Where does the ‘Budget for the future’ leave contractors now?

The Budget for the future?

It was billed as the Budget for the next generation, promising to offer long-term solutions to long-term problems. But what do Osborne’s plans mean specifically for contractors and freelancers?

 

After a weekend of media speculation, we tuned in at 12:30 today to find out exactly what the Chancellor had packed in the Red Box. Now we know. Here Intouch Accounting Director Duncan Strike, who is well used to unpicking the implications behind the announcements, identifies the three most important announcements affecting Limited Company contractors.

 

1. Personal service companies and the public sector

What transpired today was the announcement of a consultation that specifically targets contractors working through their own Limited Company for public sector bodies (including teachers and NHS workers).

 

In essence, if the consultation proceeds, this means:

 

  • the public sector body or agency paying the personal service company (PSC) must assess ‘employment status’
  • HMRC will provide ‘simplified tools’ for this purpose.

 

Furthermore, where employment status is found:

 

  • the fee due to the PSC, excluding VAT, will be reduced by 5%, then
  • Income Tax and Employee’s NI will be calculated and deducted before the PSC is paid
  • the PSC will no longer be responsible for Employer’s National Insurance (NI); this will be met by the client or agency
  • the combined deductions from the PSC and the Employer’s NI will be paid by the client or agency.

 

The proposed treatment of Employer’s NI is inconsistent with existing IR35 rules and it’s a wonder how this will be addressed in the final legislation. However, the principle of passing the Employer’s NI liability to the client or agency appears fair and likely to result in a proper consideration of status. Most consultations lead to legislation; it is reasonable to consider these changes will occur in substantially the way proposed.

 

It’s also likely that this or a separate consultation will look at IR35 further and in particular seek a simplified means of assessing status. We’ll be watching this space very carefully and reporting as the situation emerges and develops, as well as taking part in the debate.

 

2. Disguised remuneration and tax avoidance

For many years’ promoters of tax avoidance have offered tax schemes using Employee Benefit Trusts and loans to avoid Income Tax and NI. HMRC are to be given new rules that enable them to cancel out the tax advantage and possibly tax existing loans, remaining outstanding on 5 April 2019, in what might be considered a clever way of backdating the legislation. Contractors having used such schemes should be wary and prepare to consider the full effect as proposals develop into law.

 

3. Directors loans

The new dividend tax effective on 6 April 2016 means that dividends falling in the higher rate band will be taxed at up to 32.5%. Some commentators had identified that taking loans from your company may have offered a cheaper (tax) alternative.

 

The Chancellor has clearly identified this too and has now increased the tax on loans to directors or shareholders, taken from your company from 6 April 2016, to the same 32.5%..

 

Read more about the new dividends tax in our full ebrief.

 

We’ll be releasing our full Budget analysis tomorrow, specifically to help contractors and freelancers make sense of Osborne’s announcements. While we apply our expertise, tell us your initial thoughts about the Budget that Osborne believes puts family and future generations first.

 

Has George done enough to support small business owners? Share your reaction by leaving us a comment.

 

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.

Labour denies tax avoidance focus on Umbrella companies

Labour denies tax avoidance focus on umbrella companies

Ed Milliband announced at the Labour party conference this year that if elected into power it would create a £2.5 billion NHS Time to Care Fund to salvage the National Health Service. Explaining where the money for this would come from he outlined that £1.2 billion would be generated with a new Mansion Tax on properties worth over £2 million; £150 million would come from a levy on the tobacco industry and £1.1 billion would be raised by quashing tax avoidance activities.

Are Umbrella companies a tax avoidance target?

One widespread rumour has emerged that one of the tax avoidance targets would be Umbrella companies. The suggestion is that the focus would be to prevent Umbrella companies being used as a way of avoiding tax and National Insurance contributions through exploitation of rules on travel and subsistence expenses and other ‘salary sacrifice’ arrangements. Some commentators suggest that if this happened it would put many Umbrella companies out of business. As this scenario would severely affect contractors who use these companies, this would be a huge blow to the sector.

The Labour party claims that as Milliband did not actually mention this point at the conference this rumour is just speculation. With this rebuttal it’s impossible to say whether this is an option that’s been the subject of discussion in private. It’s interesting though that such a specific rumour should have emerged. Umbrella companies have already been un-settled in recent times by changes to managed services company legislation as well as to the agency workers regulations. Both the Umbrella companies themselves and the contractors who use them would surely prefer a period of stability and certainty, rather than concerns that there may be more upheaval to come.

More support for the self-employed

Milliband told the conference that Labour stands firm in its intention to give more support to the self employed. As the number of self-employed has now reached 4.6 million and their contribution to the economy increases, the collective voice of this group is gaining strength. He labelled the current rights of the self-employed as 21st century discrimination and promised to level the playing field towards equal rights. Support and allowances would be given in areas such as obtaining mortgages and saving for pensions. Of course, any increase in support to the self-employed would be welcome news for Limited Company contractors.

As you will no doubt have noticed, currently all political parties are announcing their strategies ahead of the May 2015 general election. This gives a lot of food for thought for contractors regarding both their business and personal finances. As we all know, things can change a great deal in a few months. For now it’s a case of keeping a watching brief on points of business and personal interest to see what develops.

 

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.

HMRC’s bank raiding powers

HMRC’s bank raiding powers

George Osborne announced a proposed new system during the 2014 Budget that would allow HMRC to seize assets from anyone that owes more than £1,000 in tax or tax credits.  That in itself isn’t really anything new, HMRC can already seize property or cash if they go through the Courts, but these changes would allow HMRC to simply to take money from a taxpayer’s bank account with no Court approval!

HMRC, who say they lose £35 billion a year by cheats who refuse to pay their taxes or find ways to avoid them, have stated:

“Most people pay their taxes on time, but a minority do not and some refuse to engage with us at all. It is wrong that this should hand an advantage to those who simply dodge their obligations, and is unfair on the vast majority who pay their taxes in full and on time,” he said

“We will shortly be consulting on a new measure with appropriate safeguards to help level the playing field, and tackle those who have the means to pay but are choosing not to. These are people who have, on average, over £20,000 in their accounts but are refusing to pay their debts.

“This will only affect a tiny number of debtors whom we have contacted a minimum of four times to ask for payment.”

Details of what the safeguards will be have not been released, but we do know that HMRC will have to leave a minimum balance of at least £5,000 across all bank accounts.

Frank Haskew, head of the tax faculty at the Institute of Chartered Accountants in England and Wales, says “it is a fundamental tenet of our English law and our democratic society that money cannot be grabbed from somebody’s account without a judge agreeing to the move”.

He said the change, which could come into force in just 12 months’ time, would be “unprecedented in the UK”.

And that: “At the end of the day, we can’t have HMRC as judge and jury on this.”

Mr Haskew also highlighted the fact that HMRC have a long track record of making mistakes and harassing innocent taxpayers – something that sadly most accountants will have seen first-hand.

Finally, this change would effectively see HMRC reinstated as a preferential creditor, a status that was removed from them in 2003, thus violating insolvency law.

Thankfully these new powers are not yet law, but are subject to Consultation.  With the ACCA calling the measures “seriously draconian” we can hope that they won’t become law without a fight, but with similar systems are already in place in countries such as France and the US it may be a forgone conclusion…….

 

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 new HMRC guide on tax avoidance schemes

The new HMRC guide on tax avoidance schemes

The majority of Limited Company contractors will generally steer clear of avoiding tax for the simple reason that it just seems safer to do so. However, a few may be attracted by the idea of saving large amounts of tax in a seemingly ‘safe’ way and may find themselves tempted by one of the many schemes on offer to do this. This can potentially be extremely risky though. If the scheme is deemed as being Tax Avoidance it’s worth remembering that HMRC will never approve it. Additionally, as a director of your Limited Company you could be held personally liable for the company’s tax and other debts if the company engages in tax avoidance which results in losses for the company. So, it pays to think very carefully about the management of your tax affairs and to get professional tax advice from your contractor accountant to ensure that you’re genuinely staying within HMRC’s rules.

Because tax avoidance can carry such heavy penalties and so many have been caught out in this area, HMRC provides Tax Avoidance Scheme guidelines to help.

What kind of activities amount to Tax Avoidance?

As long as you make legitimate use of the tax saving options available, management of your tax affairs to gain maximum tax efficiency is not a problem. Doing things like saving in a tax-free ISA (Individual Savings Account) or claiming capital allowances on assets you use in your business is completely legitimate and acceptable. What is not acceptable is using tax saving options in ways that were not intended or bending the rules to create tax savings where really they’re not applicable.

What do I need to look out for?

Generally if the scheme on offer sounds too good to be true it’s worth digging deeper to find out what’s really going on. No matter how attractive the sales pitch might be, Tax Avoidance is breaking the law so it’s better to be safe than not only sorry, but potentially deeply out of pocket, or at worst at risk of a prison sentence.

HMRC lists a number of ‘warning signs’ to look out for to help you spot potential Tax Avoidance Schemes including:

• the tax benefits or returns are out of proportion to any real economic activity, expense or investment risk
• the scheme involves artificial or contrived arrangements
• the scheme involves money going around in a circle back to where it started
• the scheme promoter either provides any funding needed to make the scheme work or arranges for it to be made available by another party
• offshore companies or trusts are involved for no sound commercial reason
• a tax haven or banking secrecy country is involved
• the scheme contains exit arrangements designed to side-step tax consequences
• there are secrecy or confidentiality agreements
• upfront fees are payable or the arrangement is on a no win/no fee basis
• the scheme has been allocated a Scheme Reference Number (SRN) by HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) regime

HMRC also publishes details on their website of schemes which they are aware of and have concerns about.

What can I do if I’ve already joined a potentially suspect scheme?

Contact HMRC’s Anti-Avoidance Group on 020 7438 6733. Alternatively, email them using their online form.

Getting it right the first time with your tax management

At Intouch we give all our clients access to their own Personal Accountant. They fully understand the most tax efficient options available to efficiently maximise your take home income while fully complying with HMRC rules.

 

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.