being put back to the 2^nd November as the 31^st falls on a weekend. It’s worth noting also that any returns received the first working day after the deadline will be accepted, too.

Because of the postal strike, HMRC has also stated that any tax returns received after November 2^nd will be processed as normal – so long as the sender has proof that they posted it on or before October 31^st.

It’s also worth noting that any tax returns that are unable to be completed on time can be handed in to the nearest tax office by November 2^nd. Those electing to complete tax returns online have until January 31^st to submit theirs.

Senders of late submissions will face a fixed penalty of £100, although if the sender has a valid excuse for their tax return being received after the deadline, it is possible to appeal.

Any taxpayer who can prove that their return was posted on or prior to October 31^st is within their rights to appeal and is likely to have the £100 penalty overturned.

Those submitting their tax return via post are advised to obtain evidence of the posting date, as HMRC do not check the postmarks on any tax return received after November 2^nd.

HMRC are set to streamline their system for filing tax returns on-line alongside Companies House. This common approach has been adopted to minimise the administrative burden of changes to software on businesses.

This new data format is known as Inline XBRL (iXRBL) and will be adopted by Companies House by the summer of next year for unaudited full accounts. They will then roll out the system for all accounts they receive. Companies will be able to purchase iXBRL-enabled software from Spring next year.

HMRC will follow suit in their adoption of this system from April 2011 for all Company Tax Returns (CTRs). This will include the return form, tax computations and the company accounts. The new method for filing online will take effect for accounting periods which end after March 31^st 2010. However, the HMRC’s iXBRL service will be available for CTRs from November 2009.

Chief Executive of Companies House, Gareth Jones, commented: “This early statement of our intentions will reassure businesses that both HMRC and Companies House are working closely together to align our services to make the filing of accounts as easy as possible for UK companies.”

The Carter Programme has responsibility for the improvement of HMRC’s online services. Its Programme Director, Mark Holden, said: “Today’s joint statement is an important step towards our goal of offering a joint filing facility for company accounts and Company Tax Returns, as recommended by Lord Carter’s Review of HMRC’s Online Services.”