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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Image: Getting insight by Miran Rijavec

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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Image: Challenge #4 Open Mouth by Pawns

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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Image: Hide and Seek by F. C. Photography

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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Image: I Can’t See You… by tropical.pete

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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Image: ST027: Figure 12.1 by Rosenfeld Media

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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HMRC is rubbing its hands together in glee after increasing the amount it collects from its compliance work.

In the last 12 months, HMRC’s income from investigations into tax avoidance and tax evasion rose to £16.5 billion. That’s a 37% increase on the last financial year.

Accountancy firm UHY Hacker Young said the increase was a result of the taxman adopting a more aggressive approach. Enquiries into corporation tax provided the Revenue with £4.6 billion, whilst VAT inspectors brought in £6.2 billion – up 92% on the previous year.

According to UHY Hacker Young, the government believes that if it keeps on investing in tax inspectors, the extra money will continue to flood in. In reality, a lot of businesses settle up because they feel intimidated by HMRC.

Roy Maugham said the Revenue’s aggressive stance is going some way towards helping reduce the budget deficit. However, the downside of this is that the Exchequer will find it harder to work out the total cost of compliance and the UK will become a less attractive place to do business.

A lot of UK companies have already moved their headquarters overseas to countries like Ireland, Malta and Switzerland, he continued. They have done this to escape the high business taxes in the UK and HMRC’s aggressive attitude to tax collection.

The Treasury could lose out in the long run as the lost revenues from companies relocating overseas outweigh the revenue brought in from increased compliance activity, Maugham concluded.

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The tax gap shrunk slightly to £35 billion over the last 12 months, according to the latest data from HMRC.

In the financial year 2009-10, the amount of tax that remained uncollected due to tax avoidance and evasion was 7.9%, down 0.2 percentage points on the previous year. Whilst this might sound like a lot, it is actually lower than a lot of countries who publish tax gap data.

David Gauke, the exchequer secretary to the Treasury, said that HMRC continues to show good progress in closing the tax gap, but we must not become complacent. Over the last few weeks offshore tax evaders have been challenged, tax avoidance loopholes closed and a new unit set up to make sure the UK’s richest individuals pay the tax they owe.

However, some tax experts say it is difficult to get a realistic assessment of the size of the problem because HMRC uses tax figures that are four years old in its calculations.

Heather Self, from McGrigors, said that calculating a tax gap for VAT was simple, but when it comes to direct taxes like corporation tax and income tax, it’s a different story.

She went on to say that the Revenue must make sure it does not trample on innocent taxpayers. Over the last few years, HMRC has made some errors and become more heavy-handed and she is concerned that the added pressure to reduce the tax gap may see it adopting a blunderbuss approach.

HMRC loses £6 million a year due to simple errors and carelessness on the part of taxpayers, according to the CIoT. This news led the Institute to recommend all small businesses seek professional help when it comes to bookkeeping.

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HMRC recently announced that five plumbers have been arrested as part of its crackdown on unpaid tax. In addition to the arrests that took place during raids in Hampshire, London, Middlesex, Surrey and West Bromwich, a further 500 investigations are ongoing.

Earlier this year, the Revenue sent letters to 50,000 people working in the plumbing sector warning them they would face large fines if they did not settle their tax liabilities. HMRC thought that some plumbers were moonlighting and receiving cash in hand without declaring tax. Anyone who owned up before the May deadline was fined up to 20% of the tax they owed.

HMRC then raided those who did not come forward initially to make sure they pay their outstanding tax. It is thought that some individuals owe as much as £150,000.

John Pointing from the Revenue said these arrests were the culmination of many months work and warned that more raids will take place in counties across the country including Cambridgeshire, Kent, the Midlands, Tyne & Wear, Yorkshire and South Wales.

Previously the CIoT had said that the Plumbers Safe Tax Plan campaign was not publicised enough and some plumbers were unaware of its existence. However, HMRC has now stepped up the pressure.

Gary Ashford from the Institute said the Revenue as only had limited success with its medical and plumbers’ voluntary disclosure opportunities, so now they are adopting a tougher stance with those who did not come forward. HMRC holds a lot of information and it is now starting to use it.

The government claims that it loses £45 billion every year through undisclosed taxation in the UK and HMRC has now been given £917 billion to tackle tax avoidance and tax evasion.

Plumbers who did come forward and make a disclosure have until the end of this month to pay up in full or make arrangements to pay their outstanding tax liabilities.

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Image: Bernd – The Plumber – is getting ready by insane gal

Contractor accountants may want to encourage their clients to register for VAT if they are eligible to pay it and have not already done so.

HMRC recently launched a new campaign to persuade firms that trade above the £73,000 turnover threshold to get their house in order. Businesses that take up the offer will receive softer late payment penalties, whilst those that do not will face substantial penalties and possible criminal prosecution.

The Revenue is to send out at least 40,000 letters to companies telling them how they can register and settle up outstanding liabilities. Firms have until the end of September to make a full disclosure and the majority of them will receive the low penalty rate of 10% on their overdue VAT payment. Furthermore, they will be given the opportunity to disclose other tax arrears in return for a lower than normal penalty.

Once this amnesty had ended, HMRC will begin investigating any firms that have not made a voluntary disclosure. The Revenue has received £500 million already from voluntary disclosures made during three similar campaigns.

HMRC’s Mike Wells, has urged people to come forward and take advantage of the best possible terms. The outstanding VAT, plus any penalties, needs to be paid no later than December 31st.

HMRC has also warned taxpayers that they will not get away with defrauding the tax system. The department’s assistant director of criminal investigation, Martin Brown, said HMRC is cracking down on fraud and has received additional money from the government to help fight tax avoidance and tax evasion.

He made his comments after a “self-styled Lord”, Gregory Roberts, admitted attempting to defraud the Revenue of £3.5 million from falsified documents.

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Image: 150/365: What up Dog? by Mr.Thomas

New research has estimated that 7% of SMEs deliberately evade tax and more than one in three small enterprises would willingly understate profits if they believed they would not get caught.

HMRC is about to launch a new assault on small businesses it believes are evading taxes. The Revenue believes that small enterprises are responsible for the around 50% of the annual tax gap – the difference between what it collects and what it thinks it should collect.

HMRC’s research shows that around 35% of the 4.8 million small businesses in the UK are “attitudinally non-compliant”. These firms are likely to take a casual attitude towards record keeping and believe that tax evasion was acceptable. The study also discovered that out of every five firms that are tempted to break the rules, one would actually do so.

However, small businesses could well be concerned if HMRC inspectors are working on the assumption that a large number of taxpayers want to cheat.

The Revenue on the other hand says its compliance policy aims to encourage taxpayers to get it right. The director-general of business tax, Melanie Dawes, pointed out that 93% of SMEs are not evading tax and the department wants to support honest firms by reducing administrative burdens.

The most common forms of evasion amongst SMEs include failure to record some transactions in the books and not deducting NICs and tax from employees’ pay.

Inspectors are due to start visiting small companies in the second half of this year to check their records. Fines will be levied on firms with significant record-keeping failures.

HMRC is also going to crack down on companies that should be VAT registered, but aren’t. The current threshold for VAT registration is £71,000.

The government earmarked £900 million to help HMRC crack down on tax avoidance and evasion and more than half of this money is being targeted at the small business sector.

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Dave Hartnett, HMRC’s permanent secretary for tax, recently confirmed that the taxman’s approach of targeting specific professions has raked in vast amounts of previously unpaid tax.

He said the Revenue has had great success by targeting people, including the clients of some online accountants, with offshore bank accounts and targeting sectors, like the medical profession, has been very fruitful.

The latest tax amnesty has been aimed at the plumbing sector. HMRC offered lower penalty rates to those willing to declare unpaid tax. The Revenue has also set up task forces to investigate London’s restaurant trade and these will soon be rolled out across the entire UK.

Contractor accountants with clients in the restaurant trade may want to encourage restaurant managers to get up to date with their record keeping. HMRC will expect to see till rolls, cheque stubs and records of sales and takings. The taxman is also likely to take an in-depth look into gratuities received by waiting staff. Tips are often undeclared but as the Revenue toughens its stance on cash payments, waiters could find themselves in the spotlight.

£917 million has been ring fenced to tackle tax avoidance, tax evasion and fraud this year and the Revenue hopes to claw back £7 billion every year within 4 years.

HMRC is also planning to launch an initiative to catch individuals and businesses who have not registered for VAT.

The scheme is due to start in the summer and the Revenue is already having discussions with interested parties. Mike Wells, the director of risk and intelligence at HMRC, said the department wants to gain as much insight as it can into the opinions of people and organisations so it can implement these into the campaigns it designs for its customers.

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Image: tell me, where is the love? by Tony the Misfit