Tag Archive | "umbrella companies"

IR35 – a fudge of the highest order


It is interesting to note that before an MP takes his or her seat in the House they are required, by a law dating back to 1562, to swear or affirm an oath of allegiance to the Crown. Perhaps surprisingly they do not make any promises to behave but rely on a long tradition of honest and open behaviour instead. Which is perhaps a good thing; MPS are, after all, honourable people…

Our friends in the PCG have been asking questions of HMG again, digging even further into the financial history of IR35. And they now have a breakdown of the cases and income arising for the whole life of the law to date. And it makes for fascinating reading (OK, fascinating if you’re a detail freak like me, I admit).

Nevertheless, the total number of cases to date is 4208. The total income from IR35 is precisely £12,126,572.00. And that means that the average tax gained per case is £2,881.79p. Be still my beating heart, Gordon must be so proud.

This, you may recall, from a tax measure that was intended to bring in around £900m. A year. Every year. So not exactly a resounding success then. And we don’t yet know the cost of collecting that twelve million, but with the average case costing the defending side about ten thousand, we could make a worst case stab at around five thousand for HMRC’s side. This means, even if vaguely accurate, they spent twenty one million to gain that twelve million. Hmm… Not looking good, is it?

The distribution of the cases over the years is also interesting. Sixteen cases the first year, a couple of hundred the next. It peaks in 2004 and then drops away remarkably quickly so that in the last two years there have been just thirty five. That distribution coincides rather neatly with the time that PCG got its act together and started to get the message out that IR35 is largely a voluntary tax, if you know what you’re doing.

Ah yes, “voluntary”. What we don’t know is how many people are paying up under IR35 or working through umbrellas to avoid it, which amounts to the same thing. There must be quite a few, there are lots of people using umbrellas. So we have an unknown amount of taxes being paid for no reason at all other than fear, or at least uncertainty, over how a law of the land actually works.

So what was my first paragraph all about, I hear you ask.

We’ve been asking for the numbers for a long time. Since around 2003, in fact, when we first started to think things weren’t going well for HMRC. And answer came there none. Well, not strictly true, that well known failed tax evader, Ms Primarolo, replied to a written question in 2004 (when there were exactly 771 cases and precisely £1,973,851 in IR35 taxes paid) that it was not possible with any accuracy to isolate data relating solely to this legislation. Furthermore, a year or so later, Kitty Ussher said in response to the same question, “Disclosure of HM Revenue and Customs’ compliance data relating to the legislation would result in a risk of non- compliance with the legislation. Accordingly I am not able to provide the data requested”. Don’t know about you but I see that as a fudge of the highest order.

But, as we have seen, the numbers have been there all along. Perhaps the honourable ladies were so embarrassed by the total disaster they were defending that they chose to evade the question. Dim Prawn is still in Government, and is reduced to only being able to threaten MPs as a Deputy Whip. Ms Ussher was forced to resign over being caught evading – sorry, didn’t mean that, I meant avoiding – paying quite a lot of taxes on the sale of her house.

As I said, honourable members both.

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: IR35 Tax Yield by some dude who wants to be famous

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Modern Britain in a nutshell


I’ve been having a funny old week at work. For once I’ve got up to date on my deliverables and am waiting on assorted worthies to review and respond to the results. Meanwhile the technical team next door are working all hours God sent to keep up, while my in tray is almost empty. Well, it makes for a quiet, if rather boring life.

So I find myself taking a look around the world of contracting to fill in the time. And it seems there are some odd things going on out there in Reality.

My old mucker St Vince of Cable is at it again. So busy earning money he failed to notice he was over the VAT threshold. Luckily his accountants did notice – months late, but hey – and he sorted it out, paid the tax and the (very) small fine, job done. Silly mistake by someone with his vast experience of real business (two whole years as an Economics Advisor, wasn’t it?) and no real harm done. But on that subject, could I ignore a hard and fast taxation rule, forget to declare some taxable income for a few months, then discover my mistake and pay it back with a tiny penalty and a smack on the wrist? Don’t think so, somehow.

HMRC are apparently cheering about improving their take from IR35. Say what? It seems they are getting more money back from the pitifully few cases they manage to pursue to completion. What is more, this has been seized on by some who should know better as an example of the deterrent effect of IR35. Their argument is that people are paying taxes via umbrella companies rather than risk an IR35 investigation. So that’s OK then. After all, what could possibly be wrong about scaring people into paying taxes they don’t actually owe by threatening them with a piece of legislation so badly drafted it needs a three year investigation and court case to determine if it actually applies to this single set of circumstances?

AWR is continuing to cause hilarity among those who understand it. Not only are some agencies sending out letters asking contractors to declare themselves outside its scope – something you can’t actually do in any meaningful sense, of course – but they are persuading assorted Human Remains teams that using agencies protects them from the AWR. Say what (again)? Take someone on directly with no intermediate agency and the AWR is dead and buried. Using an agency increases the risk, not reduces it. Doublethink at its best, and a good illustration of why contractors don’t want anything to do with HR if they can possibly avoid them. Or agencies, come to that.

And finally, credit rating agencies. Not the big ones who are randomly downgrading assorted banks and even whole countries, although they’re bad enough, but the ones being used to credit check job applicants in line with FSA regulations and failing them, often on some pretty flimsy histories. Which means no job offer. Fair enough?

Well no, really. For one thing the FSA rule being quoted applies to people in a limited number of roles within financial services; directors and those who advise customers on fiscal matters, for example. It’s not actually meant to apply to the third DBA from the left in the support team. But hey, it’s an income stream for someone, so who cares that it’s both utterly irrelevant and genuinely damaging; I know someone who regularly has to turn down good people because of this nonsense.

Modern Britain in a nutshell. Never mind the outcomes, follow the rules no matter how idiotic and irrelevant those rules are. Truly we are a nation of jobsworths; after all, there’s no money in being a shopkeeper any more.

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Ethan Nichtern Banner Illustration by bainesmcg

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Hey, look at what we just did. We killed off IR35!


I thought it worth returning to the Agency Workers Regulations again, if only because I was ever so slightly amused by the reactions of certain agencies to them. With their industry’s usual instant and carefully controlled grasp of the subject, this week contractors started getting emails and letters from some agencies about how to manage the AWR. After the act had taken effect and therefore after the point at which you should react to it for an existing engagement. Genius, isn’t it?

Anyway, as is the way of such things, the letters are asking unanswerable questions.

The first one is “Do you work through a Limited Company or an Umbrella?”. Excuse me, but why do you have to ask? You have the contract in your filing system, along with the payment terms and the pointless fourteen pieces of ID. Don’t you know who you are dealing with? Please don’t tell me you weren’t even faintly interested in the company with whom you signed the contract. Silly old me thought you were dealing with MyCo when clearly you are only interested in dealing with me personally. OK, so that explains a lot, doesn’t it? Dropped the mask ever so slightly there, Mr Agent.

Secondly, “Do you consider yourself to be in business?”. Cue raucous laughter. I have signed a contract with you in my capacity as the Director of a UK Limited Company. A contract in which there are several clauses establishing that there is no employee-like relationship intended, which directs you to pay money into a business bank account and which charges you VAT. Does that not give you a slight hint that I’m trying very hard to be a business and not a temp from Office Angels?

Finally, “Do you consider you are operating inside or outside of IR35?”. Now you really are taking the Michael. We’re using your contract. You set up the deal with the end client, you know the requirement, you know what’s in your contract with them, and you understand how the client views the relationship between me and them. So why ask me? If I am inside IR35, it’s because you put me there, not the other way round.

Ok, so the poor dears are only trying to keep their masters happy and, as usual, de-risk everything as far as they can. Since you can’t actually opt out of the AWR anyway it’s all rather pointless, but if it makes them happy. Although there may be a different slant on this.

If the agencies, on behalf of their clients – who, we must remember, are actually those stout and highly aware souls in the Human Remains department – are concerned about the people they supply being in the scope of the AWR and so able to claim all these interesting extra benefits like holidays, there is a very simple way to prevent it. If you’re in business, you’re out of scope. It says so in the AWR itself.

So, Mr Agent, let’s make sure I am genuinely in business, as best we can, so the AWR can be ignored. This means that firstly you stop the pretence that you have this vast pool of experts at your disposal and you just send a couple of the most relevant over for the client to look at. Secondly that the client will exercise no direction and control over how the work is to be performed, beyond that minimum necessary that all workers will need to follow. And finally we drop all this pseudo-employee-with-multiple-exclusions contractual nonsense and start using simple business-to-business contracts. You know, something along the lines of “YourCo will supply these skills for this period to deliver this thing for which we will pay you this amount of money, conveniently broken down into weekly payments. The End”. It really could be that simple.

Hey, look at what we just did. We killed off IR35 as well. Gosh…

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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AWR – everyone ready for the end of the world?


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.

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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Who said we need to import skills to ensure success…?


I was somewhat taken aback this week to read that someone in government had had a fit of the vapours and said something sensible. Even more confusing was that this was from the Labour side of the House. Although, just to restore my faith in human nature, he’s been shouted down by the rest of his side.

This was Lord Glassman, who has said that we need to put a freeze on immigration. Not a cap or a phased reduction, but a total stop, with the sole exception of the small number of skilled people we actually need to encourage to come over.

Of course none of this would be an issue if we had a better history of controlling who’s coming in, but we are where we are. At least we have some much more effective rules in place to bring a bit of sanity to the ICT system these days, which is the bit that really concerns us IT people. And for which, let us not forget, we owe a debt to the work the PCG has been doing over the years.

But as usual, nothing is as it seems.

There’s a bit of a debate going on about the new rules, centring of all stupid things on payable expenses, that well known fiddle factor beloved of the umbrella companies and assorted MPs…

But I digress. The rules set a minimum salary for the ICT candidate. However, with the usual stunning clarity of purpose, they haven’t actually defined how that salary should be made up. So you can include, for example, the costs of bringing your worker over here and giving them somewhere to live while they’re here.

Then we get into the Kafkaesque realms of do we include expenses paid for travel and accommodation while working somewhere else? I mean, let’s just think about that for a moment. You ship someone into the country, pay for their accommodation and give them a living wage. Then they have to go somewhere else on your behalf, for which you are paying the bills (or damned well ought to be). So how can that be part of their gross salary? Because I’m willing to bet that they never see any of it; if they did, their payslips wouldn’t be subject to the same level of secrecy as those nice people at GCHQ.

And just to pile on the ineptitude, the rules are being arranged so that “the taxpayer is not disadvantaged”. Excuse me? Taxpayer? The taxpayer, to the man on the Clapham omnibus, is someone who has a life here, a permanent address, is known to the gentlemen at HMRC. He’s not just popped over to perform a limited engagement (much of which seems to be to learn how to do the job so he can take those skills back home). And since his prime purpose is to take away work that could be done by someone who does live here, I’m afraid I’m not all that minded to be fair in how he gets paid.

Other countries have twigged this. Canada, for one, is taking positive action. How typical of our team that we try to treat them fairly and actively assist them in their efforts, less we tread on someone’s toes.

Talking of treading on toes, let’s give a small Hurrah for the PCG. Actually no, let’s make that a very large one. They have won not one but two trade awards, for electronic communication and membership success, against some much bigger (and older) organisations. Bearing in mind this is a very small team, the impact their work is having where it matters is out of all proportion.

Who said we need to import skills to ensure success…?

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited

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Agency Workers Directive – what ever happened to “simplification”?


The final form of the guidance for the upcoming Agency Workers Directive has been published. This has not been the subject of any great debate so far, but it does have the capacity to really shake up some corners of the contractor market. And it appears to contain a sting in the tail.

The AWD has a noble aim; it intends to ensure that agency workers – which it defines as those providing temporary services to clients via an agency – are not disadvantaged in terms of the protections and rights enjoyed by full time employees. However, being an EU-derived concept, our beloved Civil Service has failed to recognise the very different nature of the “agency” model in the UK compared to the rest of Europe. While protecting the rights of the lower paid employee of the agencies supplying temporary staff to a whole raft of industries from farming to pharmaceuticals, it also wraps up the traditional freelance contractor in its scope. And that’s not a good thing.

In the earlier consultations, the PCG picked up on the potential for this scope mismatch and were assured that Limited Company contractors would be out of its scope. The early proposed form of the Directive did in fact specifically exclude those working through their own Limited Companies. That was not considered to be much of a problem, naturally enough.

Now, however, that phrase has been watered down. It contains a further qualification, “those operating as genuine businesses”. So here we go again, we are once more being presented with the finely crafted clarity of the mud-encrusted IR35 legislation.

You may recall that Osborne kept IR35 on the statute books at the last election as a deterrent to people who may incorporate to avoid the taxes they can no longer save by using offshore EBTs. My suspicion is that they have the same qualification about “genuine business” in the AWD for exactly the same reason. This is fine as long as there is a clear definition of a “genuine business”. Which there isn’t.

One of PCG’s objectives with the HMRC’s IR35 Forum (when it gets of the ground) will be to try and define how you recognise a genuine business. Simple enough if you’re Tesco or the corner shop, rather more tricky if you are a one or two man company selling your skills and knowledge to the highest bidder. The level of debate that has been engendered within PCG about how to make that definition has to be seen to be believed, so I have no expectation we will see a quick answer. .And until we do, we remain exposed to HMRC’s biased concepts. But hey, we’re getting used to that.

The other victims are the umbrella companies who will have to keep their “clients” – who are de facto employees of the umbrella – fed and watered while they are out of contract. Wonder if anyone has told those clients who will be paying for it…?

And finally, of course, those hugely risk averse recruitment agencies will see the AWD as yet another set of hurdles to overcome to prevent any possibility of their being made responsible for the contractors who they sell to the end clients as their own staff. Expect a whole new layer of miasma to creep into the contractor-agency contracts to ensure the contractor is obeying the demands of a law that doesn’t actually apply to them at all.

Plus ca change, plus ca meme chose. What ever happened to “simplification”?

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited<

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IR35 – an abomination in the eyes of the Lord?


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.

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited<

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IR35 – The war is not won….yet


Big news of the day is the release of the Office for Tax Simplification’s report on Small Business Taxation. Well, big news for freelance contractors anyway. This is because this is the report that lays out what they think should happen to IR35. And it’s received a resoundingly cautious welcome from people like the PCG.

So not all good news then?

The main recommendation is that HMG bites the bullet and merges PAYE and NICs into a single tax. This is something that’s been around for a while – the Mirrlees report said exactly the same thing last year, as did a Treasury consultation from 2007. Except we didn’t really have a functional government back then and it went in the “Too difficult” box.

However merging the two has a lot of useful side effects, such as eliminating the advantage of payment through dividends, which among other things would make IR35 completely unnecessary. Which has to be a good thing in anybody’s book.

The snag is this will take years to bring into effect and the more you look at what’s involved the more complicated it gets. For example, the tax system recognises the difference between earned income and risk-based investment income and taxes them separately so as to encourage entrepreneurialism. Pensioners don’t pay NICs, so would need their own separate tax treatment. And so on – getting from here to there is a complicated and politically dangerous road.

But the report goes on to say that if that basic principle is adopted, then IR35 should be suspended with immediate effect. This suspension would allow HMRC to focus on other, frankly rather more important areas of tax gathering – you know, the ones that actually return more than they cost to collect – as well as showing what would happen to tax revenues if IR35 was simply abolished outright. So, for example, all those people who work through umbrella companies out of fear of IR35 may well incorporate and get the benefits of being a real contractor. There may be a rush of companies pushing their employees into turning freelance, which is what IR35 was supposed to prevent (it didn’t, as it happens, but let’s not go into that right now). There’s also a whole industry built on the existence of IR35 that would go into a sharp decline. So lot’s of potential issues to be resolved.

To be fair the report also suggests two other options; firstly that IR35 remains and HMRC are far more sensible, responsible and systematic in the pursuit of its enforcement (which caused me some hilarity and probably wins this weeks Littlejohn prize for “You couldn’t make it up”) or secondly the adoption of a series of tests that put you outside the scope of the IR35 legislation, clearly and simply.

So why a “cautious welcome” from the PG, who have been pushing for the abolition of IR35 for a long time? They are totally in favour of the suspension of IR35 as a step towards its removal but suspensions can be reversed, so it’s not the 100% solution they were hoping for. They also support the idea of the “in business” tests (as does the IoD, come to that), but are not exactly in favour of the “HMRC taking more care option” – to quote them, “This is widely regarded as risible”. And of course, it is all dependent on Mr Osborne taking note of and accepting the main recommendation for merger.

Still, it is a huge step forward and PCG deserve all credit for their work in getting us to this point. The war is not yet won, but we have perhaps now won the El Alamein battle for the abolition of IR35.

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited<

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Contractor accountants need a financial contingency plan


Contractor accountants and other professional freelancers must be prepared for financial changes, especially in these times of economic uncertainty.

The MD of the Debt Advice Foundation, David Rodger, said that everybody should have a Plan B, even if they believe their job is secure.

Rodger pointed out that redundancy might have a massive financial impact on a person’s household budget so having the foresight to plan ahead can lessen the chance of future difficulties.

This is simple to do, he says. Set yourself a realistic budget so that you do not overstretch your finances or spend large amounts on credit and keep a “rainy day” fund to tide you over if you have the misfortune to lose your job.

Contractor accountants working through umbrella companies might find that they are in and out of work due to the nature of freelancing. It is therefore vital for them to have a reserve cash fund in case work dries up for several weeks at a time.

The threat of more job cuts in 2011, coupled with the increase in VAT, could mean that more people fall into financial difficulties. The Money Advice Trust has already forecast that the number of people seeking advice on debt is going to reach a record high soon. Surprisingly, only around 16% of people who currently have money troubles seek advice.

However, consumers are showing signs of concern when it comes to debt, according to quarter four data from R3. 47% are worried about their credit card debt, 28% about their overdraft and 23% are concerned about meeting mortgage repayments.

Last week, the government launched a consultation into the regulation of consumer credit. It wants to transfer the responsibility from the OFT to a new authority; the consumer protection and markets authority. The government hopes this would provide more protection for consumers and remove regulatory burdens on businesses.

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Taking a closer look at the main parties’ manifestos


With just over two weeks until the general election, leading contractor accountant Kate Cottrell takes a look at the main parties’ manifestos, and in particular any promises for contractors and IR35.

We have had a couple of weeks of side announcements from the main parties including numerous plans to cut IT projects, cut contracts, cut recruitment and to curb the use of consultants in the public sector. We have also seen “landmark commitments” to “review” IR35 but what do the main parties manifestos say?

Labour

Labour has of course given us a limited insight into their future plans with their budget last month which contained little for contractors. On 14 April they also published a “Tax Framework for Business” in which they have set out how they will work to understand and respond to the views of business. In their drive for a sustainable tax base they have 5 stated principles, competitiveness, fairness, minimising distortions, simplicity and stability and certainity. Of these principles perhaps stability and certainty could hold a promise for contractors and IR35.

However the document goes on to explain that this principle means they would avoid unnecessary changes to tax legislation and where a change is necessary they will try to adhere to a tax-policy making process. The document also clearly states that they will also explain their reasons if they cannot adhere to this process! Labour’s manfesto talks of “creating a shareholding society” along John Lewis lines by reviewing barriers and widening share ownership which is directed clearly at employees. Labour will also consider the construction industry again by extending the Gangmasters Licencing Authority to this sector. Finally Labour are committed to enacting the Agency Workers Directive in full. All in all little for contractors and no mention of IR35.

Liberal Democrat

There is more detail in this manifesto in terms of the figures but again little gain for contractors apart from the proposed increase in the tax threshold to 10K which would impact mainly low earners. The LD’s are calling for a level playing field for business with a promise to review regulations and red tape and in particular a committment to “one in one out” for new legislation and to consult on everything.

We must not forget that it was the liberal democrats who tabled an early day motion for the repeal of IR35 but I understand that many of those who signed and their researchers are considering this again in light of the significant deterrent effect of IR35 and the large sums currently generated from umbrella companies. A more worrying point in this manifesto is a committment to further new powers for HMRC to tackle tax avoidance and tax evasion. As many will know HMRC has been given unprecedented powers and penalty provisions under the current government and the suggestion of more to come is surprising.

Conservative

The Conservative’s manifesto is very business focused and if elected we will quickly see an emergency budget with the removal of the NIC increase. Commitments on small business rates, reductions in corporation tax, moving some of the unemployed to self-employed and cutting costs for bidding for government contracts are all mentioned, as is the introduction of a new Office of Tax Simplification. Apart from the removal of the NIC hike it seems that we will have to await the publication in the first budget of the Conservatives “5 Year Road Map” for timescales on all the other issues and in particular the new Simplification Office tasked with the job of reform.

The Conservatives also commit to giving the public the opprtunity to force the worst regulations to be repealed. The manifesto does not mention IR35 but a committment to review it was given in a side letter. However it seems likely that this will, if taken forward, be a job for the new Simplification Office so could be a long way off.

In summary we have lots of pledges to reform and review from all the parties. Whoever is elected any reforms will of course all come down to the state of the public finances which would suggest that there is a lot of pain to come. None of the manifestos mention IR35 and if we do eventually see lower tax rates and the repeal of IR35 then we can also be certain that contractors will be paying a lot more tax under some other initiative introduced under the banner of fairness and simplification.

Kate Cotterell is Managing Director of Bauer & Cotterell.
© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Using a Magnifying Glass and Driving by Mike “Dakinewavamon” Kline

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Why I dislike this government quite so much…


So our Beloved Leader has finally allowed us an election. Good news on several fronts. I make no secret of my desire to see the end of the current Parliament in general and our sitting PM in particular. But before we all get drowned in claim and counter claim about who is best suited to lead us out of the crisis we find ourselves in, I thought I might just remind people why I, as a humble one-man-band contractor, dislike this government quite so much.

Firstly, the iniquitous IR35. Brought in by someone who refused to pay a legally imposed tax to address a problem that didn’t exist and so badly framed only a court could decide if it applied to you or not. So you buy insurances and pay for contract reviews and live in uncertainty, or you go use an umbrella and pay a load of taxes you almost certainly don’t actually owe. Meant to bring in £400m a year, it actually generates around £1.5m. Brilliant work chaps.

Then they killed off MSCs. Not a thing that bothered me, to be honest, but I know of people who were trading perfectly correctly through them who had to shift to a different model.

Then we had the Arctic case, trying to apply the clearly defined S660a legislation to a situation it was never meant to cover and which, in fact, was positively endorsed in the House (by a Tory chancellor as it happens…).

Then when they lost that one they immediately produced the fully-formed Family Business Tax (or Income Splitting, as they termed it). That has never actually gone away, but at least the lobbyists were able to demonstrate just how poorly thought out and generally unworkably ridiculous the whole idea was. So that never saw the light of day, thank God and the PCG. The latest one is the Agency Workers Directive, another piece of EU-inspired nonsense that has a genuine purpose at heart but once again is so badly enacted you still won’t know for certain if it applies to you.

And underpinning that catalogue on ineptitude is the constant failure to distinguish between avoidance and evasion (hint: only one of them is illegal, Gordon), the joyous embracing of selling our IT industry abroad by failing to manage the abuse of the ICT system, the wholly unacceptable retrospective change behind BN66 and a raft of smaller but equally rubbish rules and regulations that blight your working life.

So all in all, I hope never again to hear a dour Scots voice telling me all this grief is in the interests of fairness. It isn’t, it’s in the interests of a discredited socialist agenda that’s wrecked the country and cost me a lot of money for no benefit whatsoever.

So farewell, New Labour. Whoever or whatever replaces you, at least the only possible direction is upwards.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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Contractors cop the costs!


It was only a matter of time before HMRC launched an all out attack under the Managed Service Companies legislation – it would now seem that time is up! Some of the big providers have already fallen and the rest will soon come under fire.

The number of enquiries into providers has more than tripled in the last month, and I am reliably informed by my source within HMRC specialist unit that we can expect to see much more HMRC activity in the coming months.

The problem for limited company contractors

What many providers fail to warn contractors is, if they set you up with a limited company, administer the limited company for you, have involvement in your company’s activities or dictate your salary, expenses and dividend levels it is likely your company is a managed service company and your company is liable. It does not matter if the provider was based offshore or not (and in all likelihood the provider will have gone into liquidation anyway so HMRC have no hope of recovering money).

HMRC’s first port of call is the managed service company – this is your company. If the company is unable to pay the debt the next party in line, under the transfer of debt rules, is the director of the limited company – you personally.

A common misconception across the board is that if the third party administering the limited company is an accountancy practice then the Managed Service Companies rules do not apply – this is a fallacy there is no outright exemption for accountancy practices.

If you have already received a letter from HMRC’s or you are currently operating through a limited company where a third party has more say over your company’s finances or activities than you do then you need to act now – get advice from an expert, do not rely on your provider!

Any problems for non-limited company contractors?

While umbrella workers and those working through a self-employed model may not be directly in the line of fire under the managed service companies legislation they must remember that they themselves are personally liable for their own tax affairs (even if they provide their services through an offshore provider).

If your umbrella company is processing expenses you have not incurred – you are liable for the unpaid tax, not the umbrella company.

If your self-employed CIS company is not deducting CIS tax when it should, or encouraging you to claim expenses you are not entitled to you are liable for the unpaid tax.

Are any safe?

Not every provider is operating incorrectly but many are and, despite any assurances to the contrary, contractors are in the frame for the unpaid tax. Investigate, investigate, investigate! Do not simply take assurances that providers have counsel’s opinion or that they have been approved – this counts for nothing when HMRC come knocking on your door.

Ask for explanations on every document you are give, ask to see copies of the tax advice received and talk to other contractors about their experiences – at the end of the day if it looks like a tax avoidance scheme, it probably is; if it looks too good to be true – it probably is!

David Harmer is the Operations Director of Accountax Consulting
© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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2010 – a year of change and opportunity for contractors?


Contractors may have breathed a sigh of relief following the pre-budget report having found little changed. However can any tax payer really expect to pay the same tax/NIC post general election?

Considering the state of the UK’s finances the answer has to be a resounding no. The electioneering has begun and we hear calls from one party for a £10K nil rate tax band, accusations from the current incumbents of a forthcoming class war but the emphasis from all three main parties is clearly on fairness.

IR35

Public campaigns for the repeal of IR35 have so far failed. If they had succeeded it would be unrealistic in the extreme to expect in its place a system where less or even the same tax/NIC is generated from those operating through limited companies.

The Agency Workers Directive (AWD) calls for a definition of the genuinely self-employed and suggests that those outside IR35 would also be outside the AWD. This new legislation presents a real opprtunity for end clients and agencies to understand and address the issues of employment status. We could at last see an end to engagers who want all of the controls over the freelancer as an “employer” but with none of the responsibilities that an employment relationship brings. The AWD in its current form also addresses the perceived unfairness with regard to employment rights for those inside IR35.

Umbrella Companies

Arguably expenses for Umbrella users were saved thanks to the Daily Telegraph! The future is the flexible workforce and there is still an important role for umbrella companies to play. HMRC has fired several warning shots regarding Umbrellas use of over- arching contracts of employment and it seems there are numerous ones out there that do not work. Returning to the issue of fairness and the fact that agency workers generally cannot claim expenses the Umbrella user may find him/herself in the same position as the PAYE agency worker.

Changes

Brace yourselves for a change of government, an emergency budget and more tax to pay.

Opportunities

New regulations bring opportunities for education and better understanding of employment status issues by all the parties in the contractual chain which is good news for Contractors.

In the meantime we still have IR35 and Umbrella expenses schemes and HMRC is very much out there using its new powers and spending its enormous budget on compliance work. 2010 is going to be a year for all contractors to take notice of the changes and the opportunities and consider their positions accordingly.

Kate Cotterell is Managing Director of Bauer & Cotterell.
© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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An early Christmas present for umbrella company contractors


With Christmas just around the corner, it’s seems the Government have thrown themselves well and truly into the festive spirit.

Umbrella company contractors will be pleased to hear that the new rates for maternity, paternity, and statutory adoption pay will rise from £123.06 per week to £124.88 from 4 April 2010.

This is good news for those planning a baby, and particularly surprising given the fact that the official RPI for September was -1.4 per cent.

The new rates, which have just been announced by The Department for Work and Pensions (DWP), were published through a fairly low key press release. Indeed, several commentators believe that the changes have been so badly publicised, many small businesses will remain blissfully unaware of the announcement.

Steven Tucker, director of The Payroll Site, can’t believe the government was so poor at promoting it’s own positive news. “This will be really welcomed for many employees but the actual announcement was buried on page 13 on an attachment to a press release about pensions. I mean, why bother?”

Limited company contractors and contractor accountants are being advised to check their payroll software to ensure the new rates are set-up from next April.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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