Tag Archive | "nic"

Has lack of NIC payments compromised contract workers?

There are around 1.4 million contractors and freelancers in the UK workforce at last count, and these interim workers have been a driving force in the economic recovery – but arethe lack of NIC payments coming to the government a bad thing?

Flexible workers are an attractive option for employers because businesses don’t have to pay employer’s NICs for work undertaken for them by a freelancer. Contractors themselves also pay far less in NICs as well, which means there’s more money in the pockets of freelancers with every pay cheque, leaving them more cash to put back into the economy as well.

However, with fewer NIC payments coming in to the Government, it has had to scramble to find other sources of income.  Off-payroll rule legislation and stepped-up IR35 enforcement are two ways the Government is trying to make up the shortfall, but the money gathered from these sources may be a slow trickle when compared to the revenue lost from NICs, leading many to believe that contractors have been comprimised by the lack of NIC payments.

There are some discussions underway currently regarding ways to regain lost tax revenue more efficiently, but workers are not looking forward to such an arrangement because they mean they’re going to end up paying more in taxes than they do now. Some of these new taxation schemes in the planning stages – such as increasing compliance to make sure those using tax avoidance schemes don’t wriggle their way through the net – will not have as much as an impact, but other proposals for taxing contractors like employees and merging income tax with NICs could only work to drive freelancers out of the market in high numbers.

IR35 already exists to catch those who abuse the system and the off-payroll rules and controlling persons legislation are more examples of quick fix patches to mend a leaky pipe. IR35 does not work and most flexible workers pay less NICs as a result of using perfectly legitimate trading models like limited companies. No amount of ‘disguised employee’ legislation can address what is a major workforce trend.

Limited company contractor witch-hunts by politicians and the media saw a direct comparison between the circumstances of employees and flexible workers – they are not comparable; employees get paid holidays, sick pay and a raft of other benefits, contractors and freelancers do not. And, they not only receive none of these benefits, freelancers also have to make provision for holiday, sickness and pensions, and all the costs of running a business, out of their fees. What’s more they don’t enjoy employment rights and run the constant risk of not getting paid – neither do they have the relative security a full time position as an employee brings.

Taxing flexible workers and the employed the same would be a massive disincentive to a resource that is adding value to UK plc; 1.5 million freelancers are contributing more than £100 billion to the UK economy. We want to encourage this flexible resource to grow and thrive, not punish them so that it has the opposite effect of driving them out of contracting and even out of the UK altogether.

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Electricians Tax Safe Plan deadline is tomorrow!

Electricians need to get their skates on if they want to register under HMRC’s disclosure opportunity. The deadline for registration is tomorrow, May 15th!

The Electricians Tax Safe Plan is aimed at people who install, maintain and test electrical systems, appliances and equipment. Electricians have the opportunity to disclose and pay any unpaid tax in return for lower than normal penalties. It is thought the penalties will range from 10% to 20% of the total tax owed, instead of the normal fines, which can be as high as 100%.

Sparkies who want to take advantage of the Plan must register with HMRC by tomorrow and then arrange to settle their outstanding liabilities with the Revenue no later than the 14th of August 2012.

The head of campaigns at the Revenue, Marian Wilson, explained that the department had gathered data from a range of sources, including industry bodies, trade suppliers, online advertising and trade directories. HMRC’s sophisticated software means it can identify those people who should be making a declaration.

This is the second HMRC campaign to target specific tradespeople. The first campaign targeted heating engineers and plumbers. So far 14 plumbers have been arrested following the first campaign, and one received a 12-month prison sentence after being found guilty of evading £91,000 in NICs and income tax.

These campaigns are a good way for tradespeople to come forward and start afresh with a clean slate. Those who do not sign up for the Plan could find themselves in boiling hot water when HMRC eventually catches up with them.

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Should contractor accountants take less VAT?

Accountants may be interested to read the latest Office of National Statistics research concerning UK householders VAT expenditure.

The data shows that the UK’s poorest households now pay more VAT in proportion to their total income than they did twenty-five years ago, whilst in the richest households, the proportion remains the same.

In 1986, VATable items accounted for 45% of the poorest 20% of households’ weekly expenditure. By 2001/02 they were spending 58% on items that attracted VAT. That percentage has dropped slightly, but in 2009/10 they were still spending 55% of VATable items.

Over the same period, the percentage of income the richest 20% of households spent on VATable items remained virtually unchanged. The ONS research does not take into consideration the period since the VAT rate increased to 20%.

Still on the subject of VAT, employers need to be aware that changes to the VAT regulations concerning salary sacrifice come into force from the 1st of January next year.

In the past, salary sacrifice schemes have proved popular in part because they brought with them tax advantages, such as reduced PAYE and NIC liabilities and a VAT advantage.

However, as from the start of 2012, employers who recover VAT on benefits and then pass them on to employees under a salary sacrifice arrangement will have to pay VAT on the amount sacrificed.

HMRC says that schemes such as the Cycle to Work scheme will fall under this new arrangement, as will food and catering provided by an employer. Childcare, pensions and private health insurance salary sacrifices will remain unaffected by the new regime.

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Drivers of supercars set to pay more income tax

HMRC is going to start targeting supercars in April and executive high flying accountants for contractors will feel the pinch as benefit in kind payments on company cars will increase significantly.

New regulations coming into force on April 6th will see the maximum list price of £80,000 abolished. This will affect the P11D tax which is paid on company cars such as Bentleys, Ferraris, Lamborghinis and top of the range BMWs and Mercedes.

Under the current system, the maximum income tax paid on a company car is £14,000 pa and the maximum national insurance contribution is £3,584.

The increase in tax will mean that an executive with a 199mph company Ferrari 612, which has a list price of about £222,000, will have to pay income tax of nearly £39,000 a year and the employer will pay more than £10,000 a year in Class 1A National Insurance.

And drivers shouldn’t think they can get out of paying this increase by buying a used car. HMRC will charge them on the list price of a new vehicle.

David Heaton from Baker Tilly, said that when Alistair Darling introduced the legislation in 2009 it was to ensure drivers paid fair levels of tax, but as a result companies will probably stop buying supercars.

Very rich executives may not be too concerned about paying the additional tax but drivers of older company cars could get caught out. For example, a 2005 Ferrari 612 Scaglietti can be got for around £65,000, but if it’s used as company car, the tax will be worked out on the list price of £177,000, giving a tax and NIC of £39,500 a year.

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

Image: Mind The Cyclist by Nanagyei – Still has some catching up to do..

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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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HMRC caught napping again?

HMRC is in hot water yet again; this time over data showing that over 9 million National Insurance contributions dating back as far as 2004–05 have not been added to employees’ records.

The total monetary value of these unmatched contributions is in excess of £1.2 billion.

Ian Liddell-Grainger, the MP who chairs the All Party Parliamentary Group on Taxation, warned taxpayers that their pensions might be affected if HMRC does not resolve this backlog.

The problem stems from mistakes on the P14 forms that employers submit to HMRC every May. These forms log the NI and PAYE contributions for individual employees. If the Revenue finds an error, it is supposed to contact the employer in order to obtain the correct information. However, it appears that administrative corners were cut and this did not happen.

The MP said that taxpayers with unmatched NICs may need to find their old payslips or ask their employer to verify the contributions paid.

In order to qualify for a full state pension, individuals have to have paid contributions for a minimum of 30 years.

Employers have reacted angrily to suggestions that they are to blame for this situation. Phil McCabe from the FPB pointed out that HMRC has a track record of poor levels of efficiency and administration and the tax system needs simplification.

HMRC has fought back at the media coverage by posting a notice on its website saying that the department has not lost the contributions. Unmatched contributions are placed in a suspense account until they can be correctly allocated.

A spokesman for the Revenue explained that they write to individuals if they see a gap in contributions and respond to the situation immediately if someone reports a gap. It is simply not true that millions of people will lose their correct pension entitlement.

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OTS recommends five tax reliefs for the axe

On the 13rd December, the Office of Tax Simplification published its interim review of 13 reliefs, providing some light reading for online accountants.

The interim review included CGT relief on the disposal of private houses, income tax relief on luncheon vouchers, tax relief on research and development and VAT relief on supplies and sales for charities.

Of the 13 reliefs, the OTS decided that five should be axed including the luncheon voucher relief and the tax break for workers who get a taxi home after working late. The OTS says the taxi break, which was introduced in 1987, is unfair. It is used frequently by financial services and legal firms who want employees to stay at work late to complete urgent projects, but it is not available for shift workers travelling at night unless they have to work later than usual.

Another relief that could go is the vaccine research relief which Gordon Brown introduced in 2002. It was designed to encourage research into HIV/AIDS, malaria and tuberculosis but only 10 companies are allowed to claim it. The OTS says the relief is very rarely used and there is no evidence that additional research into vaccines for the named diseases has been undertaken.

The OTS has identified a total of 1,042 separate tax reliefs and is now going to focus on 74 in a final review.

The Institute of Chartered Accountants of Scotland is also urging the OTS to recommend merging income tax and NICs. This would lead to less administrative costs for both HMRC and businesses, according to the Institute.

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Doubts are being raised about HMRC’s proposed PAYE reform

Finance professionals and contractor accountants do not believe that the government’s proposed plans to overhaul the PAYE system are satisfactory.

Last week, HMRC released plans for the significant reform of the PAYE system since its introduction 66 years ago. With the new system, employers would remain responsible for the calculation of NIC, PAYE and student loan deductions and that information would be sent to HMRC via the BACS system when the employer runs the weekly or monthly staff payment run.

One of the fears amongst tax experts is that the Revenue is not famed for successfully implementing new IT systems. The most recent example being the chaos that ensued earlier this year when taxpayers were sent incorrect coding notices due to a data migration project.

Karen Thomson from the Institute of Payroll Professionals said that whilst the idea is good in principle, there are certain issues that need attention before the organisation would support the proposal.

One concern is that employers would be giving employees a payslip that does not tell them their take home pay. The chairman of BASDA’s payroll special interest group, Andrew Dove, said that this could have a negative impact on low paid employees and people who work fluctuating hours. Payroll software providers are also concerned that the new proposal will kill standalone payroll products. Although the payroll year end bottleneck would be eliminated with the new system, it would make more sense to process real time information through existing payroll software and the current government gateway, Dove added.

Tax specialists are agreed that further research and consultation is required before a new scheme is piloted. Baker Tilly’s tax director, Lesley Fidler, hopes the new initiative will be researched fully, piloted adequately and funded sufficiently before it is generally adopted.

At present the proposed reforms are at the discussion stage and suggestions from professional organisations will be taken into consideration before a formal consultation document is issued.

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Bad News, Good News?

So where was I…? Back refreshed from two weeks of idleness in the sun, and already looking for the next contract. Don’t seem to have missed anything too serious while I was away.

I managed to get back just in time for the Coalition’s first Budget. I watched it live – oh the joys of being on the bench – and for the first time in 13 years I didn’t have an overwhelming urge to throw something heavy at the TV. What a pleasure it was to listen to someone who sounded like they both knew what was going on and was willing to be honest about it.

Of course, the underlying message isn’t very nice, which is not much of a surprise unless you’ve been living in a cave for the last five years, but you have to say that the overall tone was actually surprisingly positive.

Yes, it’s going to hurt, but we knew that anyway. We’ve had the usual suspects leaping up and down in a fury about a return to Dickensian England and the public sector is up in arms about facing the same pain that private industry has been through already, but all in all I thought it was quite well judged. Let’s just hope that it has the desired result!

With my freelance hat on, it was actually pretty much neutral. I’m not planning on opening a new company and employing people so the National Isurance incentives won’t touch me the slightest, but they will help people who do want to build up their businesses. The eventual VAT rise will hurt of course, but it’s only 25p extra on something costing £10, so personally I can live with that.

The personal tax allowances are nice as well, as is the promised reduction in Corporation Tax rates. As a jobbing freelance contractor – well, when I get a job that is – I’m actually quite relaxed about it all.

The other bit of news tucked away in the Red Book (or as Cameron said to Harman at PMQs this week, in her case the “unread” book) was a clear commitment to look hard at IR35. This was backed up by an interview in the Telegraph, where Mark Prisk emphasised the intention to lose IR35 altogether.

Welcome news indeed, although we won’t break out the champagne until we know exactly what is going to come after it.

Elsewhere in the real world I’ve been plunged back in to the chaos and misery of having to deal with agencies offering work that they don’t understand on behalf of clients they don’t know to contractors they don’t want to talk to and whose CVs they utterly fail to understand. I’ve spoken to five this week and have absolutely zero confidence they know what they’re doing.

Call me an old curmudgeon but in my not inconsiderable experience it’s about one in fifty that does the job they way they tell the clients they do, so I guess I’ve a few more pointless and frustrating phone calls to get through yet. Come the revolution, I know who I’ll be putting against the wall first

Still, let’s be positive, if the reaction to the budget is positive, there may actually be some real work out there.

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So what about Son of IR35?

Now the excitement of the promise actually to consider IR35 for a serious reappraisal has died down a little, I’ve been giving some thought to what that might actually mean. What can we expect Son-of-IR35 to look like?

For one thing, I think there will still be something there that looks like IR35. Let us not forget that the original justification was to prevent the Friday-to-Monday syndrome, where a worker would switch from permanent employment to freelance contract doing exactly the same job. Either the worker did this to take advantage of the tax breaks available to a Ltd Co owner or, more often than people would admit, it was the employer divesting himself of assorted legal obligations, not to mention having to pay Employers NICs.

Of course IR35 stops this, by making the cost benefit of doing this unattractive. Snag is, it also gets in the way of the worker who genuinely wants to go freelance. So my suggestion is that IR35 (or whatever the new version is called) should only apply where the freelance’s client is the same as the immediately previous employer for a period of one year.

However, if we assume that some form of IR35 is still out there post review, the best we can hope for is that there are clear rules about when it applies. Most contractors are angrier about the lack of clarity and resultant uncertainty than about paying the taxes, after all. This is here the original “in business” test comes in – you know, the one that Red Dawn prattled on about while simultaneously refusing to accept that any freelance could possibly be in business on their own account.

But how do you demonstrate you’re in business? That’s the question…

One option is if you are VAT registered. There’s no way you can do that as an employee; even if you did, there would be precisely zero things you could legally claim the VAT back from anyway. You could add in the existence of Your Co to make the test a bit firmer, although that might impact the Schedule D Self-Employed workers. Although the Schedule D self-employed worker can’t really be hit by IR35 since there isn’t an intermediary company in the chain anyway.

Another option is to waive your rights to things like employee benefits, JSA, maternity or paternity leave and the rest of the panoply of employee benefits. The logic is that since you are not paying employee-level taxes, why should you expect to get employee-like benefits?

You could be a bit more imaginative and scrap S44-47 ITEPA 2003 (which replaced S134c) which is the one that makes the intermediary liable for unpaid taxes and is why agencies won’t deal with unincorporated (or non-umbrella) contractors in the first place. Which – whisper it quietly – is why we then got IR35…

Or, of course, you simply delete IR35 altogether – with the sole exception I mentioned above to stop the Friday-to-Monday trick. If there’s no law, there can be no uncertainty. Freelances can choose to work through an entirely legal UK Limited Company and operate it just like every other one. A bit like I do right now.

Or is that too simple…?

Anyway, end of contract today so I’m off for two weeks in the sun. Since I refuse point blank to take my laptop on to the beach – and she who must be obeyed would flay me alive if I tried – the next blog will probably be on June 25th. Let’s hope there’ll be something to write about!

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Pre Budget Report 2009 – crystal ball set of predictions for contractors

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

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

A few predictions:

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

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

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

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

Here’s hoping I’m wrong!

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