The OTS is looking into the feasibility of introducing a simpler system of income tax for the UK’s smallest businesses and the issues concerning disincorporation.

The Office of Tax Simplification says the choices for making small business taxation simpler fall into two categories. It could either change some regulations to ease the complexity in certain areas, or use non-profit measures ranging from administrative changes to more fundamental reforms.

If turnover was the determining factor for eligibility for the simpler system, the OTS is considering between £20,000, £30,000 and the VAT registration threshold which presently stands at £73,000.

The OTS will evaluate the non-profit measures in use in other countries and as well as considering cost accounting or a system of charge indicators and flat rate expenses allowances. Small businesses would then prepare their accounts based on cash received and have fixed rates for expenses, or taxable profit would be a fixed percentage of annual turnover.

John Whiting, the tax director at the OTS, said tax administration is a major headache for small businesses. He wants businessmen and their advisers to provide their opinions on the different options available.

As far as disincorporation goes, the OTS is examining whether micro-business owners should be given the chance to revert to partnership or self employment status and they ways to handle the tax implications of such a move.

Alex Henderson from PwC said the scope of the consultation was too narrow; focusing primarily on sole traders. He went on to add that he would welcome a review of all business structures and any changes would also have to deal with HMRC’s concerns.

Consultations on both proposals will be running until October 7th and the official documents can be viewed on the OTS website. Recommendations will be presented to the Treasury before next year’s Budget.

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My blog for June last year was commenting on the first budget of the new Coalition government. It got a cautious welcome from me – which they no doubt appreciated greatly – and while the overall news wasn’t that wonderful, it at least looked like things were heading in the right direction.

I also mentioned an entry in the Red Book that “was a clear commitment to look hard at IR35. This was backed up by an interview in the Telegraph, where Mark Prisk emphasised the intention to lose IR35 altogether“. On that score for this budget, I have to say close, but no banana.

The Office of Tax Simplification made three suggestions for Mr Osborne; merge PAYE and NICs, either suspend IR35 or greatly improve how it is administered and maybe look at some tests to define who is employed and who is a freelance. Those of us in the “IR35 is the spawn of the devil” camp clearly hoped that suspension would be the result. Sadly, however, it was not to be; IR35 remains in place.

So a bit of a disaster then? Well, no, not really.

Firstly I’m inclined to believe Osborne and Gauke when they say that they could not afford to turn off IR35. Elsewhere in the Budget they confirmed the December 9th announcement regarding the closure of offshore EBTs that are being used to step around paying any taxes at all by many high earners. Without IR35, these guys would simply incorporate and go back to the same old job as a pretend freelance: the classic Friday-to-Monday soft shoe shuffle. With IR35 still there, they can still incorporate if they really want to, but the tax advantage would simply not be worthwhile. Which makes a degree of sense as far as I’m concerned.

Secondly, administration of IR35 is to be improved (I was going to say “greatly improved”, but it could hardly get any worse!). In other words, stop spending tens of thousands on five-year cases that invariably lose and focus instead on the ones where there may be a genuine case to answer – which, on current numbers, is about 3% of them. HMRC aren’t doing this by themselves, they will be talking to the experts on contracting who will be very clear that the net will be focused and not widened. HMG have invited PCG to be a key player in this, and for one I’m reasonably certain PCG won’t let anything through HMRC’s clutches that makes things worse for the genuine freelance.

Finally Osborne is now looking to merge PAYE and NICs. As I said last week this is a very difficult thing to achieve, but at least we have a chancellor willing to take it on. That means that if this can be made to happen, IR35 ceases to have any purpose anyway

The rest of the budget was, I thought, probably about as good as it could be given the starting position. OK, so Osborne has done a smoke and mirrors job by changing how inflation is measured and people who understand the Oil and Gas industry far better than I do are seriously dischuffed about the raid on their profits to fund the fuel equaliser, but the intent is sound.

So not the result we hoped for, nor even the result we would have quite liked, but at least we are still in there and having a direct say on how we are to be taxed. This is, despite the cries of outrage from the hard of thinking, no small achievement. PCG and Chairman Chris Bryce have done a seriously significant piece of work via the OTS and should be praised for it.

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A number of leading organisations are calling on George Osborne to deliver a budget that supports small businesses such as contractor accountants.

Recent research from BDO found that business leaders in the UK want the coalition to speed up its plans for simplification of the tax system and concentrate on helping entrepreneurs, rather than big multinationals, in the budget.

66% of business leaders think the coalition should accelerate its plan to reform the business taxation system and make it fit the needs of all UK firms.

Respondents to the survey were also asked what measures the chancellor should take to reduce the deficit. 50% favoured more public spending cuts but very few thought the solution was to increase taxes such as income tax or VAT.

However, when the economic situation improves, 41% of business leaders believe a cut in personal taxation should be prioritised. 35% said further measures should be taken to reduce the deficit and only 6% thought a cut in corporation tax was a priority.

Stephen Herring, a senior tax partner at BDO, said the results highlight that there is an urgent need for business tax reforms to drive business growth across all sectors.

The REC has written to George Osborne asking him to make sure the Budget really is a ‘Budget for Jobs’. The letter builds on the themes of the REC manifesto to remove the barriers that are prohibiting growth and deliver opportunities and jobs.

In particular the REC suggests avoiding any increase in business taxes, implementing an NI holiday for SMEs that hire young people and scrapping the National Insurance increase. The Confederation also calls on the government to do all it can to smooth the AWR implementation and promote flexible working.

The ICAEW says the chancellor should concentrate on long-term growth plans rather than quick-fix solutions. In order to achieve this, he should develop a simpler taxation system, a better approach to supporting enterprise and a highly-skilled, socially mobile workforce.

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Nearly half of the UK’s SMEs have agreed that the government made the right decision to increase VAT.

Intuit, the producer of QuickBooks financial software, conducted a survey of small business owners and found that 44% support the VAT increase as a means of tackling the fiscal deficit. 13% believe that increasing income tax would have been a more effective alternative.

It also appears that, at least so far, the VAT increase has not had a serious impact on the majority of small businesses. 67% of the survey’s respondents said the rise had not impacted their business.

39% of SMEs decided to absorb the full VAT rise rather than increase prices to their customers. According to nearly 70% of the surveyed businesses, the increase cost them less than £350 to implement and slightly less than 50% claimed to have spent less than 5 hours on its implementation.

However, business confidence is still fragile and cashflow is starting to show signs of strain. The increase in fuel duty is a further concern for businesses, points out the FSB’s national chairman, John Walker.

Meanwhile, experts believe that we are unlikely to see many tax concessions when George Osborne delivers the Budget in March.

The Green Budget, published by the Institute of Fiscal Studies and Barclays Wealth, claims that fiscal loosening could be counter-productive if it leads to an offsetting of financial tightening.
Michael Dicks, from Barclays Wealth, said he expects the UK economy will grow at much the same rate as the OBR has predicted, but the risks are skewed to the downside.

The Green Budget report welcomed the reduction of corporation tax but said the ‘Patent Box’ will add needless complexity to our taxation system.

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The Treasury is set to lose around 25% of its workforce due to the Chancellor’s spending cuts.

The good news for the existing Treasury workforce is that this will be achieved by natural wastage with no further recruitment, as opposed to mass redundancies.

By the middle of this month, George Osborne will have settled the budgets for some of the government departments, including culture, environment, justice and transport, as well as scaling back the role his own department and the financial services function play. He’s even proposing to move staff to smaller desks in order to squeeze more people into his HQ thus saving money on rent.

Over the next four years the Treasury department will lose about 350 staff members through natural attrition bringing the number down to 1,000.

The Chancellor’s willingness to impose cuts in his own department should strengthen his hand when it comes to negotiating with other departments.

One of George Osborne’s colleagues said they would be focusing on macro analysis and spending control rather than attempting to second guess the moves of other departments.

The comprehensive spending review will cut between 25% and 40% from the majority of other government departments. The biggest challenges facing the Chancellor will be defence and welfare. Transport could also be a problem as Boris Johnson, the Mayor of London, is battling with Philip Hammond, the Transport Secretary over Crossrail and upgrades to the Tube. Hammond also wants to see a cut in the £1 billion that subsidises free travel for children, the unemployed and injured war veterans.

Meanwhile, a treasury spokesman said the department would not get drawn into the spending review negotiations of individual departments; each of which have been told to reduce their admin costs by about a third over the next four years.

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So where was I…? Back refreshed from two weeks of idleness in the sun, and already looking for the next contract. Don’t seem to have missed anything too serious while I was away.

I managed to get back just in time for the Coalition’s first Budget. I watched it live – oh the joys of being on the bench – and for the first time in 13 years I didn’t have an overwhelming urge to throw something heavy at the TV. What a pleasure it was to listen to someone who sounded like they both knew what was going on and was willing to be honest about it.

Of course, the underlying message isn’t very nice, which is not much of a surprise unless you’ve been living in a cave for the last five years, but you have to say that the overall tone was actually surprisingly positive.

Yes, it’s going to hurt, but we knew that anyway. We’ve had the usual suspects leaping up and down in a fury about a return to Dickensian England and the public sector is up in arms about facing the same pain that private industry has been through already, but all in all I thought it was quite well judged. Let’s just hope that it has the desired result!

With my freelance hat on, it was actually pretty much neutral. I’m not planning on opening a new company and employing people so the National Isurance incentives won’t touch me the slightest, but they will help people who do want to build up their businesses. The eventual VAT rise will hurt of course, but it’s only 25p extra on something costing £10, so personally I can live with that.

The personal tax allowances are nice as well, as is the promised reduction in Corporation Tax rates. As a jobbing freelance contractor – well, when I get a job that is – I’m actually quite relaxed about it all.

The other bit of news tucked away in the Red Book (or as Cameron said to Harman at PMQs this week, in her case the “unread” book) was a clear commitment to look hard at IR35. This was backed up by an interview in the Telegraph, where Mark Prisk emphasised the intention to lose IR35 altogether.

Welcome news indeed, although we won’t break out the champagne until we know exactly what is going to come after it.

Elsewhere in the real world I’ve been plunged back in to the chaos and misery of having to deal with agencies offering work that they don’t understand on behalf of clients they don’t know to contractors they don’t want to talk to and whose CVs they utterly fail to understand. I’ve spoken to five this week and have absolutely zero confidence they know what they’re doing.

Call me an old curmudgeon but in my not inconsiderable experience it’s about one in fifty that does the job they way they tell the clients they do, so I guess I’ve a few more pointless and frustrating phone calls to get through yet. Come the revolution, I know who I’ll be putting against the wall first

Still, let’s be positive, if the reaction to the budget is positive, there may actually be some real work out there.

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The CIoT is warning that the new Capital Gains Tax system is going to be more complex than a lot of people think.

George Osborne raised the rate to 28% for higher band taxpayers in the emergency budget on Tuesday. The increase was less than many people feared and it appears that the Chancellor “made the best out of a bad job”.

There had been calls for the Chancellor to introduce measures such as tapering or indexation allowances and the CIoT believes he chose to implement a lower than expected increase in order to avoid the complexities those measures would have caused.

The higher rate of CGT will be charged when an individual’s total income plus capital gain exceeds £43,875. This means that a basic rate taxpayer who makes a significant gain could find themselves falling into the higher CGT bracket.

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Ambition, the international finance and accounting recruiter, believes that contractor accountants and finance staff working in the public sector will be badly hit by cuts in public spending.

There are currently around 140,000 permanent employees, freelancers and contractors in the public sector and Ambition predicts that around 11.5% will lose their jobs and many of those will be unable to find work in the private sector.

In total, it is thought that as many as three quarters of a million jobs will be lost in the coalition’s bid to reduce public spending by £6.2bn this year.

The MD of Ambition in the UK, Tim Gilbert, pointed out that the majority of public sector finance professionals do not have the cut and thrust attitude required by the banks and City financial institutions. Those candidates with commercial acumen will be quickly snapped up but many will fall by the wayside.

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The plight of UK contractors, freelancers and temporary workers has once again come under the spotlight this week following the launch of the REC’s Agency Workers Directive (AWD) Toolkit.

Since the EU-inspired regulations were signed off in January this year there has been much speculation within the industry about the scope of the AWD. As things stand, umbrella company workers are thought to be captured by the regulations whereas those who are genuinely “in business on their own account” are not.

This would appear to suggest that contractors working outside of IR35 and through their own limited company will not be subject to the much critised ’12 week rule’. Many industry insiders however are yet to be fully convinced that this is indeed the case.

The REC is under no illusions about the potential impact of the AWD. According to the organisation, their new toolkit will assist recruiters to overcome the administrative, legal and practical challenges in a post AWR world.

A spokesperson from the REC said that the industry has reached an important milestone and the now was the time to sit up and pay attention to what is one of the most significant events ever to hit the industry. More information about AWR toolkit can be found by visiting the REC’s website.

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Restraint should be the name of the game if we want to avoid another economic recession. That’s the message accountants are sending to George Osborne in advance of the June 22nd budget.

Although VAT and CGT rises are anticipated, members of MGI UK and Ireland hope there will be some assistance made available to counter any damaging consequences of these rises.

An interesting idea put forward by Andy White of Carter Backer Winter is bound to gain widespread support from employers. He wants to see employers’ national insurance contributions abolished completely; a move he says which would encourage companies to take on more staff. The resulting loss of revenue would be compensated for by an increase in income tax collections and the reduction in the amount of state benefits paid to the unemployed.

Other online accountants say they would like to see a cut in corporation tax rates and an overhaul of IR35.

Meanwhile, government departments are going to have their work cut out in the run up to the summer recess. They need to outline spending plans, which will then be checked against tough criteria, if they want to have funding approved. One of the new criteria that must be met is that projects are essential to help meet government priorities.

Small firms and limited company contractors could benefit from this rule as outsourcing the work could prove the most efficient means of getting projects completed.

George Osborne has said that we face a great national challenge. Government must rethink the way they spend money. Gone are the days of debt, irresponsibility, and waste and we must now find ways to get the country living within its means.

We inherited this terrible economic crisis but if we all work together we can put it right, he added.

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As I write, it appears that we are headed for a Hung Parliament as no party has achieved an overall majority in yesterday’s election.

Many business people have tax policy high up on the shopping list when it comes to casting their vote in a general election. So, as there has been, in effect, no result, does that mean that there will be no change in tax policies?

In the very short term, that will be the case. All taxes as reported in the recent Budget will still be the same. However, in the next few weeks and months this will be subject to change.

There will now commence the horse-trading and side-deals between politicians and their parties that comes with the territory where no party has power. Each party will now need to start discussions with any other party that they feel they can ‘do business with’ in order to form the coalition government that will form policy going forward.

On the basis that the Conservatives and Labour will not be working together, it will be down to each of those parties trying to do deals with the Liberal Democrats. Picture the scene …….. in any one of the 20 or so bars in the Houses of Parliament, party officials will be haggling over a bottle of claret. ‘ If we could agree to work with you, you would need to support our tax policy on ………. You scratch my back and I’ll scratch yours.’

This is not really the way to develop coherent tax policies to encourage business growth.

For instance, the Lib Dems have been proposing increasing the capital gains tax rates up to 50%. For most gains currently, they are taxed at either 10% or 18%. Bringing in this sort of policy could be very damaging to contractors who have been considering closing their businesses and taking a capital repayment.

It is the uncertainty of things that is also disturbing. In the UK, coalition governments rarely last long and another election could be called later this year. That could then herald more changes in the direction of tax policies.

Gloomy stuff, I know, but it does look like we are headed into a bit of a tunnel. Let’s hope there is some light at the end of it.

John Mumford is the Accounting Director of Carrington Accountancy
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The Chartered Institute of Taxation has criticised the government’s decision to push ahead with the Finance Bill before the general election. They believe that rushing through the proposals could lead to loopholes and an overly complicated tax system.

There are several clauses in the bill including 3 new taxes. The CIOT is concerned that without proper parliamentary scrutiny the government is leaving itself open to unforeseen circumstances in the future.

One item of the bill that has upset the CIOT is the restrictions on pensions’ tax relief for higher earners. They believe that the new regulations are over-complex and question the decision to rush them through when they won’t actually come into force until April 2011.

John Whiting from the CIOT said that the government doesn’t appear to have listened to the views of respondents, including several leading contractor accountants, most of whom said there were easier ways of curtailing tax relief for the rich. He also called on the government to wait until after the election to push through the majority of the proposals.

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