Crystal Umbrella

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.

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.

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.

Only two days after urging employees, businesses and umbrella companies not to be unduly pessimistic about the recent shock announcement from the Office of National Statistics that the UK economy shrank by 0.5 per cent in Q4 last year, the Recruitment and Employment Confederation (REC) has sounded a distinctly more critical note. The Chair of REC Drivers, Rod Harris, has issued a thinly veiled admonishment to the government for having “crossed the line” in its efforts to rebalance the UK’s finances.

Conceding that a programme of spending cuts was necessary to “help the UK economy stand on its feet again,” Mr Harris nonetheless warned that there was “only so much shock the economy can absorb.” He went on to underline the triple influence of the VAT rise, increased taxation and increased fuel prices, which he believes have gone too far and are now acting to impede growth. Instead, he invited the Government to consider a reduction in the fuel duty which, he maintained “would have no implication for the money the Government earns.” It would, however, deliver a much-need helping hand to struggling small businesses in the UK by “easing their tax burden.”

A recent poll conducted by the Professional Contractors Group (PCG) found that more than half of its members, who include PAYE Umbrella contractors as well as freelancers with their own limited companies, do not believe that the recent VAT rise is a progressive policy. Prime Minister David Cameron, perhaps unexpectedly, has been bullish in his defence of the increase, claiming in a recent interview for BBC TV that it was but one part of an economic policy which is forecast to generate increased employment over the coming five years.

The Office of Tax Simplification has announced that its first two reviews are progressing well. They released a press statement to this effect while also announcing the recruitment of four tax experts to the team. It will fall upon these experts to furnish OTS with their public and private sector expertise and experience. Their role will be an advisory one. Kate Cottrell, of Bauer and Cottrell, is amongst those taking up position with OTS.

Tax director, John Whiting, stated: “I am delighted to have such an experienced team with their wide range of tax backgrounds in place, and I am very grateful to the firms that have released them. We are now getting going on our challenging task of helping to simplify Britain’s tax system.”

The Office of Tax Simplification was founded back in July. Its purpose is to advise the Chancellor George Osborne on matters directly relating to taxation. When this government came to power it pledged to simplify the country’s taxation systems and the reviews tasked to OTS are the first step in this process. They are currently reviewing small business taxation and tax reliefs, exemptions and allowances.

A published list of tax reliefs will be made available in the next couple of weeks and OTS will identify their planned review criteria. They are anticipating and welcoming comments on this which will inform the report which follows. The interim report on the small business taxation review is due to be published in time for the Budget 2011.

At a time when HMRC have made their intention clear in respect of investigating any suspected tax avoidance or evasion, Shout 99 have been speaking to accountancy group Smith & Williamson who have some advice for any new businesses and self employed individuals. Their advice pertains to record keeping in all aspects of their tax affairs including VAT.

Smith & Williamson’s national tax director, Richard Mannion, commented: “In light of the recently announced tax gap of £42billion and the pressure on public finances, the taxman will be wanting to recoup funds as soon as it can from people and businesses who have under-paid their tax. Besides, the taxman can now carry out checks on individuals and businesses which relate to the current year. This makes it more important than ever before to make sure record keeping and filing are up to scratch – and then to hold onto those records. The taxman expects to see records going back for at least six years.”

With regards to what the taxman is looking for, Mr Mannion had the following advice: “Certain areas frequently catch people out. For example, if you use assets for both business and personal use – perhaps if you are working from a spare bedroom in your home – you must keep sufficient records to back up any claims you may make for electricity and gas, for example. Similarly, if you use a car for both business and personal use you need to keep a log of mileage associated with the business and hold onto receipts for petrol and any repairs.”

Finally, with specific reference to self employed individuals, the tax advice was simple: “In general terms, the self employed must keep a record of all sales and takings, purchases and expenses. Any purchases or sales of assets such as a computer, tools or other equipment necessary for your work must also be noted, but separately from day-to-day purchases.”

New guidance from HM Revenue and Customs states that payments made by cheque will require to have cleared by the due date in order to avoid penalties being charged. This policy will come into effect on 1^st April. This now means that irrespective of the date that the cheque is actually received by HMRC, the payment will only be considered to be on time if it clears on time.

In a press release, chartered accountants Kingston Smith said: “If you are posting a cheque to HMRC, you should allow enough time for the post to arrive and for the cheque to clear. With businesses now relying on HMRC’s efficiency to bank their cheques promptly, electronic payment methods are likely to look much more attractive.”

Kingston Smith’s VAT partner, Adrian Houston, actually pointed out the inequity between the processes for electronic payments and cheque payments as those paying electronically usually have a grace period of seven days following the due date whereas those paying by cheque will now have to make the payment seven days in advance.

Another change due to be implemented on 1^st April requires any businesses who have an annual turnover of £100,000 or more to file and pay their VAT return online from now on. This rule will exist even if the business’s turnover drops below this threshold.

Houston concluded: “Most of the traders paying by cheque after April 1st will be small in size and number [so] this new measure is likely to go unchallenged and HMRC will get its wish i.e payment by cheque will become a rarity.”