There’s been a wonderful example this week of exactly the kind of problem we contractors are faced with when trying to get our point across. A government agency, SLC– which is basically a private firm owned by HMG – was having some operational issues, so they brought in an expert, a Mr Lester, to sort them out. He was proving to be quite good at it, so they offered him a two year deal. Which he accepted. So far, so good.

The original work was done as a bog-standard interim management role: the guy was not employed, he did the job and charged a fee. When the two year deal turned up, he said fine, can you continue to pay me gross to my existing Limited Company and I’ll sort out the rest.

And then it all starts to go a bit wrong.

Someone – doubtless someone with just enough knowledge to be dangerous – asks exactly why Mr Lester has been allowed to avoid paying his taxes. Shock horror! Let’s do a TV programme on it!! This is outrageous!!! Lets’ have a witch hunt and track everyone else doing the same thing!!!!

Yes well, hang on a minute. Firstly we have zero evidence what taxes Mr Lester is paying, since he’s not obliged to disclose that information. There’s no evidence he isn’t paying quite a lot in tax; certainly, like many well paid contractors, a lot more than the average worker. He may even (say it quietly) have declared his earnings under IR35. Who knows?

His is a perfectly straightforward and entirely legal way to operate his company, to share his income with his other half and generally behave like the other 1.5 million freelance workers in the country. Like that chap who earns a million or so a year from public speaking. You know the one, David Milliband, sometime brother and elected, serving MP. Or indeed, the unloved Mr Brown who does the same with his outside earnings, although in his case they all go to charity.

It’s also interesting to note that various senior people had to sign off the arrangement whereby Mr Lester was paid gross. One might think that they had a handle on such things, but I could be wrong. And it’s all a bit moot now anyway, since Mr Lester has done the honourable – if arguably unnecessary – thing and gone on the payroll like the rest of the wage slaves.

But we can glean some interesting insights from this débacle.

Firstly, there are clearly a lot of senior people, including some who are actually in charge of such things, who don’t have a Scooby about how contractors work and how they are paid. Basically they do not trust a usually intelligent and highly skilled worker to arrange his affairs so that all taxes due are paid in full and on time.

Secondly we have once again seen the conflation of avoidance and evasion. Yes you can be against avoidance, but it’s not illegal; quite the opposite, in fact, it has long been sanctioned as an acceptable practice. You want evasion? Fine, so make whatever it is illegal and you’ve got it, but being tax efficient is avoidance, not evasion, and perfectly fine.

And finally, someone can’t actually count. Mr Lester will finish his contract and leave. No pension, no golden handshakes, no extended period on full pay while he finds a new job. That’s quite a chunk of public money saved over a full time employee. In fact, if you do the sums based on the figures that have been published, this tax saving exercise of moving Mr Lester on to the payroll will actually cost several tens of thousands more that if they’d simply left things alone.

But hey, nobody ever accused either HMG or the fourth estate of being financially competent, did they.

And what grates is the underlying point that people who should know better simply fail to recognise that there are freelance contractors among us. People who keep the wheels turning, who make few demands on the state, who represent an efficient and cost-effective workforce. People who are a long way removed from those who create companies for no other reason than to avoid paying taxes on earnings that they wouldn’t have got at all were they not already on the public payroll. You know who you are.

So bring on the witch hunt. But please, break the habits of a lifetime and point it at the right target…

© 2012 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Getting insight by Miran Rijavec

Freelancers may be interested to learn that The Business Woman’s Network and the FPB are supporting the call for a national day to celebrate UK micro business owners.

The online business knowledge website wanobe.com launched the idea of a day to celebrate the UK entrepreneurs who run the 4.5 million small firms in Britain.

David Noble, the managing director of Wanobe.com said the men and women who run the UK’s small businesses represent dynamism for the battered economy at a time of high unemployment and are the nation’s unsung heroes.

95% of all companies in the UK are micro enterprises and between them they employ 33% of the workforce. Noble says it’s now time to acknowledge the vital role entrepreneurs play in driving the economy.

The FPB has already launched its own initiative called ‘Get Britain Trading’. Phil McCabe, the PR manager for the Forum, said although micro-business entrepreneurs are spearheading the fight to drive the British economy, a lot of people have no idea what it takes to run a business. Having a dedicated day to celebrate the contributions and efforts of small business entrepreneurs would be a wonderful way to highlight how commitment, creativity and bright ideas generate new jobs and help stimulate economic growth.

The Business Woman’s Network’s Mandie Holgate, explained that there are now more than 950,000 self employed females in the UK and around 15% of firms are majority owned by women. They should be extremely proud of the contribution they make to both society and the economy.

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Image: Henrik Moltke – New Media Days Award recipient 2010 by New Media Days

Contractor accountants and freelancers may have been among the 1.5 million taxpayers who received penalties for late filing and payment of self-assessment tax returns after this January’s deadline.

McGrigors obtained figures under a freedom of information request that showed 10 million self-assessment returns were issued and 15% of taxpayers were hit with penalties. That represents an increase of 8% on the previous year.

Jason Collins, a tax partner at McGrigors, said that percentage is far too high. HMRC is issuing fines at a worrying rate and now they have won the right to dramatically increase the fines they impose.

The penalty for late filing is £100, so the 1.5 million fines levied after January’s deadline represent a minimum £150 million for the Treasury. However, there have also been changes to the penalty regime that mean fines could be as high as £1,500 plus 100% of the tax due.

Rebecca Benneyworth from Tolleys explained that the government is trying to make the system of penalties consistent across all the UK’s tax regimes and we are now seeing new measures put in place on the first day of April and October each year.

As well as a change in the penalty structure for self-assessment, business owners should be aware that HMRC is planning to adopt a similar approach to the late filing of VAT returns. Late filing will attract an automatic £100 fine and penalties will increase as filing and payment becomes more overdue. It has not yet been decided when to implement this regime for VAT. The earliest possible implementation date is April next year.

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Alarm Clock 1 by alancleaver_2000

The Institute of Directors has come out in favour of cash accounting for small and medium sized enterprises, saying the system more closely reflects the way non-accountants understand profit.

The OTS recently published its discussion paper about creating a simpler income system for the UK’s smallest business. In it, the Office pointed out that a lot of SMEs probably use cash accounting already, without HMRC noticing.

Some contractor accountants have squashed the proposal, saying that we are so used to accruals accounting that it would be too complicated to change to a simpler way of doing things.

Danielle Stewart, from Baker Tilly, pointed out it doesn’t make sense to switch to cash accounting because all accounting software is geared towards the accruals method.

However, Richard Baron, the head of taxation at the IoD said cash accounting is the leading option and the OTS paper is a step in the right direction. It’s nonsensical to continue the way we are going, with thousands of small business owners struggling to get to grips with the technicalities of accountancy.

We already have a cash accounting scheme in place for VAT, whereby businesses can use cash accounting if their taxable turnover is between £1.35 million and £1.6 million.

The IoD did question the suggestion that small business owners and freelancers could claim fixed allowances for expenses, such as running an office at home. The Institute felt thus could lead to large differences in the tax charged and the amount that would be due if such expenses were worked out accurately. Baron said that profits are still the most sensible basis for calculating taxation.

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Yotsuba! by meddygarnet

One of the biggest bugbears among office workers, including contractor accountants, is sluggish IT systems, according to a study by Samsung. Its research found that 68% of office professionals cited slow IT as the most annoying part of their working life.

Employees were also questioned about fellow workers’ behaviour that annoyed them. 34% complained about their colleagues talking loudly when on the phone and 27% were irritated by people not refilling the paper supply after using the printer.

Employers may like to take note of the survey results, especially if they want to retain key employees. For example, business leaders may want to consider investing in new PCs and faster technology so that employees can carry out their duties at their natural pace.

The Work Foundation’s Wilson Wong agreed that slow IT was a major irritant. He said that he experienced that very issue in his workplace and it was hugely annoying.

He went on to suggest that IT departments can get around the issue by allowing employees to use mobile devices or work flexibly. However, he did acknowledge that not all employers were comfortable with the prospect of flexible working.

Meanwhile, a new study by OPP the workplace psychologists, has discovered that more than 20% of British workers regularly consider giving up their job and becoming freelancers due to this stress.

66% of respondents to the survey said they watched TV or films to relieve stress, while just under 50% surfed the net. 31% of people listed having a hot bath or drinking alcohol as stress relievers.

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Image: OSI Challenger 4P by Easterbilby

An interesting idea was floated this week on one of the websites I haunt. Someone was getting just a little exasperated at the identity proving process we all suffer these days, and rather than drive 50 miles to an agency’s offices to show them his passport was wondering if having a Skype video conference with the agent while holding his passport would suffice.

General response was along the lines of nice idea, but these are agencies we’re dealing with so probably not. It’s not that we have any objections to proving we are who we say we are; it is to everyone’s benefit, after all. But the whole thing is getting just a little surreal.

Start with the passport thing. What everyone fails to remember is that a passport is only proof of identity if you are the one holding it. Copies, be they full colour images, redacted black and white scans, video image, even with you in the frame – none of these are proof of anything beyond your skills with a digital camera. You have to be there, holding it, at which point the other guy can take a copy of the photo page – nothing else just that page – for their own records.

And there’s another issue. The more peripatetic contractors – like me, for instance – go through this farce several times a year. Just how safe are all these copies of a Crown documents, I wonder? And how many of them are deleted once they are no longer needed?

And given the quality of most of my communications from agencies, just how accurate are the supporting records anyway? We will never know…

The real irritation, though, is that the whole exercise is totally unnecessary. And, as usual, we have to look to those bastions of professionalism and awareness, the agencies and the Human Remains Resources teams.

Because HR are usually in the loop for hiring contractors, they only think of them as pseudo-employees. OK, that’s an old argument that bores even me, but it’s still true. Therefore the master contract the agency has with the end client’s HR team is framed in terms of employment law. This, among other things, lays fearful penalties on clients who don’t ID check their employees.

Agencies, being at the higher end of the risk averseness scale, take great care not to offend. Hence they go to great lengths to ensure everyone they touch is checked. Except I am not an employee of anyone, I am an independent supplier. I’ve checked the people I send out to work for me and am more than willing to assert that I know who they are and that they are allowed to be here. And take any penalties you care to throw at me if I’m wrong. And since I’m not the agency’s employee – much as they like to pretend we are – and certainly not the client’s, there is no legal obligation to ID check me all over again.

All that has to happen is for agencies to have two contracts with their clients: one for employees, one for freelancers. Do that and not only do a lot of contractual arguments go away – along with 90% of the threat of IR35 and the AWR of course – but they save themselves hundreds of pointless man hours a year which, you might think, would appeal to the bean counters who run most agencies these days.

But far too simple a solution will never catch on. Especially if nobody triers to sell it.

And just to close, how about this for idiocy. One guy was asked for his NI number as well as his passport and “other documentary proof of address” to get a building pass. NI numbers aren’t a proof of anything, as the Home Office is at pains to point out. For one thing, while the numbers are unique they may have been given to, or used by, more than one person. So not really a lot of good to anyone as a proof of anything.

One day, sanity will prevail. I suspect I’ll have retired by then.

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited

Image: The Usual Suspects by Dylan Parker

Owners of small businesses, contractors and freelancers should have in-depth knowledge of their own sector before approaching banks for investment funds, advises the British Bankers Association.

The BBA claims that SMEs will have a better chance of getting a loan if they are prepared to answer a barrage of questions about their respective industry.

Angela Knight, the BBA’s chief executive, said that it is imperative that you understand your market; what it looks like, is it a growth market? Is it vibrant? How large is your customer base?

Business owners should also compile a realistic set of forecasts showing costs and projected income. These numbers should be discussed with the bank to make sure they look right and are presented correctly.

In the financial year ending April 2010, total business angel investment activity dropped to £60.5 million, a decrease of 3.7% on the previous year, according to the Annual Report on Business Angel Activity in the UK.

Entrepreneurs have found it increasingly difficult to obtain funding for new start-ups. As a result, owners started exploring angel funding whereby wealthy individuals provide private equity and get shares in the business in return.

However, business angels were also affected by the recession and they had less money to invest in new ventures. The ARBAA report also showed that there were 4,555 registered business angels in the UK between 2009 and 2010, but only 37% of them were active and less than 10% made any investment during the period.

Despite the drop in activity, Mark Prisk, the business and enterprise minister, said the study shows the important role business angels have to play in financing new businesses. He went on to say he hoped businesses will continue to look to angels when they need business expertise and guidance as well as funding.

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: I don’t know by Hilary Perkins

Employers may not be too pleased to learn that 14 million working hours per week are currently being lost due to employees and contractors looking for other jobs whilst at work.

Monster recently surveyed more than 2,000 jobseekers, all of whom currently have a job, and discovered that 28% of them spend more than three hours of working time every week looking for another position. 16% spend more than five hours and 7% spend in excess of ten hours a week job hunting.

If these figures were indicative of the UK workforce as a whole, employers would be losing more than £250 million each week due to these job hunting activities.

Employees and contractors are not only surfing the net looking for jobs. 60% admit to doing online job searches, but 50% also update their CV at work, 49% actually apply for new positions and nearly 25% conduct telephone interviews from office phones.

However, 40% of employees think their boss knows what they’re doing and 12% have been caught, either by their boss or one of their colleagues. 2% of the survey’s respondents had been fired for their job hunting at work activities.

Doctor’s appointments are the most common excuse used when it comes to attending interviews. Strangely enough sickness and domestic emergencies come lower down the excuse list than pet emergencies and needing to be at home to receive a delivery.

Monster spokeswoman, Isabelle Ratinaud, said that job hunting is time consuming and the survey’s results show just how desperate some people are to move. However, although it may be tempting to job hunt during your employer’s time, this could affect references and result in disciplinary action and dismissal.

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Using a Magnifying Glass and Driving by MIke Kline

Contractor accountants and other UK workers spent an extra 3 days paying their tax bill this year, according to the Adam Smith Institute.

Tax Freedom Day this year was Monday the 27th of May. That means British workers spent the first 149 days of 2011 working for the state. The additional 3 days were mostly caused by the VAT increase at the beginning of the year.

It takes 39 days for the average British worker to earn enough to pay their annual income tax bill, a further 26 days to settle National Insurance liabilities and 29 days to pay VAT. Council tax takes up seven days of income and you need to complete a 5 day working week to pay the duty on alcohol and tobacco.

Sam Bowman, the think tank’s head of research, said it was no wonder that economic growth was so slow when we are slaves to the state for five months of the year.

Meanwhile, freelancers entering higher tax brackets could be tempted to increase the amount they pay into their pension fund.

The number of people paying higher rate 40% tax is expected to increase to 3.7 million this year, whilst 275,000 people will fall into the 50% bracket.

Bill Mackay, the marketing director of AJ Bell, pointed out that making pension contributions was one of the best ways to benefit from tax relief. His company witnessed a 179% year on year increase in the number of single contributions to two of its accounts in April.

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: by tommy

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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Image: tubey fight by JSF539

Freelancers could be encouraged to ask for advice from a specialist contractor accountant after one financial body revealed that changes to the income tax bands, due to be introduced in April, will lead to an additional 750,000 paying higher rate tax.

In the coming tax year, individuals earning between £35,001 and £150,000, will be taxed at 40%. Currently, people pay the higher tax band on earnings above £37,400.

The Institute of Fiscal Studies launches its Green Budget today which will also reveal that an additional 850,000 individuals will fall into the higher tax rate bracket within the next 4 years if the coalition meets its targets.

A spokesman from the Institute said that real earnings are expected to remain stagnant but householders will face an additional loss of around £200 a year from benefit cuts and tax increases that come into force at the start of the new tax year. This is on top of the VAT increase and higher energy and import prices.

The wealthiest 10% of the population will also have to pay a new tax rate of 50p in the pound on income over £150,000. This will mean that they are losing 3% of their income compared to the average 1% for the rest of the population.

The tax band changes will mean that 500,000 people do not have to pay any tax at all. April’s increase in the personal allowance from £6,475 to £7,475 is the first step in the government’s plan towards raising the personal tax threshold to £10,000.

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Image: Lemonade (Lime version) by floodkoff

Freelancers should take note that HMRC is stressing the importance of filing online tax returns by the deadline date of the 31st January. Failure to comply with this will result in a penalty of £100.

The Revenue has advised people who are struggling to sort out their affairs to seek the advice of a specialist contractor accountant, tax adviser or contact the department for assistance.

All outstanding tax returns for the 2009 – 10 financial year must be filed by midnight on the 31st of January, a Revenue spokesman explained. People who have not used online filing before are also reminded that they need to leave plenty of time to complete the registration process.

Once you register online you receive a User ID and an Activation Code will be sent by mail within 7 working days. It will therefore be necessary to register no later than the 21st of January to make sure the Activation Code is received on time.

Leonie Kerswill, a tax partner at PwC, said that people tend to push their tax return down the priority list during the festive season but after over spending at Christmas it would be unwise to incur the £100 late-filing fine. She also reminded taxpayers that they need to pay the tax due on January 31st as well as filing the form.

Meanwhile, the PCG is organising a tax planning event in Manchester on February 2nd. The event will take place at the Mint Hotel and will deal with the importance of tax returns and record keeping as well as the changing IR35 landscape.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: I have a burning hot love letter 4 U by Nina Matthews Photography(away all of Jan)