Tag Archive | "Office of Tax Simplification"

OTS proposes new benefits submission scheme for contractors

Benefits submission for contractors and other self-employed Brits might get a bit less complicated if the Office of Tax Simplification has its way.

The OTS has a new proposal in its latest employee benefit and expense review that could cut down on the amount of paperwork that employers (and the self-employed) have to submit to Her Majesty’s Revenue & Customs. While contractors currently have to submit a P11D to HMRC, the new proposal from the OTS could pave the way for firms to process staff benefits through payroll in appropriate situations. 

That’s a gross oversimplification of course, but you’ll have to bear with me as I work my way through the particulars of this proposal. When youi get down to the nitty gritty of course there’s plenty of things to pick over, like the fact that the OTS says that some benefits can be entered via payroll whilst others can still be submitted through a P11D, especially because some benefits are truly difficult to payroll. Whether or not there will be a specific list of which benefits will be funneled where is unknown, but the OTS is adamant that it should be up to the choice of the employer.

While it’s definitely a good idea to make it easier for contractors to submit benefits to the taxman, it seems like not much benefit if there will still be benefits that need to be submitted the old-fashioned way. Isn’t this simply creating more red tape instead of streamlining things. If it was me I would prefer to simply do it 100 per cent one way or the other and not have to split between both the old and new methods.

Still it’s just a proposal, and I’m sure the OTS will tweak and modify its plans until it lands on something that will be implemented. Hopefully it will be much more streamlined in practice as well as in theory. If not, it seems to me like it’s just an exercise in futility and more than a bit of a waste of time, money and effort. I’ll just keep my fingers crossed that this works itself out – though at the same time, I wouldn’t recommend anyone holding their breath in anticipation, either.


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Is cash accounting the way forward for micro-entities?

Contractor accountants may be interested to know that the Office of Tax Simplification has told the government that the UK’s smallest enterprises should be allowed to use cash accounting instead of producing full GAAP accounts.

The OTS’ tax director, John Whiting, said there was a good case for a type of cash accounting and we need to do more to come up with a straightforward method of calculating the tax liabilities of micro-entities.

However not all tax experts believe changing the way businesses produce their annual accounts will reduce red tape. Steve Collings for example says that preparing accounts isn’t a problem; rather it’s the tax system that needs to be simplified. He also expressed concerns that if cash accounting is adopted, something will go terribly wrong and small companies will become embroiled in tax evasion scandals.

The cash accounting proposal only applies to companies turning over a maximum of £30,000. But this could cause problems for small businesses once their turnover exceeds that amount and they need to transition to accruals accounting.

Another expert has suggested that income should still be accounted for on an accrual basis but flat rate accounting could be applied to expenses.

The OTS also recommended that there should be more flat rate expense allowances that qualifying businesses could opt-out of if they found a more beneficial system.

Companies that want to disincorporate should also qualify for a new tax relief, said the OTS. This would reduce the administrative burden on businesses while they reorganise.

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Budget 2012 – the new utopia of a modern Britain

One of the few advantages of resting between contracts is that you can go off on holiday without that nagging feeling that you’re throwing away lots of earnings to do so. And yes, I know my rate is annualised to cover such things, but it always niggles. Still, no time like the present so She Who Must Be Obeyed and I are off to far-flung places for a few weeks. Well, some friends are getting married over in Napier and it would be rude not to attend, wouldn’t it?

I will miss a few things though (no, not daytime television). I’m here long enough to see Wales grind England in the mud at Twickenham but I’ll miss the triumphant finale over France (hey, I’m Welsh, we’re natural optimists). I’ll miss the start of the Formula 1 season. And, most importantly, I’ll miss the Budget.

Now the Budget might not seem to be high on most people’s list of desirable things to witness first hand, but this one might actually do something for small business like mine; certainly the last two haven’t so it must be our turn.

It will be interesting to see if the Office of Tax Simplification – remember them? – comes up with anything. More importantly, will the IR35 Forum actually deliver something substantive? Looking at the minutes of recent meetings they seem to be in classic Sir Humphrey mode, failing to take any suggestion forward to a workable proposal. Since they have to report in time for the Budget, I’m guessing that they may have actually had to produce something this time round. They might even manage to work out how to distinguish between a business and an employee, something that is as obvious as the difference between a walrus and a walnut to most of us, but this is a body staffed by people who work in the civil Service so they can’t be expected to understand non-employees.

There is also a faint chance that Cameron and Osborne can agree what they want to do to support UK businesses. Or even that they together will decide that St Vince of Cable is wrong (he is, of course, but it’s worrying they haven’t spotted it yet).

Still, I’ll have my smartphone with me, so I’ll be able to keep up with things from the other side of the globe. Providing I’m not spotted doing so by the management; for some reason she is of the opinion that you don’t do work stuff when you’re on holiday. Most odd…

Ah yes, smartphones. Someone in HMRC has reached the 21st Century at last, and they have realised that a smartphone is not a PDA (remember PDAs – like smartphones that couldn’t make phone calls). As a result they have decided that having a business-owned smartphone can be taxed the same way as a business-owned mobile phone. It’s a small step, but we ought to encourage them; one day they might think of something really worthwhile.

Anyway, you will be spared my ramblings for the next few weeks. When I return it will be to the new utopia of a modern Britain with a growing economy, which recognises freelance contractors as the heroes they are and which has put St Vince back in his box.

Or perhaps not…

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

© 2012 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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It’s been a difficult year for many but not a disastrous one, overall.

So this is Christmas, and what have we done? Well, speaking personally, quite a lot in one way and another. But it has been a funny old year in some ways.

Last December I was being optimistic about the Coalition making significant changes in various things. I was cautious about IR35, thinking they wouldn’t be a position to repeal it out of hand, but I didn’t expect young Osborne to come out in the Budget with the statement that he needs to keep IR35 to prevent abuses of the system. Which is kind of where we came in.

He did set up the Office of Tax Simplification though, and from there has sprung the IR35 Forum. The former has turned into something of a toothless wonder, getting ever more bogged down in detail. The more cynical among us might be tempted to suggest that this is because a lot of the parties around that table have something of a commercial interest in keeping IR35 exactly where it is, but that would be an unworthy thought. Wouldn’t it….

The IR35 Forum is still to produce anything but it looks like it can at least claim it has a direction and an intent that its parent body is sadly lacking. However we won’t really know much more until the next Budget.

In reality the best we can hope for is that IR35 remains as is, but Hector is rather more competent at judging who to stick under its microscope.

The Agency Workers Regulations arrived and caught all the agencies by surprise – hey, they only had a year’s warning, so what do you expect – leading to a flurry of letters demanding that you declare yourself outside its scope. Tricky, when anyone is potentially inside its scope and we have no case law to work with. Plus can change as they say.

The Cabinet Office was presented with a major paper on Security Clearance following a detailed, wide-ranging research project led by PCG, who highlighted what’s wrong with the system and, perhaps more importantly, what damage is being done. And even some options for how to fix it. This has been very well received and personally I am delighted, having been pressing for this kind of thing to happen for around eight years now.

Several IR35 appeals were completed, all but one of which were found to be outside, so reinforcing the status quo if not setting any new precedents. The other was the one I wrote about just last week, where the guy was found to be outside and then outside, all in the same contract. I think we’ll park that one in the folder marked “Say What?” and just forget about it.

The Market: now that’s interesting. The financial sector suffered an almost universal 10% rate cut during the year, with a few going even further. The rest of the world, however, seems to be plodding along at the same level. Lots of contractor layoffs and enforced holidays as well – again, only in finance. There are nowhere near as many jobs as they were, and rather more people chasing them, but you have to say that, taken as a whole, things aren’t as bad as some were predicting. The job losses seem to have been in the permanent market, so you have to conclude that UK PLC is sticking with easily-disposable temporary resources until they can see the light at the end of the tunnel. A light which is most likely to be a train coming the other way, if the pundits are to be believed.

And best news of all – our favourite MP and failed tax evader, the fragrant Ms Primarolo, is standing down at the next election.

So it’s been a difficult year for many but not a disastrous one, overall. Speaking for myself I’ve been gainfully employed most of the year, and am hopeful of that continuing a while longer. I’m looking forward to a week off eating and drinking far too much – and not having to face a sheet of blank A4 on Thursday night – before having to face the 7:15 from Bristol in the bleak midwinter again.

Have a good one.

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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OTS considers simplifying small business taxation

The OTS is looking into the feasibility of introducing a simpler system of income tax for the UK’s smallest businesses and the issues concerning disincorporation.

The Office of Tax Simplification says the choices for making small business taxation simpler fall into two categories. It could either change some regulations to ease the complexity in certain areas, or use non-profit measures ranging from administrative changes to more fundamental reforms.

If turnover was the determining factor for eligibility for the simpler system, the OTS is considering between £20,000, £30,000 and the VAT registration threshold which presently stands at £73,000.

The OTS will evaluate the non-profit measures in use in other countries and as well as considering cost accounting or a system of charge indicators and flat rate expenses allowances. Small businesses would then prepare their accounts based on cash received and have fixed rates for expenses, or taxable profit would be a fixed percentage of annual turnover.

John Whiting, the tax director at the OTS, said tax administration is a major headache for small businesses. He wants businessmen and their advisers to provide their opinions on the different options available.

As far as disincorporation goes, the OTS is examining whether micro-business owners should be given the chance to revert to partnership or self employment status and they ways to handle the tax implications of such a move.

Alex Henderson from PwC said the scope of the consultation was too narrow; focusing primarily on sole traders. He went on to add that he would welcome a review of all business structures and any changes would also have to deal with HMRC’s concerns.

Consultations on both proposals will be running until October 7th and the official documents can be viewed on the OTS website. Recommendations will be presented to the Treasury before next year’s Budget.

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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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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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Economics 101…

The discussion about the Office of Tax Simplification is gaining momentum as the body itself starts to get fully organised. A fair range of interested parties have been discussing how they want to see things change. Naturally, for those of us who have lived with it for eleven years, a lot of this discussion has been about IR35.

Actually that is a little lopsided: there are many aspects of the tax system that need to be looked at, such as the hundred or more tax releifs you can claim for depending on your income, outgoings and inside leg measurement. However, IR35 is an obvious target, being both ridiculous and onerous in roughly equal measure.

But can I point out that much of that debate is starting from entirely the wrong premise?

Ostensibly IR35 is about ensuring an individual can’t reduce their tax liability by channelling their earnings through a different commercial vehicle and by not being employed by anyone. For example, if you have a company that has made a handsome £700 million net profit, you could potentially pay a £1.2 billion dividend to your Monaco-resident 100% shareholding other half. Leaving aside the minor detail of how you pay a dividend that represents 130% of your net profit, the point is you pay no tax at all on your personal income, perfectly legally. I mean, how ridiculous is that?

Oh, hang on a minute….

OK, so that’s an extreme case but if you think about it, Mr Green actually has a glimmering of a valid argument in his apparently specious assertion that paying lots of tax through his company somehow compensates for his not paying any tax at all on his beer and skittles money – or at least, nowhere near as much as a Brownian economist might think he owes.

My point is that most, if not all of the IR35 debate is about how to level the tax paid by a small business owner compared to an employee doing much the same job. The answer is actually blindingly obvious: the employee needs to pay more taxes to catch up.

Say what?

Think about it. Assume an individual with a not unreasonable potential income of £75k, either as salary or as net profits from their business. And, for the sake of argument, we’ll assume that none of that money is going to be ploughed back into the business for growth or protection against future gaps in earnings.

An employee would pay roughly 39% in tax and a company owner using the minimum salary and dividends option would pay a mere 26%. Clearly unfair chaps, come on, play the game.

But – and I think it’s quite a big but – look at the actual numbers. Against that income, the employee would pay £29,250 in tax. The company owner, however, would pay £32,625. That’s £33,75 more than the employee does.


It’s because the company owner would also have generated £13,125 in VAT (or £15,000 from January 2011 if you want to be really pedantic, which makes the gap even wider). And since it’s all about income for the Exchequer, the only possible conclusion is that to achieve a level playing field, personal taxation for employees needs to go up by some 13% to ensure they are providing the same level of tax income as the business owner.

Unfortunately I don’t think that is on Mr Osborne’s radar.

Anyhow, I’ve said it before and I’ll say it again; if I’m a tax avoider I’m clearly a very bad one. It really is about time we forgot all about Labour’s stupid notions of fairness and applied a bit of objective thinking to the whole debate. We money-grabbing contractors may take home more than many employees, but we do so by taking much greater risks with our income than an equivalent employee. At the same time we put a lot more back in to the economy.

And after eleven years of IR35, it would really be nice if people began to understand what it is they’re talking about.

Alan Watts can found at LinkedIn.
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Office of Tax Simplification produce initial tax allowances list

Earlier this week, the Office of Tax Simplification published a comprehensive list of all the UK tax reliefs and allowances that are available; 1042 of them!

How many contractor accountants can name all of them?

The OTS is now asking people to let them know if they have missed any off the list and invited the public to leave comments on its website if they take advantage of any of the allowances.

John Whiting, the OTS’ tax director, said he expected some people to be surprised at the number of reliefs in our current tax system. In fact, he had only expected to find a couple of hundred. Some of these allowances have a clear, valuable benefit and we do not want to change those. However, others may not be used any longer or be too complex and onerous to be of any great use, and it is those that the team wants to focus on.

Of course this long list is going to contain some odd sounding allowances such as ‘angostura bitters relief’, and this sort of relief will also be closely scrutinised.

The OTS has set criteria for abolition of an allowance and these will take into consideration the cost of administering the relief and the complexity of the legislation.

The OTS has also set up two consultative committees to take on board input from SMEs and their advisers. The small business tax review committee includes the chairman of the PCG, Chris Bryce, and Anita Monteith from the ICAEW.

In separate news, HMRC published its business plan on Monday which lays down its intention to implement real-time information for the PAYE system by April 2014.

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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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The Institute of Directors speaks out on taxation

The Institute of Directors has said that the government’s plan to reduce corporation tax is still not enough to encourage foreign businesses to invest in the UK.

Corporation tax rates recently fell to 28% and the coalition intends to reduce them further to 24%, but the IoD thinks they should be dropped further in order to attract foreign investors. A spokesman for the IoD, Alistair Tebbit, pointed out that the UK has one of the highest rates of corporation tax which means we are not competitive with other EU countries where the average rate stands at 23%.

The Institute has also called on government ministers to reform the IR35 rules that have long dogged contractors. The OTS is about to begin its review of the IR35 legislation and the IoD has already put forward its suggestions for change. As part of the review, the OTS will conduct a series of roadshows around the UK to find out what business owners think about the complexity and cost of small business taxation.

IR35 should be replaced by precise rules, along with a screening test, so that the majority of companies are taken out of its scope. But the IoD’s head of taxation also says that widespread reform of the small business taxation system could be an acceptable alternative.

John Whiting, the Office of Tax Simplification’s tax director, acknowledges that small business taxation is complex and the problem cannot be solved overnight. The OTS is due to inform the chancellor about the areas where simplification should be prioritised, before the Budget next year.

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Makes you laugh, doesn’t it?

Do you ever get the feeling you don’t really understand what’s going on? Reading the news over the last week, I kept getting this horrible feeling that I was in an episode of Reggie Perrin.

Perhaps I’m working too hard, but if we’re trying to save as much money from the public purse as we can, why are we promising to give everyone the maximum pension possible? Why is the Mayor of London up in arms about ethnic cleansing in Streatham? And why will I have to take money out of my company to provide a pension fund for my staff – of whom there is precisely one – when the money that I deliberately leave in the company is meant to be to help fund my pension…?

The world really has gone slightly mad.

There have been flashes of sanity though. The Institute of Directors has written to the new Office of Tax Simplification pointing out that there is a tax measure they really need to look at. One that causes great confusion, that is counter-productive and actually costs money to implement since almost all attempts to charge it result in failure. You might have heard of it; it’s called IR35

Errm, hullo, IOD? Aren’t you about 10 years late? Some of us – about 20,000 to be precise – have been beating that drum for quite a long time. Now, finally, it’s on the agenda for reassessment and, dare we hope, possible abolition, and the IOD have realised it’s a bad thing. Keep up at the back, chaps.

Actually what I thought was quite amusing was that they used the same arguments and most of the same statistics that PCG have been generating over the years. So perhaps there was a grain of truth in what we’ve been saying all along.

We’ve also been saying things about abuse of the visa system and the importing of non-EU workers to undercut the local variety, many of whom are now out of work. So it was with a degree of amusement that I read a survey has shown that a quarter of Tier 1 visa holders are working in non-skilled jobs.

Say what? Tier 1 are the people who can stand on their own two feet, who will make a positive contribution to the country and who, after two years, are supposed to be earning at least £35k a year to keep the visa. Granted people can work for whoever they want, at whatever they want, but if being a supermarket cashier is the height of your ambition, you really do have to wonder why they came in the first place.

I also read that someone in government has had a bit of an inspiration. When discussing the proposed cap on immigration and its reputedly monstrous impact on some companies’ ability to bring in staff, it was suggested that perhaps using up the ones they had applied for might be a way out of their dilemma.

And I’m sorry, but I still refuse to take St Vincent of Cable seriously.

Still, some things brought a smile to these grumpy old lips. The better than expected growth figures and the retention of our AAA rating prove that some think we’re going about things the right way. The Coalition’s spending review contained a lot of solid common sense, something politics has been lacking for quite a while (about 13 years, to be precise) although I still don’t quite get that thing about non-aircraft carriers. And I loved Osborne’s parting shot when announcing the programme, that the total cuts added up to 19% of government spending, which is precisely one percent less than the 20% that Labour had said was the most we could afford and what they would have done had they been in power.

So a confusing week in some ways, but not a bad one, all things considered.

Alan Watts can found at LinkedIn.
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“The hardest thing in the world…

… to understand is the income tax”. So said no less a person than Albert Einstein. Meanwhile the Coalition, in the shape of Treasury Minister Danny Alexander, have been talking about ways to increase the amount of tax flowing into the Government’s coffers.

I think most thinking people agree we need to close the gap between UK income and UK expenditure and you can only go so far in cutting down what you spend. Unless you’re a bank of course, but that’s another subject.

The only snag is, Mr Alexander was using the same old rhetoric we were really tired of hearing from the last lot: His speech was littered with references to “avoidance and evasion”. He also went on a little bit too much about “fairness” – and we all know what that means! OK he was talking at the Lib Dem conference so we might forgive a degree of tub-thumping overstatement, but his words carry a hint of his true intent.

Personally I find this very worrying. Firstly there is a very clear difference between avoidance and evasion: one is legal and one isn’t. If you want to stop avoidance, the answer is very simple; you cancel that concession or you pass a law saying that you can’t do things that way. If, for example, it is avoidance to take advantage of the tax free allowance we all get – which it is, of course – then you cancel the tax free allowance. How hard is that?

Of course there is the slight problem that an already complicated tax regime, after years of Brown-induced fiddling, is now so labyrinthine that nobody really knows what taxes they owe. Including HMRC themselves, if the various stories of under- and over-payments and the odd billion pounds of uncollected taxes are to be believed.

Secondly, if someone can define “fairness” when applied to taxation, then I would be very surprised. Danny boy’s concept – like a certain Miss Primarola’s – is basically to ensure everyone whose gross income is £50,000 pays £10,000 in taxes. Simple enough idea, but is it fair? I don’t think so. A freelancer’s gross has to cover a host of things that an employee’s doesn’t. A company owner’s gross has to cover off building the business and quite possibly tying money up for years to do so. Fairness is a good word, but it’s not one that you can apply to taxation.

You can of course arrange things so that while you may pay differing amounts against your £50,000 you at least know in advance how much it is going to be and why. What we need is someone to look long and hard at simplifying the tax system. An Office of Tax Simplification, if you like. Oh, hang on a minute…

Nevertheless, HMG need all the income they can find, and even an old cynic like me can see that if you live in the UK, work in the UK and get paid in the UK, you should be paying taxes at UK levels. Are you listening Mr Green? Just because your company pays lots of taxes against its profits doesn’t exempt you from paying taxes on the money you take out if it for your own use. Sorry, for your wife’s use.

Still, getting back to the point, HMG doesn’t need to tackle evasion, it’s already illegal. All they need to do is apply the law consistently. If they want to tackle avoidance, all they have to do is define what it is and which practices they consider to be unacceptable. The various avoidance schemes that are their real target all exist by virtue of ambiguity in the wording of the tax laws. It’s down to HMG to remove that ambiguity so those schemes become unworkable or unprofitable..

That, to my mind, is what the fairness argument should be about.

Alan Watts can found at LinkedIn.
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