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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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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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.

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

We keep hearing about the skills shortage in IT in this country. A lot of the justification for work being outsourced and offshored, for example, is justified on the grounds that the clients can’t find the people they need in the UK, so simply have to go elsewhere for them. And as I predicted some time ago, the level of work being offshored is creeping up, not only in numbers of jobs but in the seniority as well. Helpdesks have long gone, as have standard coding roles. Now we’re seeing DBA, BA and PM work going the same way.

So why are one in six of our UK resident IT graduates out of work then? I think there may be two things at work here (unlike those graduates…)

Firstly the reason is not a lack of skills; it’s a lack of money. And, to a lesser extent, a lack of vision.

We cannot possibly have that many qualified people out of work because they can’t do the job. Also, of course, the public sector has been shedding staff at an ever-increasing rate, so the pool of experienced people is steadily growing. Finally there is a still a high number of experienced freelance IT people out there who haven’t worked for many months.

As always, the client is looking to take money off the bottom line. Outsourcing is a very good way to do this, so having made the decision to outsource a key business function – in itself a dubious and very short-term move, may I add – they look for the cheapest option. That will not be the UK-based workforce who, oddly enough, prefers to charge a living wage for their work, but an offshore operation with a much lower labour rate. QED.

Except they aren’t actually cheaper, when measured over a year or two. OK, I speak only from personal experience and some apocryphal tales from co-workers, but the story is quite consistent. Firstly what you get is not what you wanted, at least not the first time round. A huge amount has to go back to be re-worked. Plus there is often a habit of not correcting the faulty code, but re-writing it. It may be more accurate but it is also a lot slower. Then, when it does work, trivia like in-line comments, error-handling and security controls are often below par, so if a problem does occur the recovery is more complex than you may realise..

So by the time you get a robust working product you have spent a large chunk of the money you were hoping to save. This is a bit of a shame. I mean, it’s almost like the business driver for the outsourcing company is to maximise their revenue, not service the client’s requirements. Surely not.

The other reason is the one I mentioned last week. If you only look inside your own industry for staff, regardless of how relevant that industry experience is to the job in hand, then obviously you will be looking at a much smaller pool of candidates. Even within apparent monoliths such as banking, you get the same apartheid; you may have five years in Investment Banking but we deal with Derivatives so sorry, you’re simply not qualified.

So combine the two and the much heralded but completely mythical UK Skills Shortage is actually a self-inflicted wound. And not only self-inflicted but self-perpetuating, since we don’t have the people coming in at the bottom to fill these roles who, in five to ten years, would be the ones in the middle management positions making it work. Damn, we’ll have to outsource them as well…

So clearly there is a skills shortage. Sadly it lies not with the workers, but with the management.

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There are nearly 11 million workers aged between 35 and 49 in the UK and yet they have missed out on the 350,000 new job opportunities created in 2010.

There are now 2.9% fewer Britons in this age bracket who are in work compared to the start of the credit crisis in the spring of 2008, according to recently published figures from the CIPD.

Dr John Philpott, who authored the report, said it was unclear why this group has been bypassed and it could simply be that they have received less support from the people who make the policies. However, this demographic group still has reasonably high employment rates and therefore is not a cause for social concern. Another possibility is that this middle age group is at the pinnacle of their career earnings and therefore employers may find their salary expectations less appealing than workers who expect less salary.

The Work Audit from the CIPD also found that, out of the 350,000 new jobs created between quarter one and quarter three, 63% went to employees, 30% were created by the self-employed and freelancers, 6% were accounted for by unpaid workers in family businesses and 1% by government job schemes.

However, 95% of those additional workers in employment are working in part-time roles and around 33% of roles are on a temporary basis only. Permanent full-time jobs for employees have not experienced a recovery this year. Women have not really benefited from the additional jobs as 289,000 of all the newly created jobs went to men! This could be because more women than men work in the public sector and it increased in size slightly during the recession whilst the private sector was making redundancies.

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Contractor accountants and other professional freelancers must be prepared for financial changes, especially in these times of economic uncertainty.

The MD of the Debt Advice Foundation, David Rodger, said that everybody should have a Plan B, even if they believe their job is secure.

Rodger pointed out that redundancy might have a massive financial impact on a person’s household budget so having the foresight to plan ahead can lessen the chance of future difficulties.

This is simple to do, he says. Set yourself a realistic budget so that you do not overstretch your finances or spend large amounts on credit and keep a “rainy day” fund to tide you over if you have the misfortune to lose your job.

Contractor accountants working through umbrella companies might find that they are in and out of work due to the nature of freelancing. It is therefore vital for them to have a reserve cash fund in case work dries up for several weeks at a time.

The threat of more job cuts in 2011, coupled with the increase in VAT, could mean that more people fall into financial difficulties. The Money Advice Trust has already forecast that the number of people seeking advice on debt is going to reach a record high soon. Surprisingly, only around 16% of people who currently have money troubles seek advice.

However, consumers are showing signs of concern when it comes to debt, according to quarter four data from R3. 47% are worried about their credit card debt, 28% about their overdraft and 23% are concerned about meeting mortgage repayments.

Last week, the government launched a consultation into the regulation of consumer credit. It wants to transfer the responsibility from the OFT to a new authority; the consumer protection and markets authority. The government hopes this would provide more protection for consumers and remove regulatory burdens on businesses.

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Contractor accountants and other freelancers are becoming more enterprising and creating opportunities for themselves according to figures released by the CIPD.

Data from the Institute shows that an extra 350,000 jobs have been created this year and 30% of these can be attributed to the self-employed. Two thirds of these new jobs went to people in the under 35 age group and the remaining third to people over 50.

However, this job creation seems to have completely bypassed those aged between 35 and 50. The author of the report, Dr John Philpott, said that it is easy to see why many people are still unconvinced that the economy is recovering when a core element of the workforce has not benefited from the recovery in the jobs market.

Once more permanent full-time opportunities become available, the middle age group should start to feel the benefits but this could take time as growth is likely to slow down somewhat in 2011.

The government is keen to encourage people to set up their own business. Mark Prisk, the business and enterprise minister, recently laid out measures to encourage micro-lending to small enterprises and called on Brits to display their spirit of entrepreneurship.

The Enterprise Finance Guarantee Scheme is to be reformed to increase community development finance institutions access to funding. Prisk said that he wanted to encourage everybody to start their own enterprise, regardless of their previous background and CDFIs give vital support to businesses in depressed communities.

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You may recall I wrote last week about there being an apparent majority of recruitment consultants who don’t actually know what they’re doing, much less understand what (or rather who) it is they’re selling, Sadly that also seems to be true of contractors themselves.

Now obviously I don’t mean the things they know about their chosen field; if you aren’t pretty damned good at what you do you won’t last long as a freelance after all. Clients hire freelances to add instant value and high levels of expertise at the drop of a hat (or a well-written contract, anyway) and I’ve met very few indeed who don’t deliver exactly that.

No, I’m talking about the other side of the freelance business, running the business itself.

Perhaps I’m biased since I’ve been doing this for quite a while now, but I am continually surprised at the kinds of questions you keep being asked. It’s not like the information isn’t out there. If you can’t face trawling through the HMRC labyrinth to find things – which is something I try to avoid as much as possible – there are many very good and authoritative guides on the web, not least the PCG’s Guide to Freelancing. So why don’t people read them?

For example, in the last week I’ve seen examples of all five of the obligatory dumb questions…

The “My accountant can’t count” question. Someone who has painstakingly worked out his taxes and thinks he should be getting more than his accountant says he should. Usually they’ve either forgotten something trivial, like Employer NICs, or they’ve got the basic arithmetic wrong. That’s why you use accountants, so why try and double guess them?

The “Why is my accountant so expensive” question. These are the guys who begrudge paying a tiny percentage of their gross for a professional service. Try as you might, you will never persuade them that if an accountant actually costs you money, get a new one. He’s there to make sure you get the best return on your gross after all. Unless you tell him to do something totally silly of course.

The “How can I get to keep 95% of my gross” question. Limited to those who have either fallen for the sales blurb or don’t actually think living and working in the UK means you have to pay UK taxes (aka “Doing a Green”…)

The “A contract is just a piece of paper” question. The guy who’s signed up to a contract but then discovers he hasn’t got a notice period (which is a good thing, by the way, not that they’ll believe you about that) or has to carry PI insurance or something else he doesn’t like. Followed by plaintive cries of “What if I simply don’t bother, will the agency put a hit man on to me”. If it’s in the contract and you signed it, it’s legally binding; why is that so hard to understand? Try reading and negotiating before you sign it next time

And finally the “What expenses can I claim” question. Comes in many forms this one. Why can’t I claim travel after 24 months (you can, it’s just that it’s taxable). Can I have a 52” plasma screen monitor for my laptop (sadly it’s too big for the study, I’ll just have to keep it in the living room). And so on..

And why does this suddenly matter? Blame IR35, as usual.

If, as seems increasingly likely, whatever replaces it is based on proving you’re in business – just like Dim Prawn always said was the case (and then promptly forgot about saying it) – then understanding the rules of business would seem to be a pretty good starter for ten.

Which means, sadly, having to ask questions…

Alan Watts can found at LinkedIn.
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The Autumn Statement from the government showed a revised prediction for economic growth next year. Previously the coalition has predicted growth of 2.3%, but this figure has now been lowered to 2.1%.

However, the IoD disagrees with this, claiming that economic growth in 2011 will be much lower. It likened the recovery cycle to a square root sign which has witnessed a temporary spurt in 2010 but will level off next year.

The IoD commented that the Comprehensive Spending Review has caused too much doom and gloom and the UK needs to realise that there are also other weaknesses in the economy. Lower than expected growth could cause George Osborne to increase taxes, a move which would affect contractor accountants and other freelancers. In fact, if the government’s predictions for GDP are accurate, the chancellor will have to choose between tax increases or further spending cuts if the coalition is to meet its budget deficit targets.

In other related news – although the government has committed to reducing corporation tax, the IoD claims that the new moves still do not go far enough towards attracting more foreign invest in the UK.

The IoD’s head of taxation, Richard Baron, said that whilst the Institute welcomed the fact corporation tax is set to reduce to 24% that still leaves the UK in the bottom half of the list of countries with an attractive rate.

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Basic administrative tasks relating to bookkeeping, invoicing and billing and filling out timesheets take the average worker in the UK 37 days every year, according to Keboko, the cloud service provider.

The cost of all this red tape amounts to more than £100 billion and could encourage freelancers to get help from a contractor accountant in a bid to reduce the amount of time they spend carrying out administrative duties.

Charlie Cowan, the CEO of Keboko, commented that companies should be trying to rebuild after the recession but instead many workers are finding it hard to do this as they are bogged down with tasks such as data input and updating reports. UK businesses are basically throwing the money spent on these tasks down the drain.

The burden of dealing with the taxman is also costing businesses dear, the IoD reported earlier this week. The Institute surveyed its members and discovered that there is still considerable room for reform to reduce the administrative burden surrounding taxes. The survey also discovered that 30% of businessmen would actually advise someone not to start up their own business because of the weight of the tax burden.

An overwhelming number of directors want to see the regulations concerning PAYE and National Insurance simplified. Business people sometimes struggle to understand the tax rules and have difficulty finding out the correct information when they contact HMRC. Only 15% of respondents said it was easy to get the right information when they called the HMRC helpline while a third said it was very or fairly difficult.

HMRC’s website does not fair any better either. 16% said they could find the information they needed easily but again 33% struggled to find what they needed to know.

Since the PAYE coding errors earlier this year, businesses have found it increasingly difficult to get through to the Revenue’s helpline. 37% of the directors who did manage it feel that the majority of HMRC officials have a poor understanding of the nature of their business.

Half of the directors surveyed said they want the OTS to simplify the PAYE and NI system and 28% said the taxation of employee benefits was the area most in need of simplification.

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I know I keep banging on about ICT abuse, but I make no apologies for it. The systematic destruction of one of the few things we do well in the pursuit of short-term gain is getting well beyond a joke. Just look at what’s been reported in the last week or so.

Firstly, it seems that British business is in dire straits, utterly unable to get the skilled staff it needs to fill some key roles. Therefore, we mustn’t put any kind of cap on intra-company transfers or we will go even more bankrupt than we already are.

OK, so explain this. While most companies need a hundred or so ICTs a year to bring in their key personnel, how come just five of them consume over 10,000 a year? If these highly skilled employees are so necessary, why are the people already doing the job being tasked with teaching the newcomers how to do it? Isn’t the point of an ICT that the holder knows what they’re doing already?

Also why, may I ask, if one of the key tests for granting an ICT is that the imported worker should not displace an established worker, why are increasing numbers of established workers being displaced as soon as possible?

Or if we really can’t supply the skilled staff we need out of the thousands of out of work contractors and the 17,000 IT graduates who can’t get work, just why aren’t UK companies training the people they need from their existing workforce?

Then I read of someone whose freelance colleagues have been told they have to become employees of the agency – not, you notice, the client – at a set maximum salary. Needless to say, they have universally decided that’s not how they want to live their lives and are leaving as their contracts run out. So now they’ve been asked to stay on long enough for their replacements to get their visas processed and receive training and mentoring on how to do the job of the departing freelance.

Kafkaesque, isn’t it?

There are faint glimmers of hope. For example, the suggestion is that you have to pay an ICT at least £40,000 a year – and that’s meant to be a genuine salary, not £20,000 plus subsidised accommodation, flights, and other ethereal additions to make the numbers look good. Although that’s been offset by the threat not to include ICTs in the immigration cap. After all, they’re not going to swap the ICT for a Tier 1 after a while and stay here, are they? Oh, hang on a minute…

The Coalition have been researching and consulting very hard on this whole subject. They have been lobbied by groups such as the PCG who feel they would rather like to hang on to their market, and by others who business model seems to be based on taking that market and moving it elsewhere. I think the policy will make interesting reading. I don’t think, however, that I’m going to like it very much.

Never has that old Chinese curse seemed so totally apt…

Alan Watts can found at LinkedIn.
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UK businesses are to receive financial assistance from a new business growth fund set up by six of the major British banks.

Companies whose average turnover is between 10 and 100 million pounds will be able to get equity support from the fund in one of a number of initiatives announced by the bank taskforce last week. Qualifying businesses could receive equity of £2m to £10 from the scheme.

Over the next few years, the taskforce, which comprises Barclays, Standard Chartered, HSBC, Santander, Lloyds and the Royal Bank of Scotland plan to build up a 1.5 billion pound investment portfolio.

However, Bibby Financial Services thinks that small businesses and freelancers have been overlooked by the proposals. Bibby’s chief executive, Edward Rimmer, points out that many small businesses will not have the high turnover figure necessary to qualify for this financial aid and the banks do not appear to have proposed any measures to help them.

He also questions whether businesses that do qualify will in reality want to hand over ownership of their company to the taskforce at a time when trust in the banks is low.

SMEs are the lifeblood of the UK economy and the government appears to be missing the point and targeting the upper end of the spectrum instead of helping the newer, smaller businesses, he added.

Another expert, Michael Baxter, the editor of the online magazine Investment and Business News, agrees that the principle behind the idea is a good but he thinks that the fund might not be big enough. He would like to see the Bank of England put some of the money it has earmarked for the quantitative easing programme into a similar scheme.

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