Contractor accountants need to be aware that HMRC intends to code out employee debts of less than £3,000 through the PAYE system.

As from April this year, the Revenue will be able to change an employee’s tax code to reflect debts of up to £2,999 providing he or she pays their tax through PAYE. Pensioners owing tax to HMRC will also receive an amended tax code.

If an employee’s income or circumstances have changed during the year, he may not have paid sufficient tax. If this were to occur, the employee will receive a form P800 Tax Calculation informing them of the amount owing.

HMRC’s guidance on the use of PAYE for recouping underpayments of tax says the underpayment will normally be included in the following year’s tax code if it is less than £3,000. The money will be reclaimed in equal instalments, usually over a period of 12 months. Therefore if you did not pay sufficient tax in the 2010-11 tax year, this will be recouped in the tax year beginning 6^th April 2012.

The Revenue began sending out letters to people who owed small amounts of tax last August. Tax credit claimants who owed money to HMRC started getting similar letters last October. The letters explained that this year’s tax code might be adjusted to take the amount owing into consideration and offering taxpayers the final chance to settle in full or contact the government department to make alternative payment arrangements.

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HMRC is going to help employers improve their PAYE data.

Targeted Employer Support will be available to more than 1,000 employers who HMRC has identified as having problems with the quality of the PAYE information they submit. Between July and October, HMRC piloted face-to-face support visits with 12 employers and said they resulted in significant improvements in data quality.

Accountants will be aware that some companies struggle to comply with the complex PAYE system, and the Revenue now seems to have recognised this fact. The majority of employers do submit accurate data, but those that don’t could be causing problems for their employees. If employees do not pay the right amount of PAYE, they could find they are unable to claim certain benefits in the future.

The Revenue often encounters problems matching employers’ data with its own records. This can happen when a date of birth or National Insurance number is either entered incorrectly or is missing. Another common error is misspelt, incorrect or fictional names.

Stephen Banyard, HMRC’s acting director general for personal tax, said the Revenue is working tirelessly to improve data quality before the introduction of Real Time Information. In addition to TES visits, the department intends to improve the guidance it provides on PAYE data.

He went on to say that the pilot schemes had been successful and provided HMRC with the data it needed to compile the materials used for interacting with employers.

A pilot Real Time Information programme will begin with 300 volunteer employers next April.

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Accountants may want to encourage their clients to take part in HMRC’s pilot of the real time information initiative.

So far, only 300 businesses have agreed to take part in the initial pilot starting next April. The employers who take part will need to file their PAYE returns online each time they pay their employees. Real Time reporting will become compulsory in October 2013.

HMRC wants another 1,300 companies to take part in the initial pilot and a further 250,000 employers to join the scheme in November 2012 after the findings of the initial pilot have been assessed.

Stephen Banyard, who is currently acting director general for personal tax at the Revenue, said increasing the number of companies taking part in the pilot will ensure RTI is implemented smoothly. Although it may seem to be an ambitious target, it is achievable because we know RTI is still on track.

HMRC has considered all possible issues, including practical and technical ones, and the department is confident that it has the capacity to increase the pilot by more than 300% by next July, he added.

The Government says businesses will save £300 million in 2014-15 because they will no longer need to submit P45s and P46s. The Exchequer will also save around £395 million that year because it will be receiving more accurate data. But, businesses will probably face one-off costs during implementation. For example, RTI will run in conjunction with the BACS computerised payment system, so all companies will need to process their payroll online.

Small businesses in particular may find the transition period both difficult and costly!

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Contractor accountants may be interested in the latest plans to make UK personal taxation more transparent and easier to understand.

David Gauke, the exchequer secretary to the Treasury, last week laid down the Government’s vision for a simpler system.

It’s no secret that a lot of taxpayers find tax confusing and the Government has now said it wants people to be able to understand what they pay. In a discussion paper entitled “Modernising the Administration of the Personal Tax System” the coalition has set out a range of ideas to help people obtain access to information about their personal taxes.

The government wants to hear the opinions of taxpayers, tax professionals and representative bodies on a variety of issues. For example, the consultation asks which areas of the personal taxation system cause the most difficulty and how technology could be used to provide taxpayers with better access to their personal tax records.

As part of its plans to overhaul our tax system, the Government has also published a paper summarising the current state of play with regards to the integration of income and National Insurance. Technical working groups are currently being established to explore the possible options and employers, payroll and tax professionals are being invited to join these groups and provide their opinions.

David Gauke explained that the tax deduction on a payslip is the only way that people know how much tax they pay, but the Government wants to make the whole system more transparent so that people understand their tax rate, the amount they currently pay and how much they should pay.

It was a busy week last week as far as income tax related plans were concerned. The Government also published its draft Real time Information regulations, which it hopes will improve HMRC’s administration of PAYE.

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Accountants may be interested to read the latest Office of National Statistics research concerning UK householders VAT expenditure.

The data shows that the UK’s poorest households now pay more VAT in proportion to their total income than they did twenty-five years ago, whilst in the richest households, the proportion remains the same.

In 1986, VATable items accounted for 45% of the poorest 20% of households’ weekly expenditure. By 2001/02 they were spending 58% on items that attracted VAT. That percentage has dropped slightly, but in 2009/10 they were still spending 55% of VATable items.

Over the same period, the percentage of income the richest 20% of households spent on VATable items remained virtually unchanged. The ONS research does not take into consideration the period since the VAT rate increased to 20%.

Still on the subject of VAT, employers need to be aware that changes to the VAT regulations concerning salary sacrifice come into force from the 1^st of January next year.

In the past, salary sacrifice schemes have proved popular in part because they brought with them tax advantages, such as reduced PAYE and NIC liabilities and a VAT advantage.

However, as from the start of 2012, employers who recover VAT on benefits and then pass them on to employees under a salary sacrifice arrangement will have to pay VAT on the amount sacrificed.

HMRC says that schemes such as the Cycle to Work scheme will fall under this new arrangement, as will food and catering provided by an employer. Childcare, pensions and private health insurance salary sacrifices will remain unaffected by the new regime.

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Accountants may be interested to know that HMRC is considering changing the PAYE system so that employers who are closely connected can be treated as a single entity for the purposes of PAYE. If such a move were implemented, it would reduce both costs and processing time.

HMRC has now issued a consultation document that discusses how PAYE Pooling might operate and requesting feedback from interested parties. The scheme would be optional and organisations would be able to decide whether they wanted to come under a pool reference of several employers.

The new pool reference would cover all employee tax records, and the Revenue would treat the pool of companies as a single entity for PAYE. Moving to a ‘PAYE pool’ would not have any direct affect on an organisation’s employees. They would still retain the same employer and their employment contracts should remain the same.

HMRC has not published its definition of ‘connected employers’ in the context of PAYE Pooling, but a spokesperson for the Revenue said it expects to be able to apply different criteria for public bodies and private businesses. As far as private entities go, HMRC will be seeking some commonality in ownership and business, whilst for public sector bodies it would be looking for those that were grouped together under a particular health authority or local council.

The Revenue has also made it clear that payroll agents would not be eligible to join the new system.

The PAYE Pooling consultation runs until the 15^th of December.

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Employers might like to seek the services of a contractor accountant to sort out their PAYE paperwork after HMRC said it found a number of mistakes in 2009/10 returns.

Every year, employers are duty-bound to send HMRC details of their employees’ tax and National Insurance contributions. However, as the Revenue has revealed, this data is not always accurate and this can lead to problems for everybody concerned. In addition to costing time and money for both the employer and HMRC, employees might find the incorrect amount of income tax is deducted from their salary.

HMRC says that employee names are often entered incorrectly on year-end returns. For example, 507 individuals apparently have the name “A N Other”, 824 have the surname “Unknown” and a further 75 have the family name “Casual”. Furthermore, incorrect dates of birth meant that 40 employees were still working at the ripe old age of 200!

Jim Harra, the direct of customer operations at the Revenue, explained that most employers do complete their PAYE returns correctly. But it is imperative that they double-check their employees’ personal data in order to prevent problems occurring in the future.

Meanwhile, David Cameron has admitted that businesses have not been taking advantage of the National Insurance Holiday scheme.

When the PM first unveiled the scheme, he expected around 400,000 small firms to apply for the holiday and be exempt from paying NICs on their first ten members of staff. However, only 7,000 firms have enrolled on the scheme so far.

Ed Miliband, the leader of the Labour party, said this was further evidence that the growth policies laid out by the coalition simply weren’t working.

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It’s happening on Saturday and no, I don’t mean Scotland beating England by eight points. Although that would be fun for us Welsh…

No, Saturday is the day the eagerly anticipated Agency Workers Regulations come into force. And for such a significant event – and not just significant in our little world of contracting but in its potential impact on the UK economy and businesses – it all seems remarkably low key. And I find that both surprising and just a shade encouraging.

Of course it could be because everyone understands the new world and have prepared accordingly. Well not us Limited Company contractors of course, since we are out of scope so don’t have to do anything. This didn’t stop one poor soul asking questions about how he could persuade his agency that he was actually in scope. God knows why he thought that might be a good idea. Of course, he may simply be winding us all up – very occasionally that seems to happen on the internet, you know – and for his sake I hope that’s the case.

And, needless to say, there have been questions about does it really, really apply because of the ominous “genuinely in business” caveat the BIS or DBERR or whoever they are decided to add in for the fun of it. To which the answer is who knows, until it goes to court. Which I suspect it won’t, but you never know.

That reminds me of one of the better ideas I heard over the weekend. A group of us were pondering the work of the OTS (remember them? They’re still going you know) and how they could better focus their efforts. OK, so perhaps some of us should get out more, or perhaps drink less, but we found it worthy of discussion. The suggestion was made that the OTS could very usefully start with the various tax laws that have required a court case or two in order to figure out just what the hell the real rules are. Still, I digress…

So clearly the umbrellas and the agencies are well prepared, to the extent that I’ve heard of one agency that was trying to get its contractors to move to the right vehicle – PAYE through an agency, umbrella or limited Company – depending on their rates. Which is slightly deranged in one way but you can see the logic of it. So well done all.

But it does beg an interesting question. Why?

I mean, why is everyone so well prepared? Previous changes of similar magnitude – stopping MSCs, killing off some of the more imaginative offshore schemes, the Arctic Systems case, even IR35 itself – sort of burst upon a world that wasn’t really ready for them. That doesn’t seem to happen any more.

And that’s down to the wonderful Law of Unintended Consequences. In 1999, when the well-known failed tax-evader Ms Primarola introduced IR35, the aim was to punish us uppity freelancers by smacking us in the pocket. After all, given the recently released Freedom of Information answer that showed how pitifully ineffective IR35 has been financially, it clearly wasn’t done for the money. Or very well, come to that. But what it did do was galvanise a bunch of us uppity freelancers to fight back. And now, ten years on, HMG is not only listening to what we say, they are asking us what we think before they do it. Doesn’t mean they have the brains to listen, mind – else why do we have the AWR in its current foggy form – but at least we get the chance to publicise and explain things well ahead of their implementation. Which has to be a good thing.

So hopefully the AWR will do what it’s meant to do and protect the vulnerable and leave those who don’t need that level of care well alone. And we won’t get any more nasty surprises.

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Earlier this year, HMRC began a pilot scheme to check the business records of small businesses.

800 SMEs, in eight areas, were included in the test and the Revenue discovered that 44% had issues with record-keeping. The pilot also discovered that 12% of the businesses it visited kept seriously inadequate book-keeping records.

HMRC has now said that it intends to step up the scheme and complete as many as 12,000 checks before the end of this financial year in April 2012. In the year 2012-13, it will carry out the checks on 20,000 small businesses.

To begin with, only firms that have kept extremely poor records be fined, but over the longer term serious inadequacies could lead to penalties of up to £3,000.

Richard Summersgill, the director of local compliance at HMRC, explained that good record-keeping enables companies to pay the correct amount of tax when it becomes due and SMEs that comply will avoid interest and penalty charges.

The Revenue says the new checks are designed to support businesses and reduce the tax gap but the CIoT is seriously concerned that the programme is to be extended.

Anthony Thomas, the president of the Institute, said it was questionable whether the Revenue has the power to penalise companies before tax returns are sent in. He went on to say that there could be misunderstandings over what constitutes adequate records rather than incomplete ones.

Thomas cited as an example the Powers team at the Revenue saying that a shoebox full of receipts and invoices was adequate in-year but the compliance team saying that unless they were listed, it was a case of inadequate record-keeping.

John Cassidy from PKF said that HMRC should focus its activities on areas that bring in an immediate cash return such as PAYE. The Revenues records show that errors and underpayments of PAYE have increased and yet compliance checks have virtually stopped.

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Smaller firms may be pleased to learn that the government is considering giving them more time to get ready for automatically enrolling their employees in pension schemes.

The Pensions Regulator last week issued guidance for employers that says smaller firms sharing PAYE schemes with other like businesses will see their staging dates deferred by up to 23 months.

The new alterations are expected to be written into legislation prior to the Pensions Bill becoming law and will cover firms with less than 10 employees who are included in a larger PAYE scheme which has in excess of 239 members.

A business fitting the above description would have until the first of January 2016 to implement auto-enrolment.

The Pensions Regulator has also launched some interactive tools to explain the new regulations. As from October next year, employers and recruitment businesses will be required to auto-enrol workers after they have completed 12 weeks service. Employees then have the option of opting out if they do not want to participate in the scheme their employer has chosen. This new duty is to be phased in over several years, starting with larger organisations.

The interactive tools will help businesses establish their staging date, help them understand which employees need to be enrolled and how to enrol them, and what level of contribution is required for each eligible employee.

The REC still has concerns that auto-enrolment will create challenges for recruiters due to high levels of turnover amongst temps and the expectation that a lot of agency workers will opt-out of the pension scheme they have been enrolled in.

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The Chartered Institute of Taxation says there are a significant number of issues that need to be addressed before HMRC can implement the tax agent strategy.

The Revenue recently published proposals that would allow authorised tax agents, including some online accountants, to use a self serve system allowing them greater access to its systems. Under the scheme, advisors that had already enrolled would be able to amend PAYE codings and change addresses themselves.

Whilst the initiative has been welcomed by many in the profession, the CIoT and the ATT have said that there needs to be an independent body overseeing the disenrollment and suspension of advisors. Around 1,500 members of the CIoT contributed their views and they highlighted concerns over data security and the additional burden a self serve system could put on the advisors.

The president of the ATT, Andrew Meeson, said there needs to be further clarification over who will be able to access self-serve. A lot of people feel that unrepresented individuals should have some access. We also need to receive some reassurance about data security within the Revenue’s systems if all agents have access. Professional agents will not want to take part in the system until these issues are resolved, he added.

Anthony Thomas, the CIoT’s president, went further saying tax advisors are not going to be interested in self-serve if it forms part of an unpalatable package which will cause problems later.

The closing date for responses to HMRC’s consultation on the tax agent strategy is September 16th.

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Another judgement has been handed down that looks like it will further clarify the eternally vexed question of when is an employee not an employee. In the case of Autoclenz vs Belcher, it has been conclusively proven that, despite the contractual terms in place, a group of workers were de facto employees since they failed the key tests for non-employment and were in fact providing their services personally.

The real trick in this case is not that the workers were employees per se, but that the actual working conditions of their engagement, the rules under which they worked and the level of freedom they had in how that work was done contradicted the contractual terms in some key areas. Hence, they are employed.

Furthermore they failed to satisfy the judge in the Appeals Tribunal that they were in business on their own account, which, as we have seen, is now the real key test for both the AWR and IR35. And that is important.

This whole issue of “are you in business” is gaining greater importance and is beginning to rank alongside the triumvirate of Substitution, Direction and Mutuality, which, as any fool knows, are how you decide if you are IR35 caught.

Clearly it is not a revelation that these conditions have to exist in fact as well as in the contract; we got that one sorted in the Dragonfly case, which upheld the arguably self-evident case that the contract has to reflect reality and if it doesn’t it will be ignored in favour of a hypothetical one describing that reality.

So from our side – that of the genuine freelance contractor – this has merely clarified what we already knew and doesn’t actually take the IR35 argument a lot further forward. For the clients though, this presents something of a headache, especially when taking on us real contractors. They may have to consider doing something I’ve been on about for a long time now, use B2B contracts that treat me as a supplier of expertise, not as a temporary employee. That, in turn, greatly reinforces my status as being a genuine business. And that puts me neatly outside IR35 and the AWR without any further discussion needed.

Although I’m not holding my breath for that to happen.

Still, this goes back to the original IR35 legislation, which contains a thumping great non sequitur at its very heart. The question it asks is “Would you be an employee if you were an employee and not working through your own company?”. Well yes, I probably would, but that situation doesn’t in fact exist. It also goes on later to talk about how you treat two contracts, one caught and one not-caught. If you have a not-caught contract, then you’re in business, almost by definition. So how can you possibly also have a caught contract? Confusing, isn’t it? Let’s hope the IR35 Forum has the wit and wisdom to get this whole area sorted out for once and all and we can put HMRC back in their box.

Ah yes, HMRC. You may recall my little contretemps from last week, about them losing a CT payment. I got another reminder last Friday, with even more interest added, so I phoned them up, more in anger than hope, it being close to seven o’clock in the evening. And astonishingly I got to speak to someone. What is more, they identified what had gone wrong – their idiot system had seen two payments and assumed that they must belong to different tax years – and was able to sort it out there and then. So well done them. For once.

Except they still owe me some overpaid PAYE and have done for quite a while now. I suppose I could always try phoning them again….

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