It’s time to get out the crystal ball, I believe. The inaugural meting of the shiny new IR35 Forum is on Friday 6th May. This is the body that Mr Osborne has charged with “improving the administration of IR35”. Which, given the present state of he administration of IR35, is a pretty open-ended kind of brief.

Clearly we aren’t going to see very much as a result of this first meeting. No doubt HMRC, who are in the chair, will present their Terms of Reference for the Forum’s agreement. Which will most likely be given, unless they contain something along the lines of “HMRC are right so there’s no point arguing” of course. They will agree the key issues such as which biscuits to buy and when next to meet, but that will be about it

But let’s assume they are honest about it – or that the other forum members keep them honest about it – and the objective is to deliver exactly what Osborne asked for, better administration of IR35. Let’s leap forward a year and see what may have happened. There are I believe three possible outcomes.

Firstly IR35 has been shown to be totally unworkable and will no longer be applied. Well that’s the dream result for some – like me, for example – but rather too far beyond the bounds of possibility. IR35 will still be festering away in the distance for a while yet. Heigh ho…

Secondly IR35 cases are only being brought against those who are genuinely within its scope. Well we can dream, but without changing the wording of IR35 so it becomes clear what that scope actually is, that is also a forlorn hope. For one thing HMRC are probably convinced that every case they’ve brought to date has been justified. For all their talk of “high risk” cases, if the rules aren’t changed the target stays the same; and that’s anyone that HMRC thinks they can bully into submission.

Finally IR35 cases are settled quickly and amicably. Yeah right. If there is no reduction in the number of cases being brought – and there aren’t that many in the overall scheme of things anyway – the only way to speed things up is for HMRC to start replying to the other side a lot quicker than they do. It’s not unusual for several months to elapse between each new step in the inquiry. Cases may well last for an average three years, but a lot of that time – probably 2 years 11 months of it – absolutely damn all is happening.

It’s also worth looking at the makeup of the Forum. There are HMRC people, tax experts of various shades, both independents and from the main industry bodies like ICAEW and CIOT, someone from the recruitment industry and a solitary representative of the freelance contractors in the shape of the PCG who, you might think, are the ones with the greatest interest in this whole debate. And who, it must also be said, are probably the only ones there who don’t have some kind of interest in maintaining the status quo. So clearly there is no question of the forum being biased in any particular direction then. Which is nice.

So I am not all that optimistic that anything significant will have changed. Although, along with 1.4 million other contractors, I would be delighted to be proved wrong.

Now there’s a challenge…

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Contractor accountants may be interested to learn that the coalition has decided to adopt a more novel approach to tax avoidance.

The Treasury released their “Tackling Tax Avoidance” paper last week and it won quick approval from the CIoT. The Institute has been campaigning for changes to the government’s stance on retrospective tax changes for some time and is delighted that the retrospective approach has finally been dropped.

Vincent Oratore, the president of the CIoT, was delighted that the organisation’s concerns had been listened to and said SMEs and contractors will welcome this new approach as it provides them with greater certainty.

Wealthy individuals who have been able to cut down on the amount of stamp duty paid on expensive residential properties will find that loophole now closed to them. In the past, millionaires have been able to set up a company and make it the legal owner of their mansion thus avoiding a large portion of stamp duty. The Treasury estimates it will rake in an additional £30 million every year by putting a stop to this practice.

The government has now made three property related schemes illegal. Two involved buying a property through a financial institution and the third involved taking a long-term lease, of anything up to 999 years on a property, rather than buying it outright.

George Osborne also intends to raise a further £750 million by clamping down on disguised remuneration schemes.

Whilst it is understandable that the government wants to tackle tax avoidance, experts claim that tax evasion and other criminal activity have a much greater impact than legal avoidance.

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Accountants for contractors may want to warn their clients that HMRC plans to increase prosecutions against people who avoid paying their fair share of taxes fivefold.

Currently, the Revenue investigates around 200 cases per year but this is about to rise to 1,000, according to a new report entitled HM Revenue & Customs: Managing civil tax investigations, published last week.

Every month the Revenue’s dedicated investigation teams receive almost 400 referred cases, but only 20% actually get investigated.

As from the beginning of the new tax year on April 6th, offshore tax evaders will face new penalties. In some instances, offenders could be fined up to 200% of their outstanding tax liability.

However, the Revenue has been warned that it is notoriously difficult to establish tax evasion and some innocent people could face criminal prosecution in order for the department to reach its target.

HMRC has also come under criticism for its plan for large-scale checks of business records. The CIoT says the proposal is misguided and needs to return to the drawing board.

Under the current proposals, HMRC intends to check up to 50,000 cases of suspected poor record keeping each year and impose fines on businesses whose bookkeeping is not up to scratch.

The deputy president of the CIoT, Anthony Thomas, says that whilst the Institute welcomes attempts to improve bookkeeping standards, the Revenue’s approach will not work. It seems to be more aimed at raising money through fines than helping companies improve their systems. Instead it should focus on providing support, guidance and education.

The CIoT is questioning the legality of imposing penalties before a tax return is submitted, unless there is proof that the company concerned has failed to maintain any records. It suggests that the Revenue should run more structured workshops, aimed at tax agents, prior to the commencement of business record checks. Furthermore, agents should receive advance notice informing then when an inspector is going to visit and taxpayers without representation should be provided with guidance on the powers and rights of HMRC.

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The Chartered Institute of Taxation has branded the government’s proposals to restrict the tax relief on childcare supported by employers as unfair and unnecessarily complicated.

Both the CIOT and the LITRG voiced their criticisms in a pre-budget government consultation. The chair of the CIOT’s sub-committee on employment taxes, Colin Ben-Nathan, said the existing regulations are well established and reasonably simple to administer.

The government’s new plans will make matters more complicated and increase the administrative burden on employers even though the coalition has committed to a simplified taxation system. It will also mean that people with similar roles and similar incomes would be allowed different amounts of tax relief.

The technical director of the LITRG, Robin Williamson, pointed out that it is often advantageous to claim help with the cost of childcare through tax credits rather than the offered vouchers. However, there are complex calculations involved and the proposed alterations will make them even more complicated.

Furthermore, the current proposal is unworkable, he continued. It appears to rely on something similar to a ‘back of the envelope’ method of calculating income. The Low Incomes tax Reform Group is concerned that the model could be used in the future to restrict other tax reliefs such as the proposal to withdraw child benefit from high earners.

The LITRG would like to see a system that provides certainty for employees and is simple for people to understand.

The previous government initially proposed restricting tax relief on employer-supported childcare in the 2009 pre budget report. It was confirmed by the present government in the last budget and will apply to people joining employer schemes after the 5th of April this year.

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The CIoT and the other main professional accountancy and tax bodies have sent a letter to the Exchequer Secretary asking the government to reconsider the timing of compulsory iXBRL online filing. However, it seems unlikely that HRMC will bow to the request.

The ACCA last week flagged up the lack of software capable of handling iXBRL. Chas Roy-Chowdhury, head of tax at ACCA, said they had been trying to negotiate a deferral with HMRC for some time but the furthest they’ve got is a promise of a light touch on compliance when the system is first implemented.

Accounting software provider Sage has admitted that its new iXBRL product will not be ready in time for the corporation tax filing deadline of April 1st. The company says it will have an interim product available, but the release of the full version will be delayed. CCH has not yet delivered its integrated package but has indicated it will be ready in time.

It will be possible for people using Sage accounts production software to file UK GAAP and IFRS tax returns. They will receive a temporary product, ONESOURCE, from Thomson Reuters, which includes the minimum requirements for iXBRL filing.

Contractor accountants will be able to compile tax returns as usual within Sage software and then transfer the data into ONESOURCE. The majority of this process is automated but some IT experts believe this could add a lot of extra time onto the filing process.

In addition to understanding the mechanics of iXBRL, accountants using Sage now need to learn how to transfer data into ONESOURCE and there’s just 3 months left to do it. They will then need to learn Sage’s iXBRL product when it is released later this year.

Will this workaround cause accountants to lose faith in Sage and switch to another software provider? Only time will tell…

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Small businesses operating in the UK are finding the tax system insufferably complex, according to the Chartered Institute of Taxation.

The CIoT expressed its view after the results of a FPB survey revealed that 57% of SMEs would accept paying more tax if the system was simplified and red tape reduced. 78% of the respondents to the survey said the current tax system deterred them from recruiting new staff.

A fellow at the CIoT, Andrew Gotch, remarked that over the past 13 years the tax system has become increasingly more complex and small businessmen have been finding this increasingly troublesome to the point where it has now become almost insufferable.

However, he warned that it is a case of “be careful what you wish for” when it comes to tax simplification. It’s easy to simplify things but the government is desperate for money so it is unlikely that simplifying the system will mean paying more tax becomes cost-effective.

Contractor accountants might be interested to learn that the UK’s professional tax bodies have produced guidance notes for direct tax advisers to help them act in difficult situations.

The guidance is half the length of the 2004 code of conduct and is meant to be easier to use. It outlines the standards members should follow when dealing with the Revenue in connection with the tax affairs of their clients. The core principles include due care, integrity and professional competence.

There is new information on the regulations concerning money laundering and tax advisers are provided with flowcharts to help them cope with difficult situations, such as a client’s refusal to correct serious errors in his tax return. It also provides information on client confidentiality and the circumstances in which data must be provided to HMRC without the consent of a client.

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HMRC has decided to rethink its policy of just sending documents to taxpayers and not their agents. The new policy, which was introduced in September, was designed as a cost saving measure.

However, the Revenue has backtracked slightly and said that some documents will also be sent to tax advisers and contractor accountants.

The decision has been welcomed but the CIOT, but the Institute remains concerned that this change will not include all tax documents.

The CIOT’s deputy president, Anthony Thomas, said that we all know government departments are under pressure to cut costs but HMRC is likely to face more queries and adjustments by keeping agents in the dark about the tax obligations of their clients. This action could end up costing the government more than it saves.

The documents that will be sent to agents include Tax Calculation P800, Entry to Self-Assessment letter SA250 and Exit from Self-Assessment letter SA251.

Agents will not receive copies of their clients’ P2 PAYE Coding Notices but the form the taxpayer receives will advise him to show it to a tax agent or adviser.

HMRC plans to use some of the money saved from the withdrawal of P2 agent copies to create an IT solution allowing e-enabled tax agents to see the P2s of their Self-Assessment clients online.

Meanwhile, members of ICAEW have said the standard of service provided by the Revenue is still declining. 70% of members said they needed to contact HMRC more than once to resolve a single enquiry and 61% said the technical knowledge of many of the Revenue’s employees leaves much to be desired.

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Families will no longer be able to avoid inheritance tax by placing their properties into trust under new disclosure requirements which are set to come into force next April.

At present, people cannot avoid paying IHT if they give away a property but continue to live in it. However, some schemes work around this rule by putting the property in a trust and naming children as the beneficiaries.

As from next April, these schemes will have to be disclosed to HMRC and as a result they could be shut down. It is thought that families who have already taken advantage of such schemes will not be affected.

The Financial Times claims that property worth tens of millions of pounds could have been sheltered in trust schemes already.

The government is keen to clamp down on any type of tax avoidance and the new requirement is one of the tools it intends to use to counter arrangements it feels are against the “spirit of the law”.

John Whiting from the CIoT has welcomed the announcement but Neal Todd, a senior partner at Berwin Leighton Paisner law firm, said the government’s new tax measures were a hash and will do nothing to restore confidence in the UK’s taxation system.

Inheritance tax is levied at a rate of 40% on the value left in an estate over £325,000. Couples can transfer their tax-free amount to their partner so that the survivor has a potential tax-free allowance of £650,000.

Bequests and asset transfers to spouses are free of IHT and people can reduce the value of their estate by giving away £3,000 per year as well as smaller financial gifts.

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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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The Chartered Institute of Taxation responded last week to the National Audit Office’s report ‘Engaging with Tax Agents’.

The report sets out ways the Revenue can work with tax agents to overhaul the tax system. Anthony Thomas, the deputy president of the CIoT, said the paper was helpful but believes the NAO could have missed a golden opportunity.

One recommendation that does meet with approval is that HMRC could reduce costs if it let agents do more self-service on-line. This would reduce the inevitable delays that always occur when using the postal system.

However, Mr Thomas pointed out that the report did not contain an analysis of who is making over-declarations of tax, and why the errors are happening. The CIoT has been working with the Revenue for several years on just these issues and he feels the report should have reflected this. The paper also relies on data that is 5 years old and does not deal with the error rate within HMRC.

The CIoT is pleased that the report acknowledges the work of tax agents and says that without them the level of tax under-declarations would probably be a lot higher. At the end of the day, tax agents save the government money by assisting clients with their tax returns and doing tasks that would otherwise need to be done by the Revenue.

Meanwhile, tax agents are angry that although their work is acknowledged in the report, it also claims that people are more likely to under-declare their taxes if they receive advice from an agent.

The NAO claimed that 37% of self-assessment tax returns from people who consulted tax advisers had under-declared liabilities compared to just over 1 in 4 of the returns filed by taxpayers on their own.

The NAO report concluded that if the average amount of under-declared tax was reduced by 3%, the government would benefit by an additional £100m each year.

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Further pressure will be piled on HMRC in 2013 when they have to claw back child benefit payments to higher-rate tax payers.

George Osborne has decided that families with a parent who earns more than £44,000 a year will see their child benefit axed as from 2013, a move expected to save around £1bn annually.

However, instead of simply stopping the payments, the funds will be clawed back through the taxation system. This is likely to make individuals’ tax affairs more complex and increase the pressure on the Revenue. HMRC recently miscalculated six million people’s tax liabilities and considering it is undergoing a major cost reduction program at the moment, the chance of errors occurring under a yet more complex tax system seems extremely likely.

The Public and Commercial Services Union said the miscalculation could be linked directly to 2005 when the Revenue and Customs merged. Since then 30,000 jobs have been lost in the department. This loss has had a serious effect on the efficiency of the taxman. HMRC has 17 million outstanding queries to deal with and nearly 50% of all telephone calls to the Revenue’s enquiry centres went unanswered in 2009 because they aren’t fully staffed.

Despite all these problems, HMRC wants to introduce Real Time Information, or even more ambitiously, centralised deductions, in a bid to make PAYE deductions more accurate.

However, the CIoT warns that these proposals will not only present significant challenges for the government, they will also require a large investment of time and money if they are to work efficiently.

John Whiting, the tax policy director at the CIoT, also pointed out that the Centralised Deductions scheme would probably involve additional costs for employers, especially those who would have to implement electronic means of paying their employees.

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The CIoT has welcomed news that HMRC is being given extra ammunition to fight the war against tax evasion.

The tax policy director of the Institute, John Whiting, said that evading taxes is not the victimless crime that some people seem to think it is. By cheating HMRC, evaders are robbing the exchequer of money that is needed to fund our public services and that has an adverse affect on all of us.

Whiting urged the Revenue to pursue tax evasion cybercrime but said HMRC had to be careful not to make tax rules more complex. More complex rules are an administrative nightmare for everybody concerned and there is also a risk that further loopholes will be created.

In related news, HMRC has sent letters to people who bank with the Swiss division of HSBC in connection with possible tax evasion. The Revenue acquired a list of wealthy Brits who bank with HSBC from a former employee of the bank, according to the BBC. A spokesperson for the Revenue said it was no longer possible to hide money offshore in order to evade tax.

The letters inform Swiss account holders that they will shortly be subject to an investigation into their tax affairs and they are advised to organise a meeting with HMRC to discuss the matter. If found guilty of tax evasion, the recipients will have to pay interest charges, penalties and face a possible civil investigation for fraudulent conduct.

The list of clients was stolen from HSBC’s Geneva branch three years ago by a former IT employee who then sold it to France. In March this year the bank admitted that the about 15,000 Swiss client accounts were affected by the theft. HSBC has since spent more than $101.5 million to upgrade its systems and improve security.

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