Tag Archive | "office for tax simplification"

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

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Insufferably complex tax system must be simplified say SMEs

Small businesses operating in the UK are finding the tax system insufferably complex, according to the Chartered Institute of Taxation.

The CIoT expressed its view after the results of a FPB survey revealed that 57% of SMEs would accept paying more tax if the system was simplified and red tape reduced. 78% of the respondents to the survey said the current tax system deterred them from recruiting new staff.

A fellow at the CIoT, Andrew Gotch, remarked that over the past 13 years the tax system has become increasingly more complex and small businessmen have been finding this increasingly troublesome to the point where it has now become almost insufferable.

However, he warned that it is a case of “be careful what you wish for” when it comes to tax simplification. It’s easy to simplify things but the government is desperate for money so it is unlikely that simplifying the system will mean paying more tax becomes cost-effective.

Contractor accountants might be interested to learn that the UK’s professional tax bodies have produced guidance notes for direct tax advisers to help them act in difficult situations.

The guidance is half the length of the 2004 code of conduct and is meant to be easier to use. It outlines the standards members should follow when dealing with the Revenue in connection with the tax affairs of their clients. The core principles include due care, integrity and professional competence.

There is new information on the regulations concerning money laundering and tax advisers are provided with flowcharts to help them cope with difficult situations, such as a client’s refusal to correct serious errors in his tax return. It also provides information on client confidentiality and the circumstances in which data must be provided to HMRC without the consent of a client.

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I am Not an Employee, I’m a Freelance

Good to see the Coalition coming good on their promise of reviewing IR35. The announcement of the creation of the Office for Tax Simplification was rapidly followed by the publishing of its Terms of Reference. This made really good reading since they contained a specific statement of IR35 as a prime target for their review.

Needless to say this has prompted an immediate flurry of speculation about how IR35 would be replaced with something more draconian. For example, the new head of the OTS, John Whiting, mentioned 80/20 when talking about their proposed plan of action, which some have immediately translated into meaning the OTS would resurrect the failed and discredited Australian idea that to be a real freelance, no more than 80% of your income should come from a single client. Heigh ho…

As I’ve said before, there is a real difficulty distinguishing between genuine one-man companies and those who use a Limited Company purely as an artificial tax avoidance vehicle. But however the OTS suggests we square that particular circle, I’m fairly sure the 80/20 rule will not be part of it.

Meanwhile this whole (and rather premature!) debate has prompted some other thoughts.

Key to any resolution to the IR35 question is defining a freelance worker. While the traditional model in UK economics defines everyone as either employer or employee, in reality there is a third category of “none of the above”. If that third way was properly enshrined as a working model, consider the many areas where things would become much clearer.

Firstly, there is the vexed question of business expenses. As we know, travel and subsistence expenses for a temporary workplace cease after two years. While this makes perfect sense for a permanent long-term employee, it is nonsense for someone like me who takes work wherever it may be found. Why should I personally be penalised if my company’s client base happens to be based in the same approximate geographical area?

Secondly ID checking and the right to work in the UK, while important, is the responsibility of the employer. My clients are not my employers; in fact most of my contracts go to great lengths to prove they are not. If we allow me to be an independent worker, that checking becomes unnecessary since my company can make the necessary declarations and accept legal responsibility for their accuracy.

Thirdly, liability for payment of taxes could go down to the individual and not, as at present under S44-47, up to the intermediary company (which in most cases would otherwise be the agency). That would step around a huge amount of contractual debate of who is an employee of whom, which incidentally would only help resolve the IR35 “problem”.

Finally there are a raft of current and future issues with the Agency Workers Directive and the Agency Regulations that would cease to be of any relevance. For example, we have to go through the nonsense of opting out of the Agency Regulations when, as any fool knows, the way this is routinely done means you are in fact opted in anyway.

And, looking a bit further over the horizon, it is clear that the EU has no concept of the UK model for the freelancer worker. If we can establish our legitimacy up front right now, we would avoid a whole new set of problems.

The UK Freelance is a hugely valuable factor in the UK economy. There are around 4.8 million of us. Why is it so hard to get that fact recognised in law?

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