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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You probably hadn’t noticed but I tend to write quite a lot about the faceless hordes that we affectionately refer to as Hector. Yep, our friend the taxman. Not my favourite person, although, perhaps grudgingly, you have to accept that they are merely doing their job and the real problem is the hopelessly complicated mare’s nest of tax law they are trying to implement. Which is down to a series of inept politicians (isn’t that a tautology?), not least one particularly dim specimen of the breed.

But now it’s getting personal.

I mentioned last week that I’m being chased for a CT bill that was paid, in full and on time. I just checked my online account again and it’s gone up, since they are adding interest to a debt I don’t actually owe. Nor have they responded to my accountant’s attempt’s to find out what’s happening. And the really worrying part is that aspect enquiries are usually triggered by non-payments and poor returns, so not only do they owe me money but I am waiting or another letter where they will offer to look over my records and make sure all is in order.

And then to add insult to injury, I managed to overpay my PAYE last year. Not by any great amount, and I’m still not sure how we managed it – most likely a side effect of restarting a payroll after a 14 month break, not that I really care that much – but the accountant wrote to them to tell them somewhere around last September.

Nothing happened. Gosh…

But today I get a letter from Hector (to be précis, a D. Wrightson) Form P35D, Overpayment Review. Page one is the exact same calculation my accountant sent them last year. Bottom right hand corner is the box “Apparent Overpayment”.

“Apparent”? Are your accounting systems that pitiful that you don’t actually know? Does my accountant telling you the precise amount not indicate that just perhaps it actually is a real honest-to-God overpayment?

Anyway, I have to fill out page 2 of the form. A list of things I may have got wrong. (Hint: none of them). A tick list of which one is actually incorrect. ( Guess what?) And then the last option, “I confirm the return is correct. My explanation is as follows”. Say what? You owe me money, and I have to explain to you why I overpaid you else you won’t give it me back?

And the last sentence is a lulu. Basically “Once I have received your reply, I will make any necessary adjustments and if necessary arrange for any payments to be offset… “

Hey, it is bloody necessary, it’s my money and I don’t want to offset it against anything, I want it back in my bank account where it belongs.

Let’s be clear about this: HMRC is not a service, even at the pitiful level they manage to achieve, it’s a tax collection agency. The only money that is theirs is the amount they are owed. Everything else in excess needs to be paid back, quickly, since it’s not yours and I would rather I got the interest than you. Oh yes, just to add insult to injury, there is no hint of interest being added. Hell no, they only charge that on money they aren’t owed, not on money they do.

Earlier this week a Parliamentary committee had some critical things to say about HMRC’s performance, or rather lack of it. Nice to know they’re keeping up with reality, isn’t it…

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Sage published research findings last week showing that 76% of SMEs have no knowledge of the proposed alterations to PAYE Real Time Information.

Since PAYE was introduced in 1944, very few changes have been made to the system. Under Real Time Information, employers and online accountants will need to give HMRC information for National Insurance, PAYE and Student Loans each time they run a payroll, rather than at the Payroll Year End. If companies understand the way this will impact their operations, they will be able to minimise the impact by preparing in advance.

There are various different payroll providers in the UK and they offer different products and levels of support. It is not mandatory for providers to include the new changes within their software so the onus is on business owners to ensure they have the correct procedures in place.

Neilson Watts, from Sage’s Small Business Division, has advised small business owners to contact their payroll provider if they are unsure how the changes will affect them.

A lot of people have expressed concern as to whether HMRC is ready to implement such a large change after the disastrous logjam last year when the department migrated PAYE records to a new system. However, the National Audit Office says the Revenue has made significant progress towards improving its administration of PAYE.

HMRC still has a lot of work to do if it is to complete stabilisation by 2013 but this work is key to the introduction of RTI. Once RTI is in place, there will be an increase in the number of in-year amendments to PAYE records and this could lead to further data quality challenges.

The report also said that HMRC must define its PAYE operating model, explain how it will transform it to fit the RTO environment and test its implementation plans.

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The government is proceeding with its plan to merge income tax and national insurance by first inviting businesses to provide evidence of the problems they encounter administering two separate taxes.

Employers and payroll professionals will have until the 19th of September to answer 14 questions primarily focusing on the burden of the PAYE system.

One of the questions on this evidence-seeking consultation asks respondents to rank the amount of time spent carrying out income tax and national insurance processes on a scale of one to five. Others ask about calculation errors, usage of payroll processing software and the introduction of Real Time Information.

David Gauke, the exchequer secretary, said the coalition has committed to making the taxation system in the UK the most competitive in the G20 countries for business, as well as simpler for individual taxpayers to understand.

Integrating income tax and national insurance will be a radical reform, but the government believes it will bring about real improvements, he added.

Anthony Thomas, the president of the CIoT, has welcomed the government’s decision to gather evidence from interested parties. He pointed out that a recent OTS report showed that both employers and HMRC can make significant administrative savings by harmonising the way NI and income tax are run.

The responses to this process will give the government an idea of how it should proceed with the formal consultation which is planned for the autumn.

The Treasury has also made it clear that NICs will not be levied on pensions, people above pension age, dividends or savings.

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A recent survey by Inuit shows that 69% of small businesses are put off recruiting new staff because of the burden of PAYE.

The software provider discovered that nearly 50% of employers did not realise that their end of year returns had to be filed by the 19th of May and 28% said they did not expect to meet the deadline.

Mark Linton, the founder of The Business Growth Show, said one of the major challenges facing small business owners is not the actual process of recruiting new staff, but what to do once they’re onboard.

PAYE for small businesses is a nightmare. “How do I pay staff?”, “Is government legislation getting in the way?” And “am I doing it right?” are all questions that worry small business owners, he explained.

In previous years, there was a seven-day grace period for people who missed the deadline but now that year-end returns have to be filed online, this has been removed. Employers who did not submit on time face a penalty charge of £100 per 50 employees for every month, or part month, that the return is overdue.

SMEs are also worried about the compliance checks HMRC is about to implement. Penalties of up to £3,000 could be imposed on businesses that have not kept accurate employee records.

Meanwhile, another survey, this time from the Clydesdale and Yorkshire banking group, has found that 10% of small business owners have been late making VAT payments and 19% have missed out on grants or tax breaks.

Whilst 15% of small business owners are bamboozled by new regulations, 16% said they did not know who to turn to for advice on business legislation. Gary Lumby from the banks said it was a matter of concern that SMEs did not know how to get help and the banks hope to remedy that situation for their clients.

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Contractor accountants urgently need to remind their small business clients that the deadline for filing annual employer returns is this coming Thursday, the 19th of May.

HMRC has already published a reminder to let employers know that the returns must be submitted no later than May 19th and firms that fail to comply will be subject to a penalty.

Last year, an extra-statutory concession gave some businesses additional time to file, but the Revenue reminds firms that this has now been removed.

This year, employers who file paper annual returns will face a penalty if their return arrives later than May 19th. In 2010, employers with less than six employees were not fined, but this transitional arrangement has now ended, an HMRC spokesperson said.

Smaller employers, their accountants or bureaux, can use the Revenue’s ‘Online Return and Forms – PAYE’ product to file their data securely online. Employers who have less than ten employees can file their return online using HMRC’s basic PAYE tools.

In related news, HMRC admits that some companies will not receive their new PAYE payment booklet before the deadline for the first payment due this month. The Revenue has advised affected firms to make their payment using the online facilities and make sure it is cleared to HMRC’s account by May 20th.

HMRC also advises employers to apply for a replacement booklet if they are still waiting for one to arrive on Friday 27th May.

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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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Now the dust has settled on the OTS report, it’s been fascinating to see the various reactions to it. Most interestingly, nobody seems to have focused on the biggest potential recommendation, that IR35 be suspended with immediate effect. Which is a shame, really.

Most of the discussion obviously centres on the main recommendation, that PAYE and NICs get merged into a single tax. As I said last week, this is a far from trivial exercise, although the ultimate benefits in terms of simplicity and consistency would be enormous. Even if Mr Osborne does take this on, as many commentators seem to think he will, it will be years before it is achieved. More importantly, if the focus stays on the anomalies that are bound to arise during the transition, such as pensioners who don’t pay NICs in the first place, rather than on the real benefits then it will go nowhere. So let’s hope that just for once the commentators and pressure groups keep their eye on the real prize and, just for once, look at the long term picture.

So assuming Osborne does bite the bullet and make a bid for being a seriously reforming Chancellor (as opposed to one who simply wants to cut everything, which is how the opposition want to portray him and which really is a load of Balls), then what is the next OTS recommendation?

That’s right – stop IR35. Whoo hoo…

Needless to say, even doing that is not that simple. What happens to the cases currently being investigated? Are they simply stopped, leaving the worker hanging without a decision in case it is later reinstated, as may happen? Are they abandoned altogether, which seems a little unlikely? Or will they be allowed to continue to a conclusion, which is my guess since legal processes are fairly much unstoppable once invoked. About the only certainty is that nobody else would have a simple PAYE audit mutate into a five year, £50,000 court case.

Take out IR35 and would we then see a rush of incorporations as all those who say they use umbrellas because they can’t be bothered with the administrative overhead of their own company suddenly realise it isn’t actually that much of a problem and the extra income would really come in handy. That wouldn’t do the umbrella companies a lot of good either, especially with the Agency Workers Directive kicking off later this year.

In fact the only people to remain comparatively unaffected by it all are those like me who have their own companies, understand the rules who are trying to work as a business and always have done.

The “In Business” tests didn’t get a lot of attention, possibly because the OTS doesn’t really see adding an extra layer of administration as a simplification, even if it would greatly limit the number of cases HMRC would have to worry about.

And the third option, that HMRC’s administration of IR35 be greatly improved, was described by PCG as “risible”. Not because the idea of HMRC doing anything even vaguely resembling effective administration is seen as something of a forlorn hope (which it is, of course), but until HMRC are subject to a formal duty of care and subject to a full cost benefit analysis of the cases they bring, there is nothing to stop them pressing cases that they have little or no hope of winning, just because they can. They demand we do everything 100% correctly and attack us for the merest slip, but are totally exempt from any such constraint themselves.

We have to wait until the Budget to see what is going to happen of course, but PCG are to be congratulated for driving us to the position we now find ourselves in, that not only HMG are recognising that IR35 is an abomination in the eyes of the Lord, but that they may actually do something about it.

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