Tag Archive | "ebt"

IR35, EBTs and the tenacity of HMRC

Just like buses, two cases of interest to freelances concluded this week. After seven years, a contractor named Mark Fitzpatrick has been found to be outside IR35 by a Tier 1 Tribunal. And another imaginative scheme to avoid paying taxes has been found to be not exactly effective.

The IR35 appeal has been rumbling on since 2009, when an appeal was lodged against earlier claims relating to contracts dating from 2001, 2003 and 2006. They involved work Mr Fitzpatrick was doing for Airbus since setting up his limited company in 1996 (same year as me, coincidentally). The details of the case are the usual deeply argued and complex analysis of the facts, but the end result was mainly that because Mr Fitzpatrick’s contractual arrangements failed to demonstrate mutuality he was not in the scope of IR35.

The reasons given for this conclusion are, to the informed reader, blindingly obvious. Mr Fitzpatrick (and others) had been sent home without pay when their IT systems failed and they could not do any meaningful work. Also Airbus could cancel Mr Fitzpatrick’s company’s contract at any time without notice.

The attentive reader may recall me raising this issue of no notice in the past. I’ve long argued that while some week’s notice on both sides may be commercially advantageous, any notice period implies you may be paid for work when there is no work to be done – else why has your contract been terminated?

Still it this is HMRC we are talking about: taking three years to decide a clearly un-winnable case is winnable and another three to discover what any half-informed contractor could have explained in a few minutes is a mere bagatelle.

The other worrying part of this case perhaps warrants wider examination. On of the witness’s evidence was dismissed by the Judge, for several reasons, one of which was that it appeared to have been prepared for him by HMRC. So not exactly impartial evidence then….

The other case concerned a company called Aberdeen Asset Management, who had contrived a scheme to save a few million pounds of tax and NICs for its directors. The judge in that case carefully and completely destroyed their case in a 10-point judgement.

Looking at the detail of the case it was clear that it was perhaps doomed to failure. It was not an EBT – although an EBT was part of the daisy chain of intermediate companies and itself paid out to some 400 other people (who presumably are now looking over their shoulders) – and was benefiting its own employees rather than any third parties, so shouts of glee from other scheme providers that this was nothing to do with the ongoing arguments about contractors using EBTs and set no precedents were to be expected.

Except for two small details. Firstly, that HMRC are clearly aiming to shut down any and all schemes that they perceive to be artificially created in order solely to avoid taxation. Secondly, as the Aberdeen Asset case proves, HMRC are not bothered how long it takes to get its tax back, but get its tax back it certainly will. And if you have to sell the house and the children to pay it, well tough but them’s the rules.

All of which leads to an interesting dichotomy. On one hand we have HMRC pursuing a case that was clearly un-winnable for 10 years, costing several tens of thousands and recovering absolutely nothing beyond egg on their collective face. On the other we have HMRC spending ten years to pursue a case against a scheme that was clearly never going to fly and eventually regaining a few millions in unpaid taxes.

Such tenacity is to be admired, in a way. But such a shame that HMRC lacks the wit to work out which case to spend ten years on in the first place.

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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The harder you try…..the harder it gets!

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

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

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

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

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

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


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

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

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

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

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

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

Alan Watts can found at LinkedIn.
© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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Motion vs. progress?

Usually I find one thing to talk about each week; even in the depths of the silly season there is something relevant to freelancing worth trying to write a few hundred words about. This week, for some reason, I haven’t found a single thing. Perhaps I’ve been a bit too busy to notice – you could say the current client presents some interesting challenges – but I have tried. Honest…

The main event in the news – well, the BBC version of the news so it really must be important – is all about the Millibands and the will-he-won’t-he tedium of will big brother work with little brother or not (and he won’t, it seems). Sorry but from here I really don’t care that much. While Her Majesty’s Opposition is an important element of the government process, precisely who wears the various labels in the Shadow Cabinet is actually fairly irrelevant. Unless you’re interested in who fights the next election, which is far enough away to be of zero interest, I’m afraid. And anyway, I’m a contractor; there are far more important things to worry about.

One of them is a bit of a debate on EBTs. I’ve said before that these may be a good thing for some but you have to go in with your eyes really wide open. The risks are just that bit too high if you don’t fully understand the scheme and, equally importantly, the government’s attitude to them. My point is that since HMG have effectively shut down EBTs from next year, people who sign up to one now are at a considerably higher risk of investigation than those who have been using them for some time. This, for some people, seems to be an unreasonable position. Heigh ho…

There’s been another discussion on Security Clearances and the old Catch-22 of no clearance no job, no job no clearance. Somehow this has mutated into a discussion about how clearance works. That’s really not what it’s about, the process and the parameters work well and are pretty effective. All I’m really interested in is being allowed to get in front of the hiring manager to sell my services, which is something that I and a majority of other contractors can’t do at the moment. I’m more than happy to take my chances of persuading a hirer that I’m worth the effort of sponsoring for clearance, but I can’t do that if I can’t ever get to meet them.

And of course the whole visa issue rumbles on. This is getting increasingly confused, not helped by a certain Mr. Cable’s interventions. Nobody is saying we shouldn’t allow ICTs; there are plenty of instances where they are entirely justifiable. However, when you consider that some of the people complaining about the proposed cap on them haven’t actually used the ones they are allowed to use, just what is the problem? Apart from reading that a small number of companies from one country have brought in several thousands under ICT visas. The argument is not about ICTs, it’s about misuse of ICTs. Some supposedly well informed people will insist on missing that minor detail.

So, lots of motion, not a lot of progress. Bit like the current contract, really.

Alan Watts can found at LinkedIn.
© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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Contractor accountants should be wary of HMRC prosecutions

UK individuals, including limited company contractors, appear to be committing less tax offences than in previous years according to law firm McGrigors.

In the 12 months to the end of September 2009, 157 people were found guilty of tax offences. That was a drop of 62 compared to the corresponding period the year before. Of the 157 convictions, 74 were for VAT related offences.

A former Inland Revenue prosecutor who is now a partner at McGrigors said that HMRC is not prosecuting as many people for tax evasion as they did in previous years because they are concerned about losing cases that come before a jury. The law firm also claims that HMRC lost £7bn through tax evasion in 2009. It is expected that the Revenue will recoup around £3bn through its tax amnesties but that still leaves a huge shortfall.

HMRC are concerned that few people took advantage of the recent New Disclosure Opportunity and the Liechtenstein Disclosure Facility but believe that this is because people are no longer afraid if prosecution.

However, things may be set to change. It appears that the Revenue plans to increase the number of prosecutions and call on judges to pass longer sentences. They also plan to ‘name and shame’ guilty parties.

A spokesman from the tax office said that they do tackle fraud effectively and prosecute where appropriate. But civil settlements are obtained where possible in tax evasion cases as this is more cost effective. By using civil proceedings the taxman ensures that all undeclared tax, plus penalties, is repaid.

Meanwhile, employers and employees are being given a limited time of 2 months to minimise tax and NIC payments due on accommodation provided through Employee Benefit Trusts. If they come forward, they will not face prosecution providing they settle outstanding tax liabilities in full.

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