Accountants may be interested to learn that one senior tax expert believes the Chancellor missed a golden opportunity to introduce a new tax band for people on middle incomes when he delivered his recent Budget.

According to Stephen Herring from BDO, the tax changes announced by George Osborne were unimaginative. The government is increasing the personal tax allowance by more than £1,000 next year, and to pay for it, it is lowering the threshold for the 40p tax band from £42,475 to £41,450.

Herring believes that the government continues to ignore the middle income group and should have introduced a 25% or 30% tax band in order to restore some measure of fairness to the tax system. He went on to say that the coalition needs to be more imaginative in future budgets if we are to have a fair income tax system across the entire income spectrum.

The Institute of Fiscal Studies recently estimated that the Chancellor’s decision to lower the 40% threshold will mean at least one million additional taxpayers will be caught in the higher income tax band.

Some people will be quick to argue that adding another tax band would add further complexity to a system that is supposed to be being simplified. Balancing the books, whether in government or business, is never an easy thing to do and the introduction of a 25%/30% band could well lead to more tax avoidance as people think up ways to avoid it being caught in it!

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Accountants may be interested to learn that the Government recently closed down another aggressive income tax avoidance scheme.

The scheme was being used by wealthy individuals to reduce the amount of tax they pay at the end of the year. It involved creating false transactions in order to generate tax relief from an artificial agricultural business. The land and property business owning it do exist, but the transactions do not. They are created solely to offset a loss against income, thus reducing the size of the individual’s tax liability.

New legislation was introduced into the Finance Bill on March 13th to close this scheme and this legislation came into immediate effect.

This is the third aggressive tax avoidance scheme that HMRC has unearthed recently and the Government realises that more similar schemes will probably emerge. Therefore it has introduced legislation to stop the artificial use of post cessation property relief.

The Exchequer Secretary to the Treasury, David Gauke, said the UK’s chief priority is to reduce the economic deficit and it is unacceptable for people to attempt to avoid paying their fair share of taxes. The Government has acted swiftly to close down this scheme and won’t hesitate to do the same as soon as it becomes aware of other tax avoidance schemes.

This latest move will not affect agricultural businesses that are trading legitimately and need to offset a loss from agricultural expenses against their general income.

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An economic think tank has claimed that an additional 1.3 million people, including contractor accountants, are going to be forced into the higher tax band thanks to the changes made in the Chancellor’s Budget last week.

As from April 2013, the threshold at which people pay tax at 40% will decrease to £41,450. Currently people can earn up to £42,475 before the 40% rate kicks in. According to the Institute for fiscal Studies, this will mean five million people in the UK will be paying the higher-rate tax by 2014. Next year, 15% of workers will be affected by the higher rate; in the 1980s it was just 5%.

The Institute also questioned the Chancellor’s claim that the Treasury will only lose £100 million when the 50p tax rate is axed in April 2013. Mr Osborne said in his Budget speech that this loss would be more than compensated for by measures such as increasing the stamp duty on properties costing £2 million or more.

The IFS has described this year’s Budget as a “hotch-potch of reforms”. Osborne said his reforms were revenue neutral but that assumes the rich who avoided paying income tax at 50p will be prepared to pay it at the lower 45p rate.

Paul Johnson, a director at the IFS, said people who got a taste for tax avoidance may carry on avoiding once the rate decreases. He also criticised the Chancellor’s decision to raise stamp duty on high value properties and said a mansion tax could have been a better alternative.

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It’s all over bar the shouting, and no doubt there’ll be a fair bit of that over the coming weeks. I’m talking about the Budget of course.

What will it mean for contractor accountants? Were there any hidden surprises? George Osborne claimed that this was a Budget that rewards work. He promised a simpler tax system and said the government was pushing ahead with plans to integrate income tax and National Insurance. More details of this integration will be published next month.

He also called tax evasion and tax avoidance morally repugnant and said legislation for a GAAR would be laid out in next year’s Finance Bill.

One of the biggest cheers came when he announced that personal income tax allowances would go up to £9,205 from April 2013. This measure will mean many low paid people will pay no income tax at all.

In the days running up to the Budget there had been rumours that the Chancellor would scrap the 50p income tax rate. It has been harming the British economy and he explained that HMRC had assessed the effect of the top rate and it had brought in a mere £1 billion, a third of what had been expected. Therefore as from April 2013, the top rate of 50p will go and be replaced by a rate of 45p.

Mr Osborne also said the government would consult on taxing small businesses with a turnover of less than £77,000 on a cash accounting basis. This is the course of action recommended by the Office of Tax Simplification and would make it much easier for small firms to fill in their tax returns.

The Chancellor had intended to reduce corporation tax by 1 percentage point to 25% as from April, but instead he has doubled that decrease. As from April this year, corporation tax will be reduced to 24%. Again this should help businesses and encourage foreign companies to move here.

At first glance, his measures seem reasonable. But what will the experts think?

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Contractor accountants were no doubt interested to learn that some members of the profession have been showering free advice on the opposition.

Nine labour MPs have had free assistance, valued at more than £270,000 from PricewaterhouseCoopers. The accountancy giant helps its clients take advantage of tax avoidance schemes and some people may wonder how much tax Ed Balls, Caroline Flint, Jim Murphy, and the other beneficiaries of this free help, have been able to save since the last General Election.

One labour MP recently warned that the opposition was treading on dangerous ground and suggested that PwC might receive preferential treatment if it bid for government contracts when Labour gets back into power.

PwC has won contracts in both local and central government in the last few years. It also acts as an advisor to Barclays, the bank recently ordered to pay £500 million to the Revenue after it emerged it was engaging in aggressive tax planning activities.

It’s not necessarily unusual for MPs to receive assistance from accountancy firms; senior Tories such as Philip Hammond, Oliver Letwin and Francis Maude received help from PwC while the party was in opposition. However, PwC staff are now being seconded to frontbenchers on a much larger scale.

John Mann, a member of the Labour party who sits on the Treasury select committee claimed there was a PwC caucus within the current parliament. He suggested that if the firm were good citizens, all MPs would receive free assistance, but they only appear to help potential ministers who could in the future have the power to award lucrative contracts. He went on to urge Labour to examine the relationships.

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HMRC recently arrested around 16 people, including some City bankers, suspected of participating in a tax evasion.

The fraud exploited a loophole in film finance schemes but the Revenue declined to divulge the details behind it.

Among those arrested were four employees from the investment banking arm of the Royal Bank of Scotland and staff from Marex Spectron, a commodities broker, and US bank Jefferies. However, the arrests were in connection with the activities of the individuals and do not reflect on their employers.

John Cassidy, a PKF tax investigations partner, said they thought the arrested men might have been over-inflating the film finance relief. For HMRC to take the trouble to raid the men’s homes and order the arrests suggests that this was a deliberate fraud. Normally the Revenue carries out very few raids as they both time consuming and labour intensive exercises. It normally finds better ways of dealing with loopholes.

HMRC has been cracking down on high earners recently to make sure they pay their fair share of taxes to reduce the fiscal deficit.

Last November, a first tier tribunal decided that two film partnerships had not been set up as commercial operations and therefore they were not allowed to claim sideways loss relief. This suggested that a popular tax avoidance strategy was being closed down.

Sir Alex Ferguson, the manager of Manchester United, is one of several high profile figures who have used film partnerships as a means of offsetting tax losses.

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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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Contractors and freelancers may be interested to learn that HMRC intends to introduce stricter procedures for dealing with investigations into civil fraud at the end of this month.

The coalition is committed to tackling tax avoidance, evasion and fraud and on the 31^st January it will launch a new Contractual Disclosure Facility.

Under the CDF, the Revenue will write to taxpayers suspected on committing a serious tax fraud, and inform them that they have 60 days in which to enter into a contract and disclose the fraud. If the taxpayer accepts the offer, they will be immune from a criminal investigation and possible criminal prosecution. Instead, any investigation will be conducted using civil powers, and a civil settlement will be agreed for the repayment of tax, interest and penalty charges.

However, taxpayers who ignore HMRC’s CDF offer will be subject to a full Revenue investigation and this could lead to a criminal prosecution. Furthermore, if a taxpayer signs the CDF but then reneges on the promise to disclose the fraud, he or she will also face the risk of a criminal investigation.

Taxpayers who are not the subject of an investigation, but want to come forward voluntarily and admit to a tax fraud can ask HMRC to consider whether they are suitable for a CDF arrangement. In those circumstances, the Revenue will still retain the right to decide whether the case is dealt with civilly or becomes the subject of a criminal investigation.

David Gauke, the exchequer secretary to the Treasury, said the CDF will be a valuable tool in HMRC’s fight against tax fraud. Taxpayers will know exactly what is expected of them and what will happen to those who choose to hide behind their crimes.

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Accountants for contractors might be interested to learn more about the recently published accounts of former PM Tony Blair.

Once he left his job as Prime Minister in June 2007, Blair adopted an opaque business structure, channelling millions through a complex network of companies. The net result of this tangled web was that it looks like he paid only a fraction of the tax he should have done.

Tony Blair managed the majority of his business affairs through Windrush Venture, a management services company. Last year the company posted income of £12 million and expenses of £10.9 million. Blair paid corporation tax on the £1.1 million profit at the rate of 28%.

However, questions have been raised about the sheer size of the administrative expenses. After paying for salaries, rent and office equipment and furniture, almost £8 million remains unexplained.

Blair set up his corporate structure as a limited partnership and he is keeping this as a tightly guarded secret. Nobody knows how much money is contained in the LP. But why is he operating a totally secretive organisation?

Tony Blair has exploited legal loopholes to ensure the limited partnership does not need to file public accounts. The Windrush accounts, on the other hand, are prepared according to accounting and regulatory guidelines, and audited by KPMG.

Conservative MPs recently supported calls for a new tax avoidance rule, and Ed Milliband, the Labour leader, is calling for responsible capitalism. Under his current accounting regime, it doesn’t look like Mr Blair would fit into the category of responsible capitalist!

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Accountants for contractors might like to know that both PM David Cameron and his deputy Nick Clegg have indicated that a general anti-avoidance rule will probably be included in this year’s budget.

Nick Clegg, the Deputy Prime Minister, said in a recent BBC interview that the government has received a report from Graham Aaronson QC pointing out that a GAAR is feasible. He also attacked the rich elite who spend a fortune employing an army of accountants to help them avoid paying tax.

Clegg was also quick to point out that normal taxpayers, who are struggling to make ends meet, are becoming increasingly angry and frustrated with large companies that avoid paying their fair share of tax. A GAAR would lead to a simpler, more transparent tax system that is not open to abuse.

David Cameron recently explained that HMRC collects taxes in a fair, business-friendly manner. However, the government needs to take a tougher approach with companies that practice tax avoidance with the help of fancy corporate lawyers. Lawyers and tax accountants know that the current legal and taxation systems are complex and they try to capitalise on this to lower their client’s tax bills.

The government is pushing on with its plan to reduce the rate of corporation tax that businesses need to pay. But the fact remains that they have to pay rather than avoid the tax, Cameron added.

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Don’t know about you but I usually have that optimistic hope at this time of the year that things are going to get better. Possibly fuelled by an excess of several Christmas spirits, but mainly on the basis that they couldn’t get much worse. But even I might struggle to feel optimistic about 2012, even if Mother Nature keeps out of it and doesn’t produce any more tsunamis and earthquakes. The economy isn’t what you would call robust; although ours is looking healthier than many thought it would, it’s still not that good and badly threatened by our continental friends and their strange ideas on fiscal unity.

But there are always glimmers of hope from which to take comfort.

The fragrant Ms Primarolo is standing down at the first opportunity. St Vince of Cable sounds like he’s been put back in his box. Hartnett is retiring. Moribund and Balls seem to be losing everyone’s respect, even their own supporters’. And the Deputy PM has come out against tax avoidance.

Actually that last one is quite amusing if you think about it. It’s come about because HMRC have been caught out rather badly; cutting deals with companies with no obvious justification and thereby not collecting some £25bn in taxes owed. You may recall me writing about Goldman Sachs and their interesting approach to penalties, a position supported against all reason by a certain Mr Hartnett. Or even my much earlier railing against the shopkeeper Mr Green, paying a personal dividend some £500 million in excess of his net profits and, just to rub salt into the wound, paying no tax at all since it wasn’t actually his dividend, it was the Monegasque Mrs Green’s.

So eventually the slumbering giant awoke and took notice. Which is nice…

However you have to say that, as usual, said slumbering giant has once again failed to understand one of the basic drivers of commerce: if there is a small pinhole by which you can save even a little money, someone will engineer a coach and horses to drive through it.

Nevertheless, Corporal Clegg has started making serious noises about attacking unacceptable avoidance. He wants to see a general anti-avoidance rule to prevent corporations employing armies of lawyers to find ways to avoid paying taxes.

So near and yet so far.

The problem is not people avoiding taxes. The problem is that there are so many complications and exemptions and offsets in tax law that finding loopholes is actually quite simple. The problem is that most of HMRC don’t actually understand the laws they are trying to enforce and when they do, their own management decides not to bother enforcing them. The problem is that any such rule will have to be so loosely framed that it will more than likely impact a whole raft of people that it was never meant to; people who don’t have armies of lawyers on tap and who therefore will end up paying taxes they probably don’t owe while the real culprits take no notice.

When will it dawn on our political masters that more and more rules are not the answer? We need fewer rules, with clearer definitions of how they apply. We need an enforcement body that knows what it’s doing and how to do it. And we need politicians who understand that avoidance is legal and if you want to stop it you make it illegal so it can be correctly described as evasion. The problem is a lack of clarity of purpose. The problem with a general anti-avoidance rule was in fact neatly summarised by Macbeth, “It is a tale told by an idiot, full of sound and fury, signifying nothing.”

Anyway, have a Happy New Year. Fingers crossed…

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Contractor accountants may be interested to learn that HMRC has extended the Liechtenstein Agreement in a further attempt to crackdown on tax evasion. The deadline for both businesses and individuals to come clean under the Liechtenstein Disclose Facility is now the 31^st March 2012.

The head of the negotiating team at HMRC, Andy Cole, said the ground-breaking agreement would ensure that British taxpayers declare domestic tax obligations on investments held in Liechtenstein.

He went on to explain that the Principality and the Revenue are committed to making sure that taxpayers with undeclared assets fulfil the requirements of HMRC as well as the Liechtenstein financial centres. Furthermore, the LDF ensures that UK taxpayers can disclose previously undeclared tax liabilities and be included in the British tax system.

In related news, HMRC has warned companies and individuals that they will be tracked down if the Revenue suspects they have been indulging in tax avoidance.

Recently, a family of five received jail sentences after an HMRC investigation uncovered a money laundering and tax fraud worth several million pounds.

HMRC’s assistant director of criminal investigation, Simon De Kayne, said the William family funded its luxury lifestyle at the expense of the British taxpayer.

The Revenue will continue to chase anyone suspected of being involved in this sort of criminal behaviour and they will find themselves in court. HMRC is now working to reclaim the monies fraudulently acquired by the family, he added.

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