Tag Archive | "NICs"

Should the UK have a single 30% rate of income tax?

The Institute of Directors and the TaxPayers’ Alliance have published a joint report calling on the government to replace eight taxes with a single income tax rate of 30%.

The call for a radical overhaul of the current system of taxation is part of the 2020 Tax Commission project, which is a joint collaboration between the two organisations. The proposals include cutting taxes to a third on national income, raising personal allowances to £10,000 and introducing a single tax on capital income and labour.

The pressure group wants the government to abolish employers’ and employees’ NICS, capital gains tax, corporation tax, inheritance tax and stamp duty on shares and land. Furthermore, it says it would abolish air passenger duty and reduce fuel duty by 5p per litre. Local authorities would also need to raise 50% of the money they spend from local taxes.

Allister Heath, the chairman of the Commission, said that although the proposals are far-reaching, they are practical. The reforms would lead to a simpler, more transparent tax system and result in significant growth. He went on to explain that if the government adopted the proposals by 2020, GDP would increase by 9.3% within a decade.

PwC’s Alex Henderson said these are radical proposals but he pointed out that the OTS has already suggested merging income tax and NICs, reviewing the regulations surrounding inheritance tax and suspending some tax rules. Assessing whether legislation devised 25 years ago is still justified would also help simplify the tax system, he added.

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Will HMRC’s security deposit compound existing problems?

Contractor accountants may be aware that as from the 6th of April, HMRC will be allowed to request a financial security from businesses it thinks are in danger of defaulting on their NICs or PAYE payments. Companies that fail to comply with this requirement will be committing a criminal offence and could face a fine of up to £5,000.

Roy Maugham, one of UHY Hacker Young’s tax partners, said that these new rules are designed to stop companies deliberately defrauding the Revenue, but the current economic climate means that honest businesses that are struggling to survive could also get caught in the security net.

HMRC has strongly denied that genuine businesses will be affected, saying the new rules target those employers who make deductions from their employees but have no intention of passing on the income tax and NICs to the taxman.

However, as Maugham points out, businesses that are already struggling will have to borrow money to pay this security, especially at HMRC has clamped down on the Business Payment Support Service, which allowed businesses with financial difficulties more time in which to settle their tax liabilities.

The size of the security deposit will be based on the perceived risk of default, and with bank loans hard to come by, this could compound existing problems for some firms. Maugham went on to say that a lot of businesses that withhold NIC and tax are simply trying to keep afloat and these new rules could mean they have to make a choice between criminal prosecution or mass redundancies.

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Reed loses long running battle with HMRC over salary sacrifice

You may have been following the recent tax case involving HMRC and specialist recruiter Reed.

The long running battle revolved around the travel and related expenses incurred by temporary job candidates.

Reed’s agents made expenses payments to about half a million temps between 1998 and 2006. The daily “allowance” covered travel expenses up to £11.45 and up to £6 for lunch. These were supposed to be included in a salary sacrifice arrangement, but it turned out that no such agreement covered the period in question.

HMRC argued that the temporary workers were engaged in job-by-job contracts and not a continuous contract as claimed by Reed.

The recent tax tribunal judgement implies that Reed manipulated salary figures to make it look as if a part had been sacrificed when in fact the temps actually received their full payment. The tax tribunal also said that although there were signs that Reed received initial approval for their scheme, there may have been a ‘cock-up’ at HMRC and it was entitled to claim backdated tax.

Reed’s problem is that it is unable to reclaim the total of £158 million in National Insurance and income tax from the temporary workers. Reed Global, the owner of the company, is disputing the figure and intends to appeal the tribunal’s decision and ask for a judicial review into the treatment it has received from the Revenue.

However, the tribunal ruling sounded emphatic. The judges said they were satisfied that the allowances constituted Chapter 1 earnings, and even if that was incorrect, they classed as Chapter 3 earnings that should have been declared for tax and NICs.

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Income tax and NI merger moves a step closer

The government is proceeding with its plan to merge income tax and national insurance by first inviting businesses to provide evidence of the problems they encounter administering two separate taxes.

Employers and payroll professionals will have until the 19th of September to answer 14 questions primarily focusing on the burden of the PAYE system.

One of the questions on this evidence-seeking consultation asks respondents to rank the amount of time spent carrying out income tax and national insurance processes on a scale of one to five. Others ask about calculation errors, usage of payroll processing software and the introduction of Real Time Information.

David Gauke, the exchequer secretary, said the coalition has committed to making the taxation system in the UK the most competitive in the G20 countries for business, as well as simpler for individual taxpayers to understand.

Integrating income tax and national insurance will be a radical reform, but the government believes it will bring about real improvements, he added.

Anthony Thomas, the president of the CIoT, has welcomed the government’s decision to gather evidence from interested parties. He pointed out that a recent OTS report showed that both employers and HMRC can make significant administrative savings by harmonising the way NI and income tax are run.

The responses to this process will give the government an idea of how it should proceed with the formal consultation which is planned for the autumn.

The Treasury has also made it clear that NICs will not be levied on pensions, people above pension age, dividends or savings.

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Would you evade tax if you thought you’d get away with it?

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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Actors beware! HMRC is on the warpath…

It seems that HMRC have found a rich new source of targets for IR35. One that has been, rather surprisingly, untapped since IR35 was first brought in but which, on the face of it, is  probably more of a target than the traditional IT contractors and engineers. And one that further illustrates the problems with using “in business” as a criterion for investigation.

It is being reported in The Stage that several “high profile” performers who work through their own limited companies have had nice letters from HMRC pointing out that they may owe many thousands in NICs, going back six years. This, needless to say, is causing some consternation among the luvvies.

Now this is interesting, to say the least. When IR35 appeared the fledgling PCG thought that the media people would be obvious targets in their own right; after all, they are supplied via agencies, and they are under the direction of their clients (literally, in many cases). And, of course, they have a much higher public presence and would have given the campaign against IR35 a serious boost.

Sadly the answer that came back was “it doesn’t apply to us”. End of discussion.

Now, however, HMRC seem to believe it does apply to them. Why now is a whole other question, but The Stage reports HMRC as saying that it “is not cracking down on actors or any other profession”.  Really?  Perhaps HMRC have only just noticed that actors exist; after all, such frivolities as the theatre and Television are not something you would normally associate with the average tax inspector. Still, not a crackdown then, more of a refocusing exercise then… Or something,

Similarly a prominent accountant is claiming that HMRC are moving the goal posts and reinterpreting existing legislation. Echoes of the Arctic case, where S660a was imaginatively applied to a situation it was never meant to cover (and, of course, S660a itself came into being as the result of an actor’s activities…). Except this time they’re not moving any goalposts, actually.  It has long been a mystery why actors, freelance journalists and assorted meeja people have escaped the predations of IR35 despite many blatant examples of them having what look like full time employments, to the extent they have claimed for unfair dismissal when those employments have ended.

So what has changed then? Clearly someone has removed a previous barrier for some reason. Perhaps it’s a pre-emptive strike to offset all those PCG members stepping away from IR35 altogether.

However, the point at issue here is what actually constitutes being in business, which HMG insist is the key separator for IR35 fodder. Is an actor in business? Apparently not, if you accept that actors are somewhat unlikely to grow and take on employees and capital assets. However, they have to bid for work against other similarly qualified people, they work through agencies, they don’t get paid if the play is cancelled and they can send in a substitute (except they call them either stand-ins or understudies).

There are also solid business reasons for working through a company. Like other contractors, they have to cover periods when they have no income, they have to cover expenses, they have to accumulate pension funds and insure themselves for illness. Just like all us other contractors, in fact.

So really the surprise is not that actors and the like are now IR35 targets, but that it’s taken so long for anyone to realise it. Still, there are 36,000 Equity members out there. That would be a nice addition to PCG’s membership…

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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Why are new businesses ignoring the employers NICs holiday?

Contractor accountancy firm, Mitchell Charlesworth, has said that several new businesses are failing to capitalise on the National Insurance Contributions holiday set up by the government last year.

When Chancellor George Osborne delivered the coalition’s first budget last June, he introduced a measure whereby new businesses were exempt from paying employers NICs, up to a value of £5,000, on the first 10 workers they employ during their first year in business. By taking advantage of this, a new company could save up to £50,000.

The NIC holiday initiative is available to new firms that set up between the 22nd of June 2010 and the 5th of September 2013.

Paul Durrance from Mitchell Charlesworth said that government sources claim the take up of the scheme has been disappointingly low.

The coalition has now launched StartUp Britain in a bid to provide more support for entrepreneurs and whilst this looks good for the government, there’s a bewildering minefield of information for resource stretched start up firms to absorb, he continued. Unless they possess specialist knowledge, these firms could easily miss the golden nuggets, such as the NICs holiday.

The government is disappointed that so few firms have taken up the NIC holiday so start ups should grab the opportunity while it is available. There are certain conditions that have to be met so start-ups may want to consult a financial expert to check their eligibility. Newly set up companies in London, east England and the Southeast are not entitled to the break and in certain sectors there is a limit on the amount that can be claimed.

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IR35 – a slap in the face? Well, no, not really

My blog for June last year was commenting on the first budget of the new Coalition government. It got a cautious welcome from me – which they no doubt appreciated greatly – and while the overall news wasn’t that wonderful, it at least looked like things were heading in the right direction.

I also mentioned an entry in the Red Book that “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“. On that score for this budget, I have to say close, but no banana.

The Office of Tax Simplification made three suggestions for Mr Osborne; merge PAYE and NICs, either suspend IR35 or greatly improve how it is administered and maybe look at some tests to define who is employed and who is a freelance. Those of us in the “IR35 is the spawn of the devil” camp clearly hoped that suspension would be the result. Sadly, however, it was not to be; IR35 remains in place.

So a bit of a disaster then? Well, no, not really.

Firstly I’m inclined to believe Osborne and Gauke when they say that they could not afford to turn off IR35. Elsewhere in the Budget they confirmed the December 9th announcement regarding the closure of offshore EBTs that are being used to step around paying any taxes at all by many high earners. Without IR35, these guys would simply incorporate and go back to the same old job as a pretend freelance: the classic Friday-to-Monday soft shoe shuffle. With IR35 still there, they can still incorporate if they really want to, but the tax advantage would simply not be worthwhile. Which makes a degree of sense as far as I’m concerned.

Secondly, administration of IR35 is to be improved (I was going to say “greatly improved”, but it could hardly get any worse!). In other words, stop spending tens of thousands on five-year cases that invariably lose and focus instead on the ones where there may be a genuine case to answer – which, on current numbers, is about 3% of them. HMRC aren’t doing this by themselves, they will be talking to the experts on contracting who will be very clear that the net will be focused and not widened. HMG have invited PCG to be a key player in this, and for one I’m reasonably certain PCG won’t let anything through HMRC’s clutches that makes things worse for the genuine freelance.

Finally Osborne is now looking to merge PAYE and NICs. As I said last week this is a very difficult thing to achieve, but at least we have a chancellor willing to take it on. That means that if this can be made to happen, IR35 ceases to have any purpose anyway

The rest of the budget was, I thought, probably about as good as it could be given the starting position. OK, so Osborne has done a smoke and mirrors job by changing how inflation is measured and people who understand the Oil and Gas industry far better than I do are seriously dischuffed about the raid on their profits to fund the fuel equaliser, but the intent is sound.

So not the result we hoped for, nor even the result we would have quite liked, but at least we are still in there and having a direct say on how we are to be taxed. This is, despite the cries of outrage from the hard of thinking, no small achievement. PCG and Chairman Chris Bryce have done a seriously significant piece of work via the OTS and should be praised for 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

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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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If it ain’t broke…

Don’t fix it, goes the old cliché. But how about if it is broke, don’t fix it either? Why not simply get rid of it?

Now the Office of Tax Simplification is up and running, many bodies have been making their submissions on how they think things should be changed. And needless to say the abortion that is IR35 comes in for a lot of debate. Which is nice.

However I am struck by the fact that almost all that debate is centred around how it could be made to work better. Make it more fair, make when it applies a lot more clear, make it more of a level playing field. No, says I, you don’t want to do that…

Let’s think about why we have IR35 at all. If you work through a Limited Company, you gain certain advantages in how you convert gross into personal income. This means that it is not all that difficult to switch from employment to freelancing, trading through a limited Company that has no other purpose than to save you tax and NICs.

This, clearly, is a bad thing. Especially if you are an unimaginative MP from South Bristol well known locally for an inability not to jump on bandwagons.

So in comes IR35, which is not meant to stop people switching from employment to freelancing but simply to make sure that they pay the same tax as those who chose to stay as wage slaves. OK, it is a model of NL legislation, poorly conceived, poorly drafted, utterly incomprehensible and all in all about as effective as a chocolate fireguard.

But, and it’s a big but, nobody is asking why we have to work through limited companies. So rather than fix IR35, let’s fix the root cause. Which is the legislation that makes the intermediary company liable for any unpaid taxes. Which is why we have small companies. Which is why we have IR35.

So, change the law slightly so that the worker, not any other intermediary, is liable for their unpaid taxes. Then agencies can use sole traders, a status that has a recognised legal framework. It means no more debate about the nonsensical 24 month rule on expenses. You can be registered for VAT, you get working expenses and you can ignore those people who say you are only pretending to be a business. If you want a limited company you can have one: but if all you do with it is move its income to your bank account, be prepared for HMRC to declare it a sham. Hire people, reinvest income in growth, build a list of assets, then no problem.

Is that not a simple solution?

Incidentally, the members of the OTS have been announced. Number 6 in that list is one Christopher Bryce who, as you may know, is current chairman of the PCG. His being there is not only a huge endorsement of PCG’s ten year struggle for recognition but a major step forward in the fight to get rid of IR35 altogether.

Let’s hope he reads this blog…

Alan Watts can found at LinkedIn.
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