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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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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Persuading the banks to lend more to businesses is still high on the agenda for George Osborne and he is now considering imposing additional taxes on them.

The chancellor said that the EU was talking about a ‘financial activities tax’ which would tax profits and bonuses rather than transactions. The Committee of European Banking Supervisors is currently considering a multiple salary cap on bonuses which would restrict cash bonuses to a maximum of 30% of salary and defer 40% of that bonus.

Osborne has already announced a bank levy and by imposing additional taxes the new government is showing that our financial institutions and business bank accounts are no longer going to receive preferential treatment.

During the Conservative party conference, the chancellor informed the banks that he would not tolerate them paying exorbitant bonuses when small businesses were struggling to obtain finance.

The first two months of next year are bank bonus season and the prospect of City traders raking in massive bonuses will not be welcomed by the ordinary man on the street who will be paying more VAT and possibly losing housing and child benefit.

However, the CBI is worried that the EU proposals will hurt households and businesses and cause the banks to relocate. The Confederation’s director of competitive markets, Matthew Fell, said that taxing financial services companies would not make the sector more resilient or encourage lending to companies. In fact, he believes it would have the opposite effect.

The financial services sector is such an important part of our economy and Fell explained that the International Monetary Fund has already rejected a global financial transactions tax because the burden would ultimately fall on households and businesses. But, imposing a European ‘FAT’ could encourage financial services companies to relocate outside the Union; a move that would hit undoubtedly reduce London’s importance as a world-wide financial centre, Fell concluded.

Dominique Strauss-Kahn, chief of the IMF, is concerned that without closer supervision, the banks will return to ‘business as usual’ which could lead to a further economic crisis.

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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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There have been recent reports suggesting that the government might scrap the Pre-Budget Report but the UK200Group has warned against this move.

The UK200Group is made up of independent accountancy and law firms and they say the Pre-Budget Report gives advance warning of potential measures allowing accountants and contractors the opportunity to lobby the government for changes.

A tax partner at Harwood Hutton said that the UK needs greater transparency when it comes to government financial planning and ditching the PBR would be a step backwards, including the potential to affect contractor and online accountants.

The PBR was introduced by the former Prime Minister, Gordon Brown, and it became one of the most important events in the political calendar. This year the Spending Review is likely to take centre stage in the autumn and George Osborne could use that opportunity to rebrand the PBR and call it the Autumn Statement.

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Last week the Government announced it was to take a two-stage approach to the new finance legislation.

An initial Finance Bill has been published by the Treasury and this enacts the key tax measures that George Osborne laid out in his emergency budget. It is expected that this will be pushed through parliament this summer.

In the autumn, there will be a minor finance bill that will introduce minor measures that had been announced by the Labour government. A draft of this will be published in July to allow plenty of time for pre-legislative scrutiny.

When asked whether these two tiered arrangements are a one-off, the Exchequer Secretary, David Gauke, made no comment. Many people have argued for reform to allow consultations to take place before finance bills are passed to the house for approval. Adopting that approach would remove the pressure to rush through technical changes.

Gauke did however say that the government was taking decisive action to pay for the past whilst at the same time planning for the future. He reminded us that the Lib/Cons had inherited the debts and uncontrolled spending from their predecessors and he reiterated the coalition’s promise to cut the deficit, deliver fairness and promote enterprise.

However, party whips are concerned that a handful of rebel Lib Dem MPs will seek to use the line-by-line debates, which start on 12 July, to table amendments to the Finance Bill.

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Contractor accountants can pass on this welcome news for freelancers and sole traders from Mark Prisk, the small business minister. In a recent interview he said that the comprehensive review the coalition is going to undertake of business taxation will seek to replace IR35 with a long-term alternative.

The rules surrounding IR35 are continually changing and the new government wants to put in place a lasting settlement. The chairman of the PCG, Chris Bryce, is delighted by the news. Although there is still a lot of work to be done in order to find a fair settlement, he is optimistic that his organisation can work together with the government to achieve this.

George Osborne’s budget speech only contained one mention of IR35 when he confirmed that the tax would be reviewed, along with the small business tax, and that the government would release more details soon. It is expected that the review will be launched in the summer.

The coalition has committed to simplifying the British taxation system. They want to implement measures that prevent tax avoidance whilst at the same time ensuring that the self-employed do not face undue administrative burdens.

There are currently around 1.4 million freelancers in the UK who are governed by IR35.

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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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