This year, for the first time in 13 years, we were saved the interminable and ultimately disingenuous dirge that was the Pre Budget Report. Mr Brown and latterly Mr Darling’s attempts to justify what they were planning to do in the real budget with no real connection to reality is no more, happily.

Instead we were treated to 500 pages of draft legislation that covers much the same ground, albeit without the over-optimistic assessment of the chances of delivering an improvement in our financial position. A lot of it is merely tedious rate setting, but there were some very interesting items in there.

One of them is the revised ruling on various mechanisms aimed at stopping people avoiding tax and/or NICs by what HMRC clearly regard as dubious methods. Mostly these are characterised as offshore EBTs although the legislation is actually very wide ranging. It does not concern itself with just monetary reward, but also things that can be utilised as monetary reward. All very clever.

Of course, every contractor I’ve spoken to about EBTs assures me that they took that route to get around IR35 and it was nothing at all to do with minimising their tax bill. Well that’s OK, you still avoid IR35 and paying the extra 20% come April is a mere inconvenience, isn’t it…

Nevertheless, as far as most contractors are concerned this is the death knell of the EBT. Changes in the taxation of the income they provide has effectively killed them off as a commercial proposition, and means that anyone using one is in no better position than the average umbrella user. HMRC also neatly avoided the trap of making this retrospective this time, delaying any charges until the end of the tax year. So there’s time to make alternative arrangements. But there is a slight gotcha…

They also introduced what they term anti-forestalling regulations. Using a degree of wit we’d all thought they’d had drummed out of them by Brown, HMRC have twigged that if the impact is not effective until next April people might actually try and take evasive action. So they’ve ensured that any such income from December 9th – the day they published the legislative changes – is in scope.

Oops.

The end result is that EBTs are, as of now, dead in the water. Which, as you may have noticed from previous musings on the subject, is something of which I approve.

Sadly, the lesson does not appear to have penetrated the skulls of some in the accountancy trade. Their immediate reaction is to disappear back into Tolley’s with their friendly local QC and look for another way to achieve the same ends. OK, so they’re protecting their business but if they could lift their collective heads from the mantra of “it’s legal to do it so it’s our right to do it” they might conclude they’re fighting a lost cause. HMRC, and indeed HMG, are clearly set on enforcing the rule that if you live here and work here, you pay taxes here. Which is something I actually agree with.

But leaving aside the schadenfreude, HMRC haven’t got it quite right, have they…?

Firstly there is vastly more money leaving the UK in the way of avoided taxation than will ever be recovered from these changes. Until they work out a way to make large corporations subject to the same principle of unavoidably paying UK tax on UK earnings – and I can’t for the life of me see how they can do that – the new rules are largely window dressing, in overall economic terms.

Secondly, and rather more importantly, they seem to have failed to exclude genuine pension payment schemes that EBTs and the like were originally intended to benefit. Which is a bit of a shame on two fronts: either the pensioners are going to see their income significantly reduced or the scheme providers will successfully appeal the change and get it reversed. Which would be a shame, in some ways.

But what it all goes to show is that the more rules you introduce, the harder it is to get the desired result.

Alan Watts can found at LinkedIn.
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There have been recent reports suggesting that the government might scrap the Pre-Budget Report but the UK200Group has warned against this move.

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

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

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

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According to Howard Archer, chief European and UK economist at IHS Global Insight, last week’s Pre-Budget Report was merely a “stopgap” and that further increases in tax and cuts in government spending are likely in 2010. This view is shared by several leading contractor accountants.

It’s no surprise that the size of the UK’s debt is a major concern for the Bank of England, who say that the current AAA credit rating could be at risk. Mr Archer agrees, but has suggested that it’s “probably” safe until next year’s general election.

He further added that “the rating agencies and the markets will be looking for early and decisive action and indications from the new government about exactly how they intend to bring the budget deficit down.”

There are two ways this can be achieved. Either through reducing government spending or raising taxes. The chancellor has already announced a series of tax changes in his Pre-Budget Report, which included a 0.5 per cent rise on National Insurance Contributions from 2011 and the reinstatement of the 17.5 per cent VAT rate from 1st January 2010.

The good news for many limited company contractors is that the planned 1p corporation tax increase for smaller companies has been delayed until 2011/12. It is thought that this is mainly due to government fears that increasing taxes now would suppress the UK’s economic recovery. There is no change to the IR35 Rules or Family Business Tax.

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With the PBR set for 9 December, it will be interesting to see what changes the Chancellor makes to help struggling contractors, operating either via their own limited company or through umbrella companies.

Unfortunately, I don’t see the Chancellor providing any early Christmas presents to us. With the country in debt for approximately £200 billion, it’s inevitable that the Chancellor is going to have to use his speech to tell us that we are all going to have to pay more to bail out the country. The question is, will contractors have to pay a disproportionate amount?

A few predictions:

VAT provides a vast source of revenue for the government and I wouldn’t be surprised if this is increased to 20%. This could provided additional revenue for contractors who have registered under the terms of the Flat Rate VAT scheme – so potentially good news!

Restriction of company losses – If the government restricted losses so that they cannot carried forward and used to reduce future profits, when times improve, all limited companies would be required to pay more tax.

NIC increases – It would seem logical that we will see an increases in NIC. My guess is that the employer rate will remain as is at 12.8%, but an increase to the rate payable by employees earning above the higher rate. At present, NIC is payable by these employees at 1% on the top slice of their income. How high would the Chancellor go – 2.5 or 3%? This will impact more on umbrella contractors, as those running their own business can still use dividends to reduce their overall tax bill (subject to IR35).

So how will it be for contractors? Overall I see the Chancellor taking his pound of flesh equally from employed contractors as well as those running their own businesses. Therefore, the gap between umbrella contractors and limited companies will remain equal. However, the “net” income earned by both groups each will, unfortunately, go down.

Here’s hoping I’m wrong!

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