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…

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Image: Getting insight by Miran Rijavec

You will probably have heard me sounding off at fairly regular intervals about how inconsistent and impossible to judge the average IR35 case is. I’ve looked at many appeal judgements over the years and each one has been supportable, given the vague nature of that which is being judged. You can usually kind of see where the judge was coming from.

Now, however, we have a case that fails even a generous stab at understanding the logic.

How else do you describe a judgement that puts the contractor outside IR35 and then inside IR35, within the same contract…?

The case was JLJ Services Ltd vs. HMRC, heard by Howard Nowlan. On the face of it this was one of those cases where a contractor, a Mr Spencer, working through his own limited company and an agency for an end client had been challenged under IR35 and found wanting. He appealed the case and it went to the First Tier tribunal.

So far, so good. Well, not good for Mr Spencer, but you know what I mean.

Then life starts to get a little strange. JLJ had started off as a Unix-based technical expert for the client, Allianz in Bristol, working on a succession of projects. After a few years of presumably valuable and acceptable work, Allianz’s requirements changed and Mr Spencer moved to a more part-time role, on a series of rolling contracts, picking up whatever needed doing.

Now this is the key point, as far as the judge was concerned; the first part, being deliverables based, did not exhibit a degree of control, the second, however, did. Accordingly Mr Nowlan rules that the first part was outside and the second part inside. This despite everything working to the same overarching contract – only the schedule of deliverables had changed – and I’m guessing it never crossed Mr Spencer’s mind that the game had changed underneath him. He simply kept on doing what he was clearly very good at for a client with whom he had a good and mutually beneficial relationship.

That said, by screwing up your eyes and squinting, you could just about see where Nowlan was coming from; the increased level of Control moved the IR35 goalposts in the wrong direction.

Ah but, I hear you cry, having been paying attention over the years, Control is not the only test. What about Substitution, Mutuality and that most recent phenomenon, “being in business”? Which is where I rather part company with the judiciary.

Substitution? The contract had a right of substitution and, as near as I can tell from the judgement, Allianz could reject a substitute with reasonable grounds but were not actually averse to considering taking one on if Mr Spencer was unable to work. Nowlan, however, after a bit of verbal gymnastics – including allowing an Allianz representative rather too much latitude in the accuracy of his evidence giving – said that he “ took it to exhibit a realistic businessman’s contempt for a clause that he probably found irrelevant”, a position he agreed with.

So, Mr Nowlan, how many employees do you know who are allowed to submit a substitute worker?

Mutuality? A mere bagatelle. Mr Nowlan’s words: “There is considerable case law in relation to this test, progressively indicating that the test is of diminished importance or that it is indeed nearly meaningless”. Really? Can’t say I’d noticed any diminution in its importance. Cases have recently hinged on someone being sent home without pay when the systems failed and they could no longer work, while the permies sat and waited for normal service to be resumed. On full pay. Heigh ho.

So there went the RMC judgement on what constitutes employment then.

In business? It’s clear from various comments that Nowlan considered JLJ Services to be irrelevant and queried why it had been set up. So a judge trying a contactor case involving an agency who hasn’t heard of S44-47 ITEPA 2003 then. But hey, it was Nowlan’s first IR35 case.

So in conclusion, at a very long stretch, the judgement may be supportable. But we should not lightly dismiss the ability of a judge to take a fairly cavalier attitude to the key IR35 tests on some fairly flimsy grounds.

In fact the only good thing to come out of the whole case is that we should be grateful that First Tier cases do not set precedents. Luckily for us…

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Image: 1996 UK Royal Mail Cartoon Stamp Card by andertoons

You know when you’ve been commuting too long when, without having to think about, you stand on the platform, the train rolls in and you only have to stretch out your hand to open the door. The good thing is that you can get to work with minimal mental effort which, at the time of day I’m usually doing it, is rather a good thing.

In fact there’s only one thing that is really getting on my wick during the daily commute. A regular army of lycra-clad cyclepaths with silly hats who seem to think any rules of the road, the pavement and basic courtesy simply don’t apply.

I’ve lost count of how many times I’ve had to dodge them in the car coming off pavements or through red lights. Today I had to crash stop because one of them sailed across a zebra crossing; even the dumbest pedestrian has twigged that stopping and looking before stepping off the kerb is a good idea, so why are cyclists immune? Not to mention they aren’t damned pedestrians anyway and cycling across a zebra is actually illegal.

Then once off the train (having first waited for them to negotiate their idiot machines thought the barriers) and on the daily walk across the city centre I routinely get confronted by them ploughing through a busy walkway, heads down, mindless expression behind the obligatory dark glasses, utterly indifferent to any thought of risk analysis. Can’t slow down, got to get there, mustn’t stop, can’t possibly communicate with mere mortals, don’t care about anyone else; I’m a road warrior, me…

Remind you of anyone?

I paid my Corporation Tax bill last month, well ahead of the due date. Thanks to the vagaries of the banking system I couldn’t do it in one transaction (what, you think I’m going to pay extra to send Hector money?) so I sent two BACs transactions to occur one day apart. Same reference number, same destination bank account, accurate to the penny.

I got an acknowledgement for the first one. But not the second. Oh oh…

Then I get a letter. I have an outstanding payment on my Corporation Tax account. You now owe us the balance plus another lump of interest. The accountant has written to them pointing out their error, and enclosing a copy of MyCo’s bank statement clearly showing the payment.

No response. Hector doesn’t do letters, apparently.

So they phoned them up. All that achieves is to elicit a promise to send an internal email to the payments team. Say what? We don’t want payments, we want to you understand that no money is owed so payments have nothing to do with it.

Still no answer.

Next step is to log into the account and see what they think I owe. Got to wait for some more paperwork for that of course, can’t possibly use the credentials I already have to pay my employee taxes and VAT. Or register online, has to be done by post. Well I suppose it keeps a few hundred envelope stuffers off the streets.

Then the accountant tells me that Hector won’t talk to them about my affairs anyway until I fill out a form (one I’ve already done once, by the way) to allow them to do so: notwithstanding the minor detail that the accountant has been dealing with my company’s affairs for around seven years now, as even a cursory glance at their own records would demonstrate.

So I’m not optimistic about a quick resolution to this one. Nor, come to that, the payment of the money (plus interest…) they owe me for overpaid income tax from last year which has also not appeared in MyCo’s bank account.

At least when confronted with a moron on a bike you get some satisfaction by thinking you might just send him on his way wearing it rather than riding it. Sadly, that doesn’t work for taxmen.

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Image: Hand shake by khalid Albaih

Accountants should be aware that the end of the present tax year is fast approaching and HMRC has reminded the UK small business community that changes to corporation tax are imminent.

As from the start of the new tax year, corporation tax filing and payments will need to be made electronically. Furthermore, all company tax returns for accounting periods that ended after March 2010 will also have to be filed in XBRL or iXBRL format.

Payment of corporation tax will have to be made by Direct Debit, credit or debit card, using either bank transfer or the BillPay service.

An HMRC spokesperson explained that these changes will affect associations, charities, clubs, co-operatives and societies as well as any limited company. Firms will be able to use commercially available software to file or the department’s own CT software aimed at firms with less complex taxation affairs, the Revenue added.

As from April next year, firms will also have to submit their VAT returns online.

Meanwhile, the Institute of Directors is calling on the government to reduce corporation tax until it reaches 15% in 2020. People are starting to think of the UK as a high-tax economy and that will not encourage foreign companies to invest here.

The IoD wants the UK to have the lowest rate of corporation tax throughout the world. It has estimated that this could be achieved at a cost of £9 billion a year, a figure which could be achieved by continuing restraint on public sector growth.

By reducing corporation tax to just 15%, the UK would be sending out the strong message that it is open for business.

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Image: Micro Ecosystem by PierrePocs

David Cameron has attacked the people he considers to be the enemies of enterprise that are threatening to hold back British businesses.

Speaking at the Conservative spring conference in Cardiff, the PM repeated his commitment to the promotion of economic growth. Cameron said that as well as having a positive social impact, new enterprises are good for the economy. He did however admit that we have our work cut out to encourage people to form a limited company.

For more than 10 years, the enemies of enterprise have taxed, regulated, smothered, crushed and generally got in the way, he said.

George Osborne’s budget later this month will lay out specific measures to help business start-ups. These could include the removal of bureaucracy and the easing of regulations.

Meanwhile, existing companies are confused about the requirements of the new senior accounting officer legislation adding compliance costs to their existing financial burden. However, Deloitte says most are in a good position to comply.

According to Deloitte’s research, 11% of organisations have complete confidence in their compliance, although 69% expect to file an unqualified certificate. The areas that are causing most concern are VAT, PAYE, corporation tax and excise duties.

The new rules mean that senior financial officers now have to certify annually that their company systems are fit for tax reporting purposes. The legislation only affects companies with a turnover in excess of £200 million.

HMRC had assured companies that the sign-off would not lead to increased costs, 50% of respondents claimed the costs had been significant. 13% did admit that the increased cost of compliance has been set off in part by the savings they discovered during the review process.

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Image: 115/365 – Evil Twin by B Rosen

George Osborne delivered the government’s Autumn statement on Monday and laid out new plans for the multinational tax regime in the UK.

Designed to provide certainty for businesses and contractor accountants, the new controlled foreign companies’ rules will be legislated for in the 2012 Finance Bill.

The coalition plans to introduce an entity-based system and levy a CFC charge on overseas profits artificially diverted from this country. Attention will be focused on high risk entities and the government intends to devise specific rules for financial institutions such as banks and insurance companies as well as property industries.

An exemption will be made to allow groups to manage their overseas operations efficiently, while at the same time protecting the UK tax base. It will work by assessing the debt-to-equity ratio of the finance company and levying the CFC charge on any excess equity.

Businesses have suggested to the Treasury that the CFC rate should be less than 10%. The current government proposal is a debt/equity ratio of 1:2; meaning two thirds of income from overseas finance would be exempt from the tax. With a 26% rate of corporation tax, the levy on overseas finance income would be 9%.

Next year’s Finance Bill will contain an interim step of exempting foreign to foreign group transactions that do not affect the UK tax base.

Other proposals laid out on Monday included annual phased reductions of 1% to the main corporation tax rate, leading to a rate for a limited company of 24% in 2014. The government also intends to introduce a “Patent Box” scheme in April 2013 whereby profits arising from patents will be subject to a 10% tax.

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

Image: A golden opportunity by kevindooley

My research has revealed a record breaking increase in the number of new contractors / limited company formations, which supports the theory of a new entrepreneurial culture developing to partly replace the traditional employment culture, as a result of the economic crisis.

Many jobs are being shed by the civil service and local government, with quangos being particularly hit hard. The government have stated their expectation that the private sector will replace a lot of the jobs and functions hitherto carried out by the public sector.

According to the Management Consultancies Association which represents 70% of the industry in the UK, member organisations have already seen a significant fall in public sector work, with most expecting to drop further in the remaining part of the year.

An increasing number of consultants are setting themselves up with their own business to position themselves to take advantage of the new way of doing business in the UK. Their client organisations are increasingly looking to become more flexible, preferring to outsource and sub-contract rather than employ permanent staff, with all of the financial and legal risk that traditional employment involves.

An increasing number of agencies are in the marketplace to provide an important link between the client organisations and the contractors and consultants who can fill the required roles.

In my experience, the hourly rates achievable by independent contractors are nearly always significantly higher than what the consultant would be likely to expect if they were employed by the same business.

In nearly every case, it is best to form a limited company and take a small salary and high dividends to maximise take-home remuneration. It is now possible to set up a limited company in a matter of hours and set up a business bank account within a week. Also, with the advent of online VAT registration, it is now possible to register within a few weeks.

By registering for the VAT Flat Rate Scheme (FRS) and maximising claims from their company for allowable business expenses, consultants can optimise their take home remuneration by operating through their own limited company.

All good accountants will be able to explain in simple terms the benefits and the ease of working through your own company. For more information visit our website or please don’t hesitate to call 0800 8 40 40 14 or email me.

Graeme Bennett is a Director at Forbes Young Accountants
© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited

Image: Transhumance sur le Causse by Pierre Roudier

The work and pensions secretary, Iain Duncan Smith, plans to help Britons long-term unemployed start up their own business.

Smith told the Conservative Party conference that financial backing and support would be available to people who have been out of work for over 6 months.

Up to £2,000 in financial support would be made available through the New Enterprise Allowance and the government would arrange mentoring to help new entrants and contractors to the business world.

The government hopes to create 10,000 new small businesses and limited companies through this initiative and is part of a radical shake up of the entire welfare system.

Included in the proposals is a move that will see benefits streamlined so that recipients receive just a single payment.

It is believed that the high street banks will shortly announce a new fund dedicated to lending to SMEs. Although details are yet to be finalised, each institution would be injecting tens of millions of pounds into the fund. And to give small businesses a better chance of having their loan approved, a mentoring programme to advise on their capital structure will also be set up.

Any move to encourage the banks to lend more will no doubt be greatly appreciated by SMEs. A new report shows that 18% of small business owners are turning to alternative funding sources in order to stay afloat. 10% of business owners have turned to family and friends, 7% are using their credit cards for business finance and 7% have turned to loan companies for help.

One third of SMEs have had to make cuts in the workplace with 47% reducing their use of utilities, 38% cutting expenditure on staff refreshments and the same percentage cutting back on travel expenses.

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Image: growth by iChaz

Traditionally this is the Silly Season, when the Press have to file stories about singing sheep to fill the papers since there is no real news to talk about. But actually there are not one but two interesting stories to ponder this week, one illustrating how very confused the whole immigration argument has become and the other illustrating just how out of touch with reality the Senior Civil Service seems to be.

Firstly, immigration. A large delegation of politicos, business leaders and sports stars (why sports stars?) led by Mr Cameron has been dispatched to boost our trade with India. Given that they are a tiger economy in their own right, this is probably a good move. Snag is, the Indians and Vince Cable have been talking about opening up the barriers to immigration while everyone else is talking about closing them. Remind me, what is the definition of “Coalition”?

Still, Mr Cable is actually correct; bless him; the ability to allow highly skilled workers in to the country to fill necessary gaps in our native skills is a good thing, not least because we have signed reciprocal treaties that mean we have to do so. Sadly this has got wrapped up with the whole net immigration argument which in turn has evolved from the last government’s unofficial but very real open door policy. We do actually need these skilled people, be they heart surgeons or chefs who understand Thai cuisine. Provided they pay their way and add some value to the UK economy, what’s the problem?

However, before we get all optimistic about them, how about the government looks at abuses of the system first? There isn’t a skills shortage in IT; we have 40,000 IT graduates out of work and hundreds of good applicants for almost every role. Why then, do we allow IT staff to come in on Intra-Company Transfers in their thousands to learn how to do our jobs so they can export them back home?

This is an entirely different issue to the one about net immigration. It would be nice if HMG and the Press could get that difference clear so we can have a reasoned argument about it…
The other interesting story is that the current IT Director for HMRC, a certain Mr Singh, is finishing his three year fixed term contract but staying in post as a freelance through his own shiny new limited company. Instant cries of “Foul” and “Why isn’t he being done under IR35?” arose. Unfairly perhaps, since he hasn’t yet had to fill in a tax form so his position under IR35 is unknown. OK, he’s a classic IR35-caught candidate, and I can’t believe HMRC would let him get away with anything, but he hasn’t done anything wrong yet.

Or has he?

The point of a Fixed Term Contract is that it has a definitive, pre-agreed end date: the clue is in the name. So why, after three years, is there not a suitable replacement lined up ready to go, either from the open market or by promotion from within? Is there really only one person suitable in the whole of the UK? Surely not…

But there’s even more to this debacle…

They are paying Mr Singh as a freelance a day rate equal to around four times his previous salary. HMRC mandarins claim this is to achieve parity with an equivalent Deloitte consultant. Fine, except Mr Singh doesn’t work for Deloitte and so doesn’t have to support myriad partners and office buildings. Nor a sales and marketing team, apparently. So while it‘s good that HMRC accept that freelance workers have greater overheads than employees, something we’ve been arguing about for at least ten years, a little bit of market perspective wouldn’t go amiss. Especially when it’s our money they’re spending.

You could also argue that Mr Singh, having failed to identify a suitable replacement, has significantly failed one of his key duties. After all, had he gone under a bus, clearly there is nobody in the organisation, or outside it, ready to take over. So much for continuity planning then.

We could also query the proper application of the OGC tendering rules for new staff and various other inconsistencies, but let’s not Labour the point more than necessary.
In May I was hopeful that our shiny new Coalition had a clear idea of where they were going and why. I confess I am beginning to have my doubts.

Alan Watts can found found at LinkedIn.
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Image: Their serious sides by tim_d