Intouch reviews the Office of Tax Simplification’s response to HMRC’s proposed IR35 status tool

HMRC’s proposed IR35 status tool

Last month, Intouch Accounting’s MD Paul Gough shared his thoughts on HMRC’s proposed IR35 status tool within the public sector. In this article he drew attention to the weaknesses in HMRC’s proposals and discussed the likely implications which HMRC appear to have neither fully considered nor understood.

 

As we wait for the outcome from the consultation phase, we read with interest the recently published response from the Office of Tax Simplification (OTS) in regards to the consultation document.

 

Who does the OTS side with?

The contracting community. The OTS believe the proposals will add unnecessary complexity to the already confusing subject of IR35. In particular, they believe it will:

 

  • increase administrative burden, as more information will be needed in order to help determine a contractor’s IR35 status
  • create boundary issues between the private and public sector, as the test’s final decision may not be binding and therefore lack certainty
  • the OTS have previously encouraged the use of a digital employment status tool, but now warn that a tool could only ever simplify the current process if, clear and easy to follow rules and regulations will show (without question) an individual’s working status
  • require two versions, to allow for different circumstances and businesses
  • finally, need to be updated on a regular basis

 

The Public Sector

It would be unfair to subject all contractors to these changes, without explaining in detail how their sector is affected and whether they should be operating within the proposed rules.

 

There’s also the ongoing concern that by enforcing such rules they will create an imbalance between private and public sectors. This in turn would make it harder for the public sector to hire contractors with specialist skills.

 

Protection for the engagers

There must be enforced protection for engagers who can demonstrate that they have taken all reasonable steps to obtain reliable information from the other parties in the supply chain that should have supplied it, but for whatever reason have not done so.

 

5% allowance

The OTS believe that should a contractor fall ‘inside’ IR35, the 5% deemed payment allowance should be eliminated, as it adds unnecessary complexity for the engager. Instead, the PSC should claim it separately.

 

VAT

If a contractor is found ‘inside’ IR35, then there should be no VAT implications. It is unfair for HMRC to make a PSC pay employer’s VAT whilst being forced onto the payroll.

 

Tests and the online tool

Parts one and two of the test (before progressing to the online status indicator) do not show conviction, as the decision is not final. The OTS believe that even if the first two parts did show conviction, it still may not apply as it does not allow wiggle room for any changes to the contract, which the engager / contractor may not be aware of.

 

Materials for the job

The majority of contractors and freelancers provide services which are predominantly knowledge based. If 20% or more of a contract is for materials which are wholly consumed in the services required to complete the contract, then it is automatically deemed to be ‘outside’ of IR35.

 

There are very few circumstances whereby Limited Company contractors, (such as those who specialise in the IT or finance sector for example), would use 20% of materials to complete a contract and therefore cannot be classed as ‘outside’ under this rule.

 

Personal service and control

If the 20% test is failed, the engager must then move onto the second part, two questions on personal service and control questions. Should these two questions deliver a positive answer then IR35 will apply. If the engager is unable to answer ‘yes’ to both of these questions, they will then have to progress onto using HMRC’s online status tool.

 

Attempting to rely primarily on personal service and control tests to determine a contractor’s IR35 status is simply not appropriate for the majority of highly skilled contractors and freelancers. Whilst a highly skilled contractor may not be able to send another contractor in their place, this does not provide a definitive indication of their employment status.

 

HMRC should also consider the fact that for some contractors, especially those who work within the public sector where security is an issue, that sending a substitute to complete their work is simply not an option.

 

For skilled workers, the ‘control’ aspect of the test does not always give a clear-cut answer for whether the contractor is a disguised employee or not. Many stakeholders are of the opinion that such a test is more relevant for the lower skilled flexible workforce, where more direct oversight and control over how the work is performed is more common.

 

The OTS believe that unless the coding for the status tool is based on new employment status case law, then it will be considered biased in HMRC’s favour.

 

Penalties

The OTS completely agree that any tax rules should be supported with financial penalties and interest, but that it must be fair. The rules and procedures must therefore be easy-to-follow, to allow the engager to operate correctly and to avoid penalties.

 

The consultation period outcome

Whilst the exact date for the consultation outcome is still unconfirmed, Intouch will be reviewing it as soon as it’s published, so ensure you’re following us on social media and be first to get all the information and support you need.

 

Worried about how the proposed changes to IR35 could affect you? Our team of expert Personal Accountants are on hand to offer Intouch clients bespoke advice and support, that’s tailored to their circumstances and future contracting goals.

 

If this sounds like the type of specialist support you need as a serious contractor, why not get in touch? We look forward to speaking to you.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

IR35 consultation hot off the press

IR35 consultation

HMRC has now published the anticipated consultation on IR35 and the public sector, following closely on the heels of the announcement made in this year’s Budget and the discussion document in 2015.

 

The consultation centres on a new online test that HMRC expects engagers to use to determine a worker’s status and therefore the tax they will suffer at source. The reliability and acceptance of that test is critical to the fair application of the new rules. HMRC are inviting interested parties to offer to assist in the development of this test. Intouch has already registered its willingness to contribute to the development of a test that is appropriate, fair and consistent with the legislation and case law, and not just HMRC’s view of the world.

 

We will be submitting a response in defence of the genuine self-employed contractors and we urge everyone who has a vested interest to respond to the consultation. It is our chance to influence HMRC’s understanding of our market and attempt to contribute to the shape of the future of tax, not only for public sector contractors, but the wider freelance and contracting market.

 

The consultation can be found here and it invites all to respond, so let’s have our voices heard.

We’ve unpicked the consultation to see just how fair it is…and whether it really is a consultation. Read our findings in our blog posted on Contractor UK.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

July 2015 Budget – what does it mean for contractors?

July 2015 Budget

Yesterday Chancellor George Osborne presented his first Tory Budget to the House of Commons.

 

He optimistically presented it as a “Budget for working people” that creates a “sensible path for the benefit of the whole of the United Kingdom”. He reported that the British economy is fundamentally stronger today than it was five years ago and that it is growing faster than any other major advanced economy. Osborne is confident his plans will boldly back the aspirations of working people and suit a country with big ambitions.

 

We’ve unpicked exactly what this means for contractors – it’s immediately clear how some of the pledges will impact this community. With others, the coming months will reveal more and we’ll be keeping a keen eye on the proposed changes and what they mean for you. We’re involved in the conversations right at the top level and will continue to actively and aggressively champion contractors’ cause. We’re here to speak up on your behalf against the unfair and inappropriate suggestions put forward by government and remain an active part of the consultation discussions.

 

What is clear from yesterday is that changes are afoot for the contracting community and while Umbrella companies and workers will suffer the most (and soon), Limited Company contractors continue to have more opportunities to get the most out of contracting. And those who engage the services of an expert contractor accountant will certainly benefit more than those who rely on accountancy software alone to get them through. After all, keeping tidy records is one thing; having the know-how to make sure you’re getting the most while remaining compliant is quite another.

 

We’ve picked out the Budget announcements that contractors will be most interested in:

The challenges

 

    • In the March Budget no mention was made of IR35. Three months on Osborne clearly stated that consultations will take place soon to deal with the increasing abuse of the rules around disguised employment when working through a personal service company. On the face of it, this shouldn’t affect most contractors operating legitimately as long as you are able to demonstrate you aren’t operating as a disguised employee. But it will be more important than ever that you get every contract you undertake assessed for the level of risk you face under IR35. We’ll be part of the discussions and have already been invited by HMRC to take part in the consultation. We’ll be there to represent the interests of contractors.
    • The lifetime of the Office of Tax Simplification (OTS) has been extended. Earlier in the year it wasn’t clear if it would survive beyond the election but now its role has been extended and it will be looking at small company tax matters. This will include personal service companies.
    • The permanent non-dom tax status will be abolished and by April 2017 those who previously positioned themselves as such will pay the same taxes as everyone else.
    • Dividend tax credits will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from April 2016. After this amount, tax rates on dividend income will increase incrementally. Put simply, those who have a modest income (i.e £5,000 or less) from dividends will see either a tax cut or no change in the amount they owe; those with significant dividend income will pay more tax. It’s likely many contractors will need to reconsider the split between what they take as salary and what they take as dividends.
    • A consultation document has been issued following the March Budget’s limitations to Umbrella workers’ travel and subsistence (T&S) claims. Following our earlier involvement in the debate, Intouch has been invited to further round table discussions on T&S and we will be making sure that the contractor voice on this subject is heard loud and clear!
    • Employment Allowance has been removed for companies where the director is the sole employee. At this stage it is unclear if this will apply for companies which have a spouse second employee and we await further clarity on this.
    • The National Living Wage will increase to £7.20 an hour for over 25s in April 2016. This will rise to over £9 an hour by 2020. Any change may well affect spouse wages that are paid.
    • Tax relief for buy to let landlords will be restricted to 20% for all individuals by April 2020. In addition ‘wear and tear allowance’ will be replaced by a system that only applies if the landlord actually replaces furnishings.

 

The additional pledge by Osborne to increase HMRC resources to make sure people pay the tax they owe may set alarm bells ringing for some but knowing what you can do and remaining compliant doesn’t need to be a headache for you if you have the services of a reputable contractor accountant at your fingertips.

 The good: 

    • Forecast for jobs growth, created by businesses with the confidence to invest, to grow and to hire. This could be the boost contractors want to hear as businesses launch projects they may have been holding off on while they awaited Budget news.
    • The tax free Personal Allowance will be increased from £10,600 in 2015-16 to £11,000 in April 2016. The longer-term plan is to increase this to £12,500 by 2020 but we hope to see this come into effect sooner.
    • The 40% higher rate income tax threshold will increase from £42,385 in 2015-16 to £43,000 in 2016-17.
    • Corporation Tax will be cut to 19% in 2017 and 18% in 2020.
    • Inheritance tax is set to change and from 2017 the Government will phase in a new £175,000 allowance for your home when you leave it to your children or grandchildren. This is in addition to the existing £325,000 threshold which will be fixed until the end of 2020-21.

 

- Both allowances can be transferred to your spouse or partner.

- Those who choose to downsize will not lose any of the allowance from the property they used to own.

- In some cases you will be able to pass up to £1 million on to your children free of inheritance tax.

- Subject to relief will be tapered away for estates worth more than £2 million.

 

    • Free childcare for working families with three and four year olds will double from September 2017, from 15 to 30 hours. This should have a significant impact for all contractors with children, in particular single parent families and mums planning to return to work. In addition the childcare voucher scheme continues until early 2017 when the new tax free childcare is introduced.

 

Tips to help you manage outcomes from today’s Budget:

  •  The ongoing T&S consultation suggests that all PSC contractors look at their working practices and contracts to determine how HMRC’s proposed plans might affect them. Do this before the final legislation comes into play in April 2016 if you want to protect your expense claims for travel and subsistence.
  • If you are working through an Umbrella company then now is the time to think about the future. With most of your expense claims becoming ignored or taxable and the threat to your mileage claims following the T&S consultation you may find your income dropping off quickly after April 2016.
  • If you’re not already using a specialist contractor accountant, consider engaging one sooner rather than later. They are best placed to understand the implications of the Budget and the options available to you. If they deal with the sector every day they should know the pitfalls and opportunities, so take advantage of their experience and expertise.
  • The Budget has made it clear that scrutiny on IR35 has shot up Government’s agenda so it makes sense to opt for an accountant who can support you with IR35, including assessing the risks.
  • Look at the service you are receiving – if it’s software-heavy but light on personal advice you are likely to be missing out on opportunities. Consider if you are making the most out of contracting and fully mitigating the risks. And most importantly, that you are only paying the right amount of tax!
  • Change accountant – if you’re not happy with the service you are receiving from your current supplier, don’t put up with second best. You need to be able to rely on your accountant and there’s no room for complacency.

 

If you’ve been trying to manage your accounts by yourself or use the services of a software company without the personal service, it’s wise to engage a reputable accountant who can help you navigate through the changes. If you already have an accountant but don’t think you’re getting the service you deserve, talk to us about switching to Intouch. With the right advice you can make the most and mitigate the challenges.

The qualified experts at Intouch work with contractors every day and keep on top of changes that will affect you. We charged a fixed all inclusive fee of £92 + VAT a month and this covers everything you need to run your company smoothly and ensure you remain compliant.

For further information, download our July 2015 Budget summary.

 If you are already an Intouch client and have questions about what the Budget means for you, please contact your personal accountant directly.

 If you are not an Intouch client, contact us today to talk about how we can help you get the most from contracting.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

July’s Budget – what’s in it for contractors?

July’s Budget – what’s in it for contractors?

With tomorrow’s Budget just hours away, what’s in the red briefcase for UK contractors? It’s George Osborne’s first solo Budget, so it’s only natural to wonder what effect both the Budget and the recent general election will have on the UK’s contractor landscape.

An impending UK Budget is always an uncertain time, especially when the self-employed are likely to be affected. Whilst all of us dream of policies that will make our lives easier, some contractors simply want a fairer way of working, helping them to reach their contracting potential. Here’s a few things we’d like to see tomorrow that would help the UK contractor market:

  • Clarity surrounding the reimbursement of business expenses post March 2015
  • Clear decisions on the proposed changes to travel and subsistence rules
  • Clear decisions and commitment to the simplification of the tax system
  • Clarity about Government’s long-term intentions regarding IR35
  • Greater support for small businesses, especially contractor companies, to get the right start
  • Exemption for small companies from tax reporting so small businesses don’t suffer under big business rules
  • Quarterly RTI submission, to match existing quarterly payments – surely it makes sense to bring the RTI reporting regime in line with the payment regime
  • Greater clarity on timescales for digital tax returns
  • More childcare support by increasing the threshold for child care vouchers. As child care tax relief has been delayed, it makes sense to use another incentive to make it easier for people to get back to work
  • Back to work schemes that encourage all people to get back to different types of work, not just permanent employment. The schemes need to encourage entry to a flexible workforce, including contracting
  • Increase personal allowance to £12,000 – why delay?
  • Increase the threshold after which a formal members’ liquidation is required, from £25,000 to £50,000 to make it easier to close a company where no other creditors are involved
  • HMRC should adopt a fairer basis for penalties and interest, as proposed in their consultation document.


Whilst the above in most cases may remain fantasy, we are hopeful that this Government will be keeping the self-employed’s best interests at heart. To understand exactly who will be fighting the corner for UK contractors we’ve taken a look at some of the MPs, and what their positions are:

Ambassador for self-employment: @davidmorris has been reappointed to provide single focus for the self-employed. With his presence within parliament, the self-employed are empowered with a voice for change and support. David regularly tweets about how he is planning to challenge IR35, with talks last week of the Secretary of State for Business bringing it to the top of parliament’s attention.

Secretary of State for Business: @sajidjavid has been appointed to engage and demonstrate the value of the UK’s self-employed in today’s workplace. Previously Mr Javid has demonstrated a strong emphasis on late payments to contractors, clearly demonstrating that issues which affect contractors are close to his heart.

The Minister for Small Business, Industry and Enterprise: @anna_soubry is tasked with ensuring there’s growth and competitiveness with the UK’s small businesses market. A newly created position within parliament, only demonstrating further the commitment the Tories have towards supporting Limited Company contractors.

So whilst contractors can hope to see positive pledges being made in tomorrow’s Budget, the reality is we don’t quite know. Be sure to look out for our blog for our Budget reaction and whether it’s a positive step for the UK’s contractors.

What would you like to see in tomorrow’s Budget? Let us know what’s on your wish list.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Tax Planning: Are you outraged, pleased or jealous?

Tax Planning

Is it not about time that the staffing industry paragons of virtue shifted their position from one of agreeing with the BBC each time they disclose abuses of tax or employment legislation and become much more proactive in regulating their own Industry?

After all Poachers make the best Gamekeepers!

A growing number of upstanding members of the flexible workforce supply chain are (and quite rightly so) willing to condemn poor practice, highlight “non-compliance”  and they repeatedly assert that these revelations by the BBC and others only represent a small minority of providers who are tainting the majority. So how many swallows does it take to make a summer?

HMT and HMRC have fuelled the fire by expanding interpretation as to what constitutes tax planning (and where their view is upheld by the courts that particular planning is illegal) and what is permissible management of the existing legislation. Add to this some of the public’s growing sense of moral indignation that whether or not the legislation applies, certain arrangements are immoral and should be challenged and you are left with impending chaos. The Office of Tax Simplification (“OTS”) has made some very sensible suggestions as to how to simplify a complex and confusing system and I look forward to their further announcements. However, in the meantime the staffing industry needs to improve its transparency even further and decide where they sit with regard to sympathy with the victim.

My view is that the victim is too often the Contractor or the Freelancer and it is in their defence that transparency and a level playing field are required.

Contractors and Freelancers are the victims not the defendants

Promoter’s fees are often passed on through the hirer or other intermediary down to the worker and their pay does not increase to reflect the benefits being gained further up the chain. Arrangements which seek to avoid National Insurance or VAT seldom pass the tax benefit on to the worker, that’s not what the promoters and creators designed them to do. Also, pressure to place the worker in a trading vehicle which they do not understand or indeed require, with the tax savings disappearing into the supply chain is again outrageous. Remuneration models involving salary sacrifice (including that of some Umbrellas) also pass no benefit on to the worker. These models use legislation to maintain the same take home pay for the worker but any benefit of taxation is used to enhance or protect the margin of the provider.

There are those who cite the Treasury as the victim and but in an attempt to protect Treasury’s tax take legislation often has collateral damage. Those whom the original rules and reliefs were intended to benefit, so that they could stimulate the economy and promote growth, are caught in the cross-hairs and tarred with the same brush as abusers. Let us not forget that fees charged by Insurers and scheme promoters generate profits elsewhere in the supply chain and innocent workers incur professional fees in defending themselves (often with success). Ultimately this income stream finds its way to the Treasury’s coffers, again at the expense of the worker.

Finally, the whole supply chain for flexible workers, in common with many other supply chains, is an intricate balance of margins, risks and competitive advantages. Those compliant providers who refuse to take an aggressive stance on matters of National Insurance, NMW, and Expense claims, risk placing themselves at a competitive disadvantage to others who are more aggressive. But compliant providers should delight in the removal of non-compliant businesses; not in the sense of one less competitor on the preferred supplier list, but more as a clear indicator that the industry can self-regulate and demonstrate that the interests of the worker are important to the intermediary.

We as providers should not be jealous of a competitor who aggressively uses ( or abuses) the legislation to increase their margin, we should not be pleased when HMRC responds with more and more rules to police its own income, we should not even be morally outraged when advisers interpret legislation to the benefit of the taxpayer rather than the Government. Where we should be outraged is that time and again the loser in all of these skirmishes is the worker. Either vulnerable or skilled, the worker needs openness and transparency in the entire supply chain so that they can see for themselves who really has their interests at heart.

Paul Gough

Intouch Accounting Limited

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

“The Budget for Britain: the comeback country”

The Budget for Britain

In Monday’s blog we looked ahead to what we thought this week’s Budget might bring for contractors and freelancers. Osborne had already made it clear that there would be “[N]o giveaways, no gimmicks, a Budget for the long-term” and it certainly proved to be a steady Budget. Yesterday the Chancellor was at pains to stress that the UK is experiencing true national recovery, and with the highest rate of employment in history and businesses being backed, the Coalition is confident their measures are making work pay.

A Budget that “backs small business owners”?

So what does yesterday’s announcement mean specifically for contractors and freelancers…

Income Tax personal allowance

Back in the Autumn the Government announced that the Income Tax personal allowance will increase to £10,600 as of April 2015. This means the basic rate limit will be £31,785 and therefore the higher rate threshold above which individuals pay 40% Income Tax will be increased to £42,385. The personal allowance will rise to £11,000 by 2016/17 with the higher rate subsequently rising to £43,000.

National Insurance upper earnings and upper profits limits will increase to stay in line with the higher rate threshold. The basic, higher and additional rates of Income Tax for 2015-16 will remain at their 2014-15 levels.

Capital allowances

It had been expected that the Chancellor might announce an extension to the £500,000 limit to the Annual Investment Allowance due to fall back to just £25,000 on 1 January 2016 but this didn’t materialise in yesterday’s Budget.

Travel and subsistence claims for workers engaged through Employment Intermediaries (Umbrella companies and possibly PSCs).

The 2014 Autumn Statement announced that the Government would review with the intention of restricting the use of overarching contracts used by some temporary workers, and their employers to claim tax relief on travel and subsistence (T&S) expenses.

Yesterday’s Budget revealed that, with effect 6 April 2016,  Government intends to implement the conclusions of a consultation which is likely restrict T&S relief for workers engaged through an employment intermediary, such as an Umbrella company or a personal service company, who are also under the supervision, direction and control of the end user. They intend to force Employment intermediaries to provide workers with greater transparency on their terms of employment, including what they are being paid.

The springboard for these plans has arisen as HMRC seek to level the playing field between employment businesses that lower their costs by taking advantage of these arrangements, and those that don’t. But Osborne did say that the Government would continue to protect those genuinely self employed.The period of consultation will determine the finer details of the eventual proposals to restrict tax relief and we’ll post more about what that means for our clients as the plans unveil.

What else is there for contractors and freelancers in this year’s Budget?

Well, there are some ups and some downs for contractors with a range of benefits and penalties coming out of this Budget. The announcements to help savers will benefit most contractors and Osborne mentioned several times that this Government have made sure it pays to work. And with planned investment in infrastructure across all parts of the UK, this will be welcome news for contractors, especially in the North and South West.

Other headlines contractors will be interested in 

  • The annual Self-Assessment Tax Returns (SATR) will be abolished and replaced by online tax accounts. Osborne cited that the self-employed should be working for themselves, not the taxman. This news was particularly welcomed by IPSE, the Association Independent Professionals and the Self Employed who welcomed “a more flexible returns system to replace the current outdated model”.
  • Government will review Entrepreneurs Relief (ER) and this could impact on how contractors can extract cash efficiently from their Limited Companies.
  • A new personal savings allowance means the first £1,000 of savings income will not be taxed.
  • A fully flexible ISA that won’t penalise savers for withdrawing their own money or replacing it throughout the year.
  • A new Help to Buy ISA meaning first time buyers will get £50 from the Government for every £200  they save.
  • Tax relief on lifetime pension pots will fall from £1.25m to £1m but will be indexed from 2018 to protect those in place.
  • As predicted, investment will be made into the oil and gas industry, creating jobs for contractors in that field. The Chancellor stressed the importance of taking action in this area to protect the future of the industry.
  • TV, film and gaming tax credits will benefits contractors and freelancers working in the UK’s creative sector.
  • The freeze on petrol prices promises “£10 off a tank with the Tories” while alcohol duties will be cut.

Osborne hailed this as “[T]he Budget for Britain: the comeback country”. Will yesterday’s announcements make the sun shine for you? Let us know your thoughts.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

“No giveaways, no gimmicks, a Budget for the long-term” – but will the 2015 Red Box budget for contractors and freelancers?

Will the Red Box budget for contractors and freelancers?

The Budget is this Wednesday and in true pre-Election fashion it is unlikely it will be full of radical announcements.

I predict it will consist of Osborne telling us what he thinks we need to hear and not what he really intends to do, if he still has his job in the second week of May.  Could we be looking at two Budgets in one year?

The Conservatives billed themselves as being ‘the party of small business’ but, in reality, very few independent professionals will have felt any benefits from policy changes. In fact, the Government could be criticised for not delivering enough to empower freelancers and contractors. In the final pre-Election Budget it is uncertain, but also unlikely, that contractors will see significant changes in Osborne’s statement.

A number of tax changes have been announced already and have been under discussion. To the extent that they are not contentious, or at least acceptable to the other major political parties, they will be included in the Finance Bill and will be enacted before the end of this month.

The main, eye catching, announcements are likely to be changes which the Chancellor would like to make in the next Parliament if the Conservatives are in power, or are a member of a Coalition, in that Parliament; as there will then be less than six weeks of campaigning before the Election on Thursday 7 May.

The tone, and content, of the Budget is going to be highly political and will have a strong influence on the campaign not least because the Chancellor is the key strategist of the Conservative party. We know that contractors and freelancers are the lifeblood of the UK economy and they have an important role in rebuilding the economy. Inevitably there won’t be many people whom the Budget doesn’t affect one way or another so we’ve picked out some of our predictions that will be of particular interest to freelancers and contractors.

What is likely to come up in the Budget 2015 specifically affecting contractors and freelancers?

More measures to tackle tax evasion and tax avoidance

We can definitely expect that more tough measures will be announced, for next Parliament, to provide criminal sanctions for tax evaders and their advisors, whatever their role. Initiatives such as a ‘diverted profits tax’ targeting multinational companies who have been judged to have shifted profits overseas to avoid tax are expected to be implemented.

Support for key industries

It is expected that Osborne will unveil measures to support the North Sea oil and gas industry which will be welcome to many contractors who work in this industry, from engineers to IT specialists and finance professionals. It is hoped that a boost to British manufacturing will help rebalance the economy and protect the livelihood of contractors already in the industry while creating demand for their skills.

Tax simplification

The Office of Tax Simplification (OTS) has suggested many changes in a variety of areas that have previously been adopted but it has suffered from a lack of resources and is due to wind up at the end of this Parliament. The Chancellor may decide to put the OTS on a more permanent footing and properly resourced if the Conservatives win the election. If so we can expect more changes to arise in the coming Parliament to simplify taxation especially for small businesses and individuals.

Travel and subsistence claims for Umbrella workers

This is still high on the political agenda but the highly anticipated clampdown on travel and subsistence (T&S) expenses may not happen in this Budget. The concern was originally raised by MPs accusing Umbrellas of exploiting workers but FCSA disagree and have plead to MPs that imposing these proposals would threaten the £2.8bn of income tax and National Insurance Contributions generated by Umbrella service providers  HMRC have already stated that “any proposed measure to address this misuse will not come into effect until 2016 at the earliest”.

We can expect a restriction rather than a removal of tax relief for workers, with a curtailment of T&S expenses more likely from April 2016. The Chancellor’s statement last Wednesday, following the closure of HMRC’s consultation, will “inform the government’s decisions at Budget ‘15 on how best to address this avoidance.”

Personal Allowances and income tax thresholds

The Allowance for the average person went up from £6,475 to £10,000 over this Parliament, and the Autumn Statement announced an increase to £10,600 from 6 April 2015. A further increase is possible, perhaps by an additional £200, but unlikely, although there are hints that the Chancellor may announce future target increases.

It’s possible that the Chancellor may extend the basic rate threshold so that, allowing for allowances that the basic rate band moves closer towards an intended goal, announced in the Autumn Statement, of £50,000.

Inheritance Tax

Inheritance Tax is currently levied at 40% on estates worth £325,000 and above. There are hints of a return to the promise of increasing the Inheritance Tax nil rate band to £1 million and clarifying if the limit is per person or per married couple or civil partnership. It is thought Osborne will announce plans which involves the person inheriting rather than the deceased’s estate, being taxed. This would be popular among high earning professionals including contractors who may currently view Inheritance Tax as an inhibitor to aspiration and ambition.

Entrepreneurs’ Relief

The cost of Entrepreneurs’ Relief (ER) in 2013/14 is £2.9bn: three times higher than HMRC’s estimated cost. Unexpected changes were announced in the Autumn Statement and it is possible that further announcements on ways to limit ER will arise.

Capital allowances

The Annual Investment Allowance is currently £500,000 but is due to fall back to just £25,000 on 1 January 2016. It is possible that the Chancellor may promise to extend the £500,000 limit if the government is re-elected.

Research and development tax credits

Changes to the system for claiming research and development R&D tax credits were announced in the Autumn Statement introducing a new advance assurance service for small companies from the autumn. Further assistance may be announced to help small companies undertaking R&D perhaps in simplifying the definitions of applicable costs.

Pensions and pensioners

The Prime Minister has announced that he wants to protect pensioner benefits. But there may be announcements about tax relief for pension contributions and limiting the contributions possible or the scope to only basic rate tax relief.

Watch this space

It is hoped that the 2015 Budget will finally address the realities faced by the freelancer and contractor community.The Federation for Small Business has been calling for policies to help small businesses grow, through tax reforms and sensitive changes to Minimum Wage rules. Of course Osborne needs to leave some rabbits in the hat for Wednesday and it may be that initiatives such as a further reduction to Corporation Tax (which would be welcomed by Limited Company contractors) are saved for the Conservatives’ Election manifesto.

Whatever happens in the 2015 Budget, we’ll publish our views on what it means for contractors after the announcement. Make sure you follow us on social media for the latest updates:

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What do you hope to see in this year’s Budget?

While we wait for the Budget, are you ready for the 2014/15 tax yearend? Download our new guide and get the most from being a contractor.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Travel and subsistence: It’s robbery

The taxman is claiming that Umbrellas are trying to steal from him, but is it the other way round? Travel and subsistence: It’s robbery

HMRC is trying to reach the conclusion that overarching contracts of employment (OAC) are a form of underhand scheme designed by shady Umbrella organisations and other non-compliant employment intermediaries to avoid paying an estimated £400m in Income Tax and National Insurance.

There is no doubt that modern employment models have moved on since the original tax legislation was first drafted, but subsequent tax changes have simply not kept pace with current practice.

Nevertheless, for HMRC to contemplate removal of tax reliefs on previously acceptable expenses, which they introduced, based on an argument that too many people may be benefiting, is a poor argument that will not protect the interests of the vulnerable and lower paid.

Following the issue of a discussion document in December 2014 HMRC invited comment from stakeholders in the temporary labour market, to help the Revenue determine if some end hirers, agencies and Umbrellas, pressurise temporary workers to operate under OACs which in turn allows them to make claims for home to work travel costs that would otherwise be ‘normal commuting’ in order to reduce overall tax payable to HM Treasury.

What is really interesting is the reasons that HMRC have stated as to why they believe contractors should not be entitled to claim travel and subsistence from home to their place of work:

  • “It’s not fair” on other taxpayers who cannot claim, as these other taxpayers are effectively subsidising abuse.
  • “We want to level the playing field” and treat all taxpayers in the same manner
  • “Technically flawed planning schemes” being deliberate abuse especially of the vulnerable workforce.
  • “Because the Treasury wants to collect more tax” – to reduce public borrowing we could always collect more tax.

It seems most likely that if all of the reasons why HMRC want to change the rules are placed in order of importance, then the final one is the biggest driver and therefore highest priority, as they themselves confirmed. The remaining issues are the political justification for a very unpopular and ill-considered project.

Technical highlights

When a worker travels from home to their place of work, the primary assumption is that this is normal commuting and tax relief for the costs of travelling or subsistence is not allowable. However, legislation provides for an exception to this restriction if the travel is to a ‘temporary’ place of employment, rather than a ‘permanent’ one.

This ability (under certain circumstances) for the existence of an OAC to transform what would otherwise be a permanent workplace into a temporary one is what creates the tax relief for expenses.

Other types of workers not engaged under an OAC (permanent, or short term agency contracts), could sit next to an Umbrella worker, may make the same journey from home to the same place of work and are not able to claim tax relief for their travel costs. So there is a moral justification and a case for symmetry of treatment but that only carries weight if one assumes the risks, responsibilities and rights and obligations are also the same for differing types of worker. Which they are not…

HMRC wish to collect £400m more in taxation, remove this inequality, level the playing field and stamp out tax avoidance…and protect the vulnerable worker’s rights and income! (It is not disputed that within this figure some non-compliant business models exist, which rely upon an aggressive interpretation of how the tax laws should be applied. They may fail under anti-avoidance legislation and remain a legitimate target for HMRC.)

The alternative options suggested by HMRC to collect this tax are also open to comment and may even be extended to include personal service companies (PSCs). Today’s main targets seem to be Umbrellas and tax avoidance scheme users; tomorrow’s may well include an attack on the independence of PSCs and small businesses.

If we assume that the estimate of tax loss from HMRC is indeed correct at £400m and HMRC outlaw current tax avoidance models and legislate to make all travelling from home to work under OAC non tax deductible, who will be the losers?

Any increase in the tax take has to come from somewhere. Will contractors and temporary workers in general, but especially at the lower skilled end of the market, be able to afford this additional burden? Will they be able to pass it on to their employer (the Umbrella)? Will the Umbrella be able to pass it on (via the agency) to the end hirer?

Will UK plc be willing to pick up the costs of an extra £400m and in doing so accept this hit to their profits? If they do, the taxable profits of UK plc will fall by the same amount and reduce the tax they pay by approximately £84m…I’m not convinced.

Umbrella v Limited – what’s right for you? Understand your options and contract with confidence. Contact us  to discuss your options.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Donations

Donations

If you’re donating money to charity there are a few things you should be aware of, and a couple of hidden tax traps you may not know about.

Paying personally

If you donate to a registered charity in your own name you can opt to donate under the Gift Aid scheme.  This means that if you donate £800 to the charity they can reclaim a further 20% tax from HMRC, so it’s worth £1,000 to them.  Look out for Gift Aid on entry fees to certain museums as well as intentional gifts, as the admission sometimes counts as a donation.

When you then come to prepare your personal tax return you should add in any donations you have made because they will increase your basic rate tax band by the gross value of the donation.  So for 2014/15 if you give away £800 your tax band will increase from £31,865 to £32,865.

But be careful!  If you tick the gift aid box but are not a UK taxpayer in that year, or your tax paid is not enough, then the 20% that the charity reclaims from HMRC will be reclaimed from you as part of your tax calculation.

Paying via your company

If you donate to charity via your company then it’s not under Gift Aid, so a donation of £800 is worth just that to the charity.  However, it is a deductible expense for Corporation Tax purposes and, because it is a company payment, therefore doesn’t need to be declared on your personal tax return.

Your company accounts may need to detail the donations that the company has made if they go over a certain level, but that’s just for notational purposes.

If you are not a higher taxpayer it therefore makes more tax sense to pay donations via your company, as you will then get 20% Corporation Tax relief – although the charity will receive 20% less in funds.

Limitations

We’re often asked by clients if they can donate to their child’s school in return for tuition, or to their local rugby club in return for their membership, and the answer is usually no because of restrictions on what you’re allowed to receive in exchange for a donation:

donations

 

 

If you’re not sure about how these rules effect you, give your friendly contractor accountant a call before you make the donation, and they can talk you through it.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Main residence election

Main residence election

The 2013 Autumn Statement contained details about the extension of capital gains tax (CGT) to non-residents when they dispose of residential property held in the UK, and the Government and have now issued a Consultation document entitled “Implementing a capital gains tax charge on non-residents”.

The main changes proposed aren’t a massive surprise as they reflect the way things work in most other countries, which is to charge tax based on the location of the property rather than the location of the seller.  But the consultation document also contains a global proposal to alter the ability to elect which of several properties you own is your main residence, and thus exempt from CGT upon sale. The motivation behind this change is to remove the ability for a non-resident to simply elect the UK property as their main residence and therefore avoid UK tax entirely, so it is understandable and fair to make such a change. But it will also have a knock on effect on UK residents who own more than one property…

Under the current system you can elect, for any specific period, which property is your main residence and it will then quality for tax relief.  The Consultation document sets out two ways the new rules could work:

  • Remove the ability to elect which property is your main residence and instead determine it based upon the balance of evidence – where does any immediate family live, where is mail sent, what address is used for electoral roll purposes etc.  This is the way the law currently works when someone has not made an election and there is any dispute.
  • Replace the ability to elect which property is your main residence with a fixed rule – for example which property the person has been present in for the most days in the tax year.

Both of these suggestions will require additional records to be maintained by the taxpayer to support their case, which could be quite onerous if they regularly swap between two or more properties.  The Consultation does mention the possibility of allowing the current election process to be retained in some circumstances, but unfortunately does not expand on what those circumstances may be.

How these changes will work in practice has not yet been disclosed, but the Institute of Chartered Accountants in England & Wales have promised to make strong representations as they foresee many difficulties is establishing which property is a taxpayer’s main residence in various circumstances.

The slight saving grace for non-residents is that if they do have to pay CGT on their UK property, which will likely be collected via a withholding tax mechanism, then they will also become entitled to an Annual CGT Allowance, reducing the gain by £10,900.  CGT rates will then apply at the normal 18% or 28%.

Due to the complexity of the proposed changes they won’t be effective until April 2015, but the Consultation deadline is 20th June, so we’ll update when we know more.  Read the full document, including the changes discussed above in section three.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.