I started a new contract this week, having had rather too long a break from real work. And not a moment too soon, to be honest. Apart from having an income stream again, it’s a lot more fun talking to intelligent people about real problems instead of chatting to the dog about where we should go walkies today. Not that he ever answers me, beyond a slightly lopsided grin and a frantic tail wagging session.

Which is rather how I feel about certain agencies over the last week or so.

Perhaps the stress of having to get up in the morning and go somewhere is getting to me, but I am getting increasingly irritated by the flood of emails from assorted agencies offering me work that is nothing to do with my CV. They obviously have my CV, or some version of it, since they get the name and email address right almost every time (apparently I am a Mr Wells according to one recent email). But hey, does that CV imply that I really can’t wait to go be a permanent change manager in Geneva for twelve months? Or sit on a help desk in Warrington on £20 an hour? (Gosh. Be still my beating heart…). Still, just like the dog, you have to pretend they understand what you’re telling them or run screaming in despair.

And that is why I am seriously worried about the upcoming Agency Workers Regulations.

PCG and others seem fairly confident that the regulations, which are aimed at ensuring temporary workers get the same protections as permanent staff after a short while, won’t apply to genuine contractors working through their own Limited Companies. While that may well be the case, I have a horrible feeling that the agencies won’t quite grasp the point. An industry that routinely confuses a senior Service Delivery Manager and sometime Head of IT with a Helpdesk worker in Warrington is really going to struggle with the concept that not everyone they place in a job wants to be protected.

Which means that rather than move the Agency/Contractor contract more towards a genuine business-to-business one, which would establish the true nature of the relationship with the end client, they will be telling everyone that you need to have even more draconian clauses in the contracts to reinforce that point that the contractor is not an employee of theirs, or the agencies, or anyone else. Honest. Cross my heart…

Which really is the wrong way to go.

After all, the more you try and nail the myth that someone is not an employee, the more HMRC is going to think you have something to hide. All those interlocking clauses about no rights to be implied and mutuality is not assured must be hiding something or why have them?

And anyway, I am employed by someone, in all meaningful senses; there’s this company that I work through that supplies all I need in the way of income and sick pay and holidays and pensions funding and the rest in return for me hauling myself over to Cardiff or wherever and doing my thing. OK, so I own it, but it is a separate legal “person” and operates totally in accordance with a whole pile of relevant statutes. Accept that it exists, and has a real purpose, and all this Agency Worker nonsense, not to mention IR35 itself, suddenly ceases to have any meaning.

If only someone could tell the agencies that…

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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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Image: Alphabetical Jigsaw by CrosswordMan

Hargreaves Lansdown, the FTSE 250 investment company, partially backs the coalition’s proposals to change tax relief on pensions but suggests that further adjustments could make the system simpler.

Reducing the annual allowance to about £40,000 and reinstating marginal rate tax relief were definitely a lot better than Labour’s idea of restricting tax relief to high earners.

However, by restricting 50% tax payers to pension tax relief of just 40%, the coalition risks undermining the positive impact of the reform. Hargreaves Lansdown suggests that it would be a better idea to have a lower annual allowance but with full marginal rate tax relief. On average, individuals only contribute about £2,020 a year to their personal pension so an annual allowance of £35,000 for example is still more than enough for the majority of investors.

The Association of British Insurers says that the allowance should not fall below £35,000. Earlier this year the Treasury launched a consultation on tax relief for pension contributions. The ABI argued that the allowance should be £45,000, i.e. the top of the Treasury’s suggested range.

The ACCA is concerned that the changes will do more harm than good. The Assocaition would like to see a low allowance for people who are just starting their first job and a larger allowance for people aged over 50.

The secret to success here must be simplicity or else the government runs the risk of investor confusion. It has already been revealed recently that the majority of people nearing retirement age are not financially prepared for the consequences of retirement and any changes to the current pensions regime must be simple for the investor to understand and the taxman to implement.

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Image: the c(o)urse of life by ‘PixelPlacebo’

The Association of Consulting Actuaries has slammed the government for the “complex” nature of its new proposal for pension tax relief reforms for high earners.

They say that not only are the reforms complex, ill thought out and costly to implement. They will also harm the pension prospects for those on lower incomes.

Whilst understanding the need for the government wants to raise additional revenue, the chairman of the organisation, Keith Barton, believes that basing this on an income threshold is going to prove highly inefficient.

The new reforms are aimed at about 300,000 people earning over the threshold of £130,000 but the fear is that more good schemes are going to close as a result and this will directly affect hundreds of thousands of employees.

Some employers are already proposing to withdraw pensions as part of a pay package due to the risk that they might trigger the new tax. There is also a concern that redundancy payments could result in a large tax bill.

The ACA and many contractor accountants now believe that the scheme proposed by the NAPF should be given serious consideration. The NAPF scheme involves the government lowering the limit on pension savings that qualify for full tax relief. At present the figure stands at £245,000 a year and they are calling on this to be reduced to between £45,000 and £60,000.

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If you are one of those who have decided they are caught by IR35, you are no doubt aware that your options regarding taxes paid are fairly limited. 95% of your gross, less some allowable expenses, is the rule. However, there is a way to remove some (or even all) of your gross from the clutches of IR35.

Since A-Day in 2006, pension rules were considerably relaxed with many of the old restrictions being lifted. You can now invest up to £245,000 a year, up to a maximum of £1.75 million, in your pension fund: limits which are reviewed and increased annually, incidentally. So how does this help with IR35 taxation?

The point is that pension contributions from your company are taken out before the tax liability is calculated. In other words, the deemed salary at the heart or IR35 is lowered, hence you pay less taxes. Putting some earned money into a pension instead of drawing it as salary reduces your net income, but saves anything up to 48% of the tax due on that money. (The actual amount depends on your income. You can get your own figures from contractorcalculator.com

Clearly you still need to take enough salary to pay the monthly bills, but pensions are not simply about putting money aside for retirement. After age 50, you can draw 25% of the cash in a pension fund tax free. The fund does not have to be put into an annuity until age 75, so can be invested elsewhere and you gain the interest (although, sadly, that income is taxable). If you die before 75, the fund can be paid out to your family and not be subject to inheritance tax. Pension funds are very heavily protected and they can’t go insolvent.

There are some recent changes that affect people earning over £150,000 a year. Between £150,000 and £185,000 a sliding scale of tax relief will be applied. Above £185,000 the rate is capped at 20% (as at 2009). There are also conditions about irregular payments and changes in pensions providers.

While basically a simple idea, professional advice is very necessary. Any such arrangements should be done with the help of a professional Financial Advisor.

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Image: Thinking RFID by Jacob Bøtter