… to understand is the income tax”. So said no less a person than Albert Einstein. Meanwhile the Coalition, in the shape of Treasury Minister Danny Alexander, have been talking about ways to increase the amount of tax flowing into the Government’s coffers.

I think most thinking people agree we need to close the gap between UK income and UK expenditure and you can only go so far in cutting down what you spend. Unless you’re a bank of course, but that’s another subject.

The only snag is, Mr Alexander was using the same old rhetoric we were really tired of hearing from the last lot: His speech was littered with references to “avoidance and evasion”. He also went on a little bit too much about “fairness” – and we all know what that means! OK he was talking at the Lib Dem conference so we might forgive a degree of tub-thumping overstatement, but his words carry a hint of his true intent.

Personally I find this very worrying. Firstly there is a very clear difference between avoidance and evasion: one is legal and one isn’t. If you want to stop avoidance, the answer is very simple; you cancel that concession or you pass a law saying that you can’t do things that way. If, for example, it is avoidance to take advantage of the tax free allowance we all get – which it is, of course – then you cancel the tax free allowance. How hard is that?

Of course there is the slight problem that an already complicated tax regime, after years of Brown-induced fiddling, is now so labyrinthine that nobody really knows what taxes they owe. Including HMRC themselves, if the various stories of under- and over-payments and the odd billion pounds of uncollected taxes are to be believed.

Secondly, if someone can define “fairness” when applied to taxation, then I would be very surprised. Danny boy’s concept – like a certain Miss Primarola’s – is basically to ensure everyone whose gross income is £50,000 pays £10,000 in taxes. Simple enough idea, but is it fair? I don’t think so. A freelancer’s gross has to cover a host of things that an employee’s doesn’t. A company owner’s gross has to cover off building the business and quite possibly tying money up for years to do so. Fairness is a good word, but it’s not one that you can apply to taxation.

You can of course arrange things so that while you may pay differing amounts against your £50,000 you at least know in advance how much it is going to be and why. What we need is someone to look long and hard at simplifying the tax system. An Office of Tax Simplification, if you like. Oh, hang on a minute…

Nevertheless, HMG need all the income they can find, and even an old cynic like me can see that if you live in the UK, work in the UK and get paid in the UK, you should be paying taxes at UK levels. Are you listening Mr Green? Just because your company pays lots of taxes against its profits doesn’t exempt you from paying taxes on the money you take out if it for your own use. Sorry, for your wife’s use.

Still, getting back to the point, HMG doesn’t need to tackle evasion, it’s already illegal. All they need to do is apply the law consistently. If they want to tackle avoidance, all they have to do is define what it is and which practices they consider to be unacceptable. The various avoidance schemes that are their real target all exist by virtue of ambiguity in the wording of the tax laws. It’s down to HMG to remove that ambiguity so those schemes become unworkable or unprofitable..

That, to my mind, is what the fairness argument should be about.

Alan Watts can found at LinkedIn.
© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Scattered puzzle pieces next to solved fragment by Horia Varlan

While there was no surprise on the part of the Association of Certified Chartered Accountants when HM Revenue and Customs announced yet another taxation blunder, they did add that HMRC had an insufficient number of staff to handle the invevitable influx queries resulting from it.

HMRC recently made an announcement that there were millions in taxes underpaid to them due to a glitch in their PAYE system, resulting in a massive posting of letters demanding repayment. The silver lining is that some taxpayers had actually overpaid due to the glitch and will be receiving a rebate.

The same PAYE system that caused these latest tax miscalculations was also responsible for another glitch earlier in the year: as reported by Independent Contractor Services, HMRC had sent out incorrect tax codes in the thousands, resulting in a large number of taxpayers to receive more than two differing codes, which put them at risk of overpaying through PAYE.

UK contractors are already of the opinion that the British tax system is needlessly confusing and complicated, resulting in the UK earning a reputation for possessing one of the most complex tax systems on a global scale and possibly justifying the creation of the new Office of Tax Simplification by the government said Chas Roy-Chowdhury, taxation head for the accountancy body.

Mr Roy-Chowdhury stated that the issue highlighted the problems caused by the complications of the tax system in the UK. He said that there will be quite a few employers and taxpayers are now distrustful of the country’s tax regime since there have been so many who have encountered problems with the tax codes.

For those have been affected by the PAYE error, the HMRC has instituted a repayment strategy that can be assessed by calling 0845 302 1435; the strategy can be utilised by businesses, including contractor accountants, as well as individual taxpayers.

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

Image: Longleat Hedge Maze by Cyberslayer

SMEs and online accountants are spending a disproportionate amount of time on administration and tax compliance, according to the CIOT.

Andrew Hubbard, the Institute’s immediate past president, said that the new tax changes that occur every year have created a lot of anomalies in the system and it is now very unstable.

He believes that the government should create stability so that people setting up a small business know exactly which tax path they will be following for the next 5 years.

A recent survey carried out by specialist insurer found that 80% of SMEs and limited company contractors feel that the burden if taxation is their major worry.

Last week, George Osborne and David Gauke officially set up the OTS to look into the simplification of the current tax regime. Michael Jack will chair the new body and he already stated his view that entrepreneurs should never feel deterred because the tax system is too complex.

John Whiting from the CIOT will act as the interim tax director for the OTS and he reiterates Jack’s view saying that whilst it is probably impossible to have a truly simple taxation system, working towards a simpler one will help everybody.

Jack and Whiting will be helped by external tax and legal experts who will focus on individual complex areas and provide additional advice to the Office of Tax Simplification over the coming months.

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

Image: In Search Of Lost Time by bogenfreund

You would have thought that following last week’s news about the possible replacement (or even repeal) of IR35 that there would be signs of general celebration. But nope, not a bit of it. Quite the opposite in fact.

On one side we have a people saying that it’s only promising a review at some point, so clearly this is just another HMG stitch-up. There’s another group saying it will simply metamorphose into a version of the Construction Industry Scheme, making you an employee unless you supply your own paper tape or something. There’s another group saying that actually IR35 isn’t such a bad thing, it has its uses and we shouldn’t be surprised to see it left unchanged.

I also read one comment that PCG weren’t actually representing freelance workers at all and their work was actively damaging the “real freelances” best interest. Sorry? Didn’t quite follow that argument myself.

Really fills you with joy, doesn’t it…

One thing I have noticed though is that a lot of this negative comment is from people whose business is largely built on the existence of IR35. Fair enough, they’re looking at the business disappearing, but that’s the nature of business, after all. Still, let’s hope they’re simple bemoaning the threat to their business and not trying to persuade HMG to keep IR35 alive so they can keep earning rather than servicing their customers.

So it looks to me like the real advice is perhaps not to believe all you read until you know what the author does for a living.

There’s another group who are predicting the instant demise of PCG if IR35 goes. What they haven’t realised is that IR35 is only a small part of the freelance landscape. OK, it’s a pretty serious one, but even so, some of the plans coming out of Brussels make IR35 look positively benign. There will be a serious role for PCG for a while to come yet.

Finally there’s muttering about the promised Office of Tax Simplification being rigged. Looking at the way these things used to work that’s not a bad conclusion, except it seems that this one will be staffed with genuinely non-political experts with a wide-ranging brief. Certainly the one potential member I know of cannot possibly be accused of being pro-HMRC in any way, shape or form. Or pro-IR35 come to that!

Still, it hasn’t even been formed yet, much less done anything. I think I’ll be keeping up my insurances and being careful to read the contract small print to keep me clear of IR35 for a little while yet. Although hopefully, not too long a while…

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

Image: J. Jonah Jameson by OntologicalDoubt

When I wrote my piece last week, I was saying I was suffering a little from having to write it before the election result was known. I didn’t think that I would still be waiting when I started putting this week’s one together…

Anyway, it is all settled for now, and it looks like we really are in for some interesting times. Clearly the next budget will not be pleasant for anyone; certainly some of my contacts in the Public Sector are seriously worried about what the future is going to bring. Although if the markets react positively then things should start to move and there may be more work around for everyone

On the other hand, if they change the tax thresholds – something I actually think is a damned good idea – then a lot of contractors are going to have to rethink their payroll policies a bit. Also if the new government deliver their promised Office of Tax Simplification and put IR35 at the head of the list, then we will have something to celebrate.

Elsewhere there was a far more interesting story on the news this morning. A hospital in Nottingham has switched its food supplier to a consortium of local farms, saving themselves several millions a year but cutting out the retail supply layer and many thousands of food miles. The farmers are also delighted; as one said, until recently he was looking at closing down, now he’s making a profit.

Now that’s something the whole of government needs to take notice of. A few years back I proposed the creation of virtual consultancies, who pick up parcels of work that are normally handed out to the big consultancies (who are usually using contractors to do the real work anyway…). The Nottingham hospital is precisely that – ok, using food instead of code, but you know what I mean – then we are truly in a brave new world.

By the way, what do we call the new government? The BBC is sticking with “the Liberaldemocratconservativecoalition”, which is less than snappy. “ConDem” doesn’t sound quite right either.

But one anagram of Lib Dem Tory is “Bye, Mild Rot”, which sounds fairly appropriate…

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

Image: Summer Baby by zetson