As well as being technically proficient, independently minded and a bit intolerant of rigid work patterns, we’re also a tolerant bunch, us contractors. You kind of get used to having to dig out the truth from the often intentional obfuscation you get from the agencies, the client, the civil service and a host of other places. And you get to recognise some universal truths.

“Cyclists can ride safely on footpaths”. Yeah right…

“All contractors are very well paid”. Well we aren’t exactly running on empty, but we are usually pretty good at what we do, and command a decent rate accordingly. But the average rate for IT contractors as a whole is around £40 a hour these days,which is near as damn it the same net take home as a permanent employee on £40,000 a year; good but not exceptional.

“We require you to opt out of the Agency Regulations”. No you don’t. For one thing it’s nothing to do with you, Mr Agent. It’s not my problem if you’ve agreed a contract with the client that is incompatible with the requirements of an Opted-In contract for me. Since 95% of all Opt Outs aren’t legally correct, from what I’ve seen, why not work on the assumption that everyone is opted in? Ah, of course, then you wouldn’t be able to claim that the workers you supply are your own dedicated resources, would you?

“Opting In is highly beneficial”. Well, is it? The two key gains are guaranteed payment and a time limit on handcuff clauses. The former may have a superficial appeal, but if the agency’s not got any money they aren’t going to pay you anyway. The latter looks nice, but there will be the upper contract between agency and client that almost certainly stops them taking you on for at least as long as the period in your own contract. So where’s the handcuff limitation protection then?

“Retain 85% of your gross with our compliant solution”. Yeah, right. You do until the scheme gets legislated out of existence, the scheme owners do a runner or you discover the scheme doesn’t actually work in the first place. Then again Hector has recently given up trying to shut down some of these schemes because they can’t safely separate out those who should genuinely use them, like pension funds, and those who are taking advantage. Although that won’t stop them trying.

“We need to retain IR35”. Ah, now, hang on a minute. That was Osborne’s position in the last budget, when for a while we thought we had proven that IR35 was not only damaging and spiteful, it wasn’t actually earning any money for HMRC. The case was slightly hampered by the repeated assertion that there are no figures specifically covering IR35 within the ledgers of the Treasury. So we kind of accepted Osborne’s assertion that he needed it to dissuade Friday-to-Monday converts. (This despite one of the more obvious cases being Mr Hartnett, ex permanent Head of HMRC, now freelance Acting Head of HMRC. Didn’t even have to empty his waste bin). And the implicit assertion that since he wasn’t keeping any measure that wasn’t cost-effective, then IR35 was paying its way.

Then, all of a sudden, PCG gets a very interesting answer to an FIO request. It seems those figures do exist. What’s more, they are pretty damning: total case prosecuted over the last five years? Three hundred and twenty two. That’s slightly over one a week. Total revenue gained as a result? Five million, four hundred and forty two thousand, two hundred and ninety nine pounds. A shade over a million a year. Or just under seventeen thousand per case, assuming all were successful, which they almost certainly weren’t. Doesn’t exactly go very far against the one trillion government shortfall, does it…

Ok, so this is interesting. We have been told more than once that no figures on IR35 were being kept. You can even find that in Hansard. Now, suddenly, they have been. Most odd. So who’s kidding who, Mr Osborne?

And who in the previous administration was responsible for the earlier statements. I think we need to be told.

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This year, for the first time in 13 years, we were saved the interminable and ultimately disingenuous dirge that was the Pre Budget Report. Mr Brown and latterly Mr Darling’s attempts to justify what they were planning to do in the real budget with no real connection to reality is no more, happily.

Instead we were treated to 500 pages of draft legislation that covers much the same ground, albeit without the over-optimistic assessment of the chances of delivering an improvement in our financial position. A lot of it is merely tedious rate setting, but there were some very interesting items in there.

One of them is the revised ruling on various mechanisms aimed at stopping people avoiding tax and/or NICs by what HMRC clearly regard as dubious methods. Mostly these are characterised as offshore EBTs although the legislation is actually very wide ranging. It does not concern itself with just monetary reward, but also things that can be utilised as monetary reward. All very clever.

Of course, every contractor I’ve spoken to about EBTs assures me that they took that route to get around IR35 and it was nothing at all to do with minimising their tax bill. Well that’s OK, you still avoid IR35 and paying the extra 20% come April is a mere inconvenience, isn’t it…

Nevertheless, as far as most contractors are concerned this is the death knell of the EBT. Changes in the taxation of the income they provide has effectively killed them off as a commercial proposition, and means that anyone using one is in no better position than the average umbrella user. HMRC also neatly avoided the trap of making this retrospective this time, delaying any charges until the end of the tax year. So there’s time to make alternative arrangements. But there is a slight gotcha…

They also introduced what they term anti-forestalling regulations. Using a degree of wit we’d all thought they’d had drummed out of them by Brown, HMRC have twigged that if the impact is not effective until next April people might actually try and take evasive action. So they’ve ensured that any such income from December 9th – the day they published the legislative changes – is in scope.

Oops.

The end result is that EBTs are, as of now, dead in the water. Which, as you may have noticed from previous musings on the subject, is something of which I approve.

Sadly, the lesson does not appear to have penetrated the skulls of some in the accountancy trade. Their immediate reaction is to disappear back into Tolley’s with their friendly local QC and look for another way to achieve the same ends. OK, so they’re protecting their business but if they could lift their collective heads from the mantra of “it’s legal to do it so it’s our right to do it” they might conclude they’re fighting a lost cause. HMRC, and indeed HMG, are clearly set on enforcing the rule that if you live here and work here, you pay taxes here. Which is something I actually agree with.

But leaving aside the schadenfreude, HMRC haven’t got it quite right, have they…?

Firstly there is vastly more money leaving the UK in the way of avoided taxation than will ever be recovered from these changes. Until they work out a way to make large corporations subject to the same principle of unavoidably paying UK tax on UK earnings – and I can’t for the life of me see how they can do that – the new rules are largely window dressing, in overall economic terms.

Secondly, and rather more importantly, they seem to have failed to exclude genuine pension payment schemes that EBTs and the like were originally intended to benefit. Which is a bit of a shame on two fronts: either the pensioners are going to see their income significantly reduced or the scheme providers will successfully appeal the change and get it reversed. Which would be a shame, in some ways.

But what it all goes to show is that the more rules you introduce, the harder it is to get the desired result.

Alan Watts can found at LinkedIn.
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HMRC should take extreme care when taxing people retrospectively otherwise people lose confidence in our taxation system, says the CIoT.

The Institute commented that although it is still a reasonably unusual; there has been a growing trend for the government to introduce tax rules with retrospective effect. The coalition should clearly state when retrospective action is valid, the Institute pointed out in a paper handed to the government. Retrospection damages confidence in the taxation system as it undermines certainty and stability, which in turn has the knock-on effect of damaging the economy.

The paper states that the fundamental principle that taxpayers are taxed based on the legislative wording in place at time of the Revenue’s actions must remain. The government must make a clear statement of when it sees retrospective action as appropriate. The CIoT thinks this should form part of a new protocol when legislative changes come into effect immediately.

The Institute is not totally opposed to retrospective action but thinks extreme care should be taken if it is to be implemented and there should be lengthy justification in Parliament for such a move. The general presumption should be against retrospection but that principle could lay out some very limited instances where it is considered essential as opposed to desirable.

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It was Benjamin Franklin who declared that the only two certainties in life are death and taxes. It is probably a good thing that he never met the present day HMRC: recent events have shown that while we will be certain to be taxed, not even those on good old bog-standard PAYE can be certain exactly how much tax they are going to be asked to pay.

Of course your average jobbing contractor has been in that position for the last eleven years, thanks to the predations of IR35. No matter how sure you are of your status, and how careful your accounting, you simply cannot be certain that you will not be hit with a new assessment from HMRC that says you got it all wrong and please can we have a few tens of thousands extra. Actually, I rather doubt they even say please. Nor will they say sorry when, after several years of uncertainty and court appearances, they are told they were wrong and your tax has been correctly assessed all along.

Then there came BN66, which put simply was HMRC “clarifying” an arrangement hat had gone unchallenged for several years and declaring that it never actually applied. The sums involved in that one are horrendous, stretching into six figures for some. That case is still rumbling along, and will do for a few more years yet until all the avenues for appeal have been exhausted.

Now we have the latest fiasco, where a new system has gone back over HMRC’s records and found a raft of miscalculations. Sadly, and perhaps typically, HMRC decided that they couldn’t simply ignore the errors and are now sending out demands and tax refunds in roughly equal numbers. Given that the net balance of taxes owed is a mere £200 million, not counting the cost of the whole exercise, you have to wonder why they are bothering.

I say “mere” advisedly. While it is a significant number in itself, it seems that HMRC are not actually collecting a few billions of pounds each year that they already know about, which rather puts that £200 million into perspective. But no, HMRC are a tax collecting organisation and collect taxes they surely will, regardless of how much trouble it causes to the victims. Victims, it must be remembered, who almost all have no idea that they weren’t paying the right taxes in the first place and who can hardly be blamed for getting it wrong.

Then into the middle of all this comes a consultation document from HMRC proposing that taxes are deducted at source and will be calculated on a month-by-month basis, which on the face of it has some merit. However, a bit further down the paper they are talking about taking the whole tax calculation exercise away from the employer and using some centralised system that takes the gross pay from the employer, works out the tax due, gives that to HMRC and sends you the balance.

How terrifying a thought is that? An organisation that is so utterly inept it can’t do the equivalent of tying its own shoelaces setting itself up as the ultimate arbiter of who gets paid. I don’t think so…

I was talking recently about the wisdom – or lack of it – of giving HMRC a General Anti-Avoidance Regulation to play with. It seems my misgivings as to their ability to handle such a tool were actually rather underestimated. And I am absolutely certain of that!

Alan Watts can found at LinkedIn.
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So our Beloved Leader has finally allowed us an election. Good news on several fronts. I make no secret of my desire to see the end of the current Parliament in general and our sitting PM in particular. But before we all get drowned in claim and counter claim about who is best suited to lead us out of the crisis we find ourselves in, I thought I might just remind people why I, as a humble one-man-band contractor, dislike this government quite so much.

Firstly, the iniquitous IR35. Brought in by someone who refused to pay a legally imposed tax to address a problem that didn’t exist and so badly framed only a court could decide if it applied to you or not. So you buy insurances and pay for contract reviews and live in uncertainty, or you go use an umbrella and pay a load of taxes you almost certainly don’t actually owe. Meant to bring in £400m a year, it actually generates around £1.5m. Brilliant work chaps.

Then they killed off MSCs. Not a thing that bothered me, to be honest, but I know of people who were trading perfectly correctly through them who had to shift to a different model.

Then we had the Arctic case, trying to apply the clearly defined S660a legislation to a situation it was never meant to cover and which, in fact, was positively endorsed in the House (by a Tory chancellor as it happens…).

Then when they lost that one they immediately produced the fully-formed Family Business Tax (or Income Splitting, as they termed it). That has never actually gone away, but at least the lobbyists were able to demonstrate just how poorly thought out and generally unworkably ridiculous the whole idea was. So that never saw the light of day, thank God and the PCG. The latest one is the Agency Workers Directive, another piece of EU-inspired nonsense that has a genuine purpose at heart but once again is so badly enacted you still won’t know for certain if it applies to you.

And underpinning that catalogue on ineptitude is the constant failure to distinguish between avoidance and evasion (hint: only one of them is illegal, Gordon), the joyous embracing of selling our IT industry abroad by failing to manage the abuse of the ICT system, the wholly unacceptable retrospective change behind BN66 and a raft of smaller but equally rubbish rules and regulations that blight your working life.

So all in all, I hope never again to hear a dour Scots voice telling me all this grief is in the interests of fairness. It isn’t, it’s in the interests of a discredited socialist agenda that’s wrecked the country and cost me a lot of money for no benefit whatsoever.

So farewell, New Labour. Whoever or whatever replaces you, at least the only possible direction is upwards.

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I was reading up on the House of commons Finance Committee’s debate on the BN66 case – that’s the one about retrospectively taxing people who thought they had joined a valid scheme and suddenly found they hadn’t – and came across a seriously disturbing comment from one Colin Breed, who is, it turns out, a Liberal Democrat Shadow Minister for the Treasury.

I quote: “I say at the outset that we accept entirely the need for the Government to legislate against tax avoidance”.

Now forgive me for being an optimist, but I thought avoidance was not only an entirely legal activity, but was actively condoned by Parliament, most famously by the then Chancellor when separate taxation for man and wife was introduced. He said, in the House, that every taxpayer is at liberty to arrange their taxation affairs in the most efficient manner.

In other words not paying taxes you don’t owe is entirely legal but not paying taxes you do owe isn’t. How hard is that to understand?

So just what is Mr Breed on about, I ask? Has he been brainwashed by Brown’s continual re-interpretation of reality? Is he genuinely unaware of the difference between avoidance and evasion? How many other supposedly senior MPs demonstrate such woeful ignorance?

Or is he saying that anyone who doesn’t pay the maximum taxes they possibly can is doing something wrong? In which case when will they outlaw ISAs, or pension funds? Or even the basic tax allowance…

More to the point, how can we hope to get some kind of validity in the tax system if the people making the laws – or in Breed’s case, rubber-stamping the laws – do not understand the subject they are nominally in charge of protecting?

This upcoming election looks increasingly like a fiasco in the making. Not only is the majority of the public largely indifferent to who they’re voting for and why, the people we’re electing also look like refugees from Fred Karno’s army. It really doesn’t bode well….

Put it this way. If I get faced with another five years of Gordon telling me it’s all about fairness, I’m leaving.

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The certainty in the UK tax system has been thrown into doubt by the Treasury’s use of retrospective action according to the Chartered Institute of Taxation.

They are concerned about amendments to the taxation rules regarding manufactured dividends, which were announced by the Treasury’s financial secretary Stephen Timms last week. These amendments have been applied retrospectively back to 1 October 2007.

John Whiting, director of tax policy at the CIOT understands that the government needs to ‘confirm the general understanding of the tax system’ but warns that they should proceed with extreme caution.

He believes that the government should issue a clear statement defining when retrospective action will be used and what boundaries will be applied so as not to ‘dislodge the principle that the taxpayer is taxed on the wording of the legislation in place at the time of their actions.’ Many leading contractor accountants have already voiced their concern over this issue.

The latest amendment has been introduced to close a loophole that allowed manufactured payments from sale and repurchase transactions to be exempt from corporation tax even though they were taken into account in calculating accounting profits.

Previously HMRC has closed loopholes with immediate effect but to also apply the new rule retrospectively seems to be a sign that the government department is taking an ever more aggressive stance towards tax evasion.

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Big news of the day is about a court case that concerns a piece of the 2008 budget referred to as BN66.

This is one of those things that came out in the supporting documentation that tells the actual truth about the contents of the 2008 budget as opposed to what the chancellor said in the House.

To put it very simply, the use of an Isle of Man-based taxation avoidance scheme used by quite a few contractors was closed off. The scheme relied on an interpretation of an earlier piece of legislation that, in effect, exempted you from some UK-based taxation. Closing it off is fair enough, the Government can make any laws it likes after all.

However the killer in this case was that the effect of the legislation was made retrospective back to the original act, basically by arguing that this was what was originally meant to be the case and we’re just clarifying the wording. Since tax investigations that don’t involve fraud or evasion can only go back 6 years, this meant in effect that all those scheme users’ income from 2001 onwards was in scope. Clearly this is a little unfair, to put it mildly.

As a result a group of them have been preparing a case for a Judicial Review of the retrospective aspect of the change. The judgement has just been handed down today and found in favour of HMRC, hence the retrospection stands.

Clearly this is awful news for those involved, since they are looking at tax bills into six figures. This is not the kind of money many of us can find lying around and will cause some people major problems if HMRC press for the full settlement

Furthermore, it’s also not that good news for everyone else. HMRC already have form for imaginative re-interpretation of the law; the whole point of the Arctic case – which involved splitting out company income between husband and wife shareholdings – was that the rule they tried to apply was never meant to apply in that situation. Clearly, if this ruling means that HMRC can change the rules retrospectively by “clarifying” already understood rules, then an already uncertain tax landscape just got a whole lot more wobbly.

The BN66 group will be looking at the possible next steps so this isn’t yet the final position. However, it’s not been a good day for any of us.

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