Tag Archive | "Personal Service Company"

Accountants warn against using personal service companies

If you’re a freelancer or a contractor that uses a personal service company you might be in for a world of hurt, many accountants warn.

Contractor accountants and other financial service experts with experience in helping the self-employed reconcile their tax burden with Her Majesty’s Revenue & Customs have begun to warn of using PSCs, especially since the taxman seems so damned keen to eradicate the use of such arrangements on the grounds that they’re too easily abused when it comes to tax avoidance. For what it’s worth the warning has quite a bit of urgency behind it considering how much trouble HMRC has been stirring when it comes to contract workers using PSCs, all because a few bad apples have ruined it for the rest of us.

Honestly the controversy surrounding the use of PSCs isn’t necessarily new, but it has been renewed over the past few years – and it’s absolutely grown to epidemic proportions. The taxman has convinced itself that any contractor that uses a PSC is a dirty tax dodger, and has been strengthening regulations to root out avoidance – especially through increasing disguised employment rules through IR35 and related activities. Honestly most sane people are sick of IR35 and its depredations – and a recent consultation by the House of Lords reiterated the sentiment that IR35 is a cumbersome and over-reaching method for determining tax avoidance – but even with all the evidence to the contrary there’s little indications that disguised employment rules are going to go away any time soon.

In order to combat the issue, accountants have begun to earnestly tell their contractor clients to think twice about using a PSC if they don’t want to run aground in the razor-sharp shoals of IR35 enforcement and investigation. This is something that may be easier said than done, considering some 1.5 million business entities currently use PSCs in the UK – and a massive number of those are undoubtedly freelancers and contract workers. Still, if you’re looking to keep your nose clean when it comes to tax avoidance accusations, I can’t think of a better way to do so than avoid anything that HMRC has in its sights – and with PSCs currently on the taxman’s radar it’s not such a terrible idea.

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Auntie Beeb puts the screws to its stars over tax dodge

Apparently the BBC has had it with the whole controversy surrounding stars being paid through personal service companies as a tax dodge by slashing salaries.

The Beeb has decided to start handing out pay cuts left and right to any of its stars that have received payment through personal service companies in the past. It’s a tactic by the broadcaster to bring contracted television and radio personalities into the fold as employees in order to stamp out the highly popular tax dodge, especially after the BBC has been raked over the coals repeatedly for its lax approach to the number of freelancers and contractors it employed.

To be honest there was – and still is – a serious problem with paying contractors through personal service companies, as it means a given worker ends up only paying corporation tax instead of income tax. For low income earners this isn’t really an issue, but when you earn enough to end up paying the higher 45 per cent tax rate and use a personal service company to pay only 23 per cent, it’s a pretty egregious move.

Of course, there’s nothing illegal about doing things this way. Immoral? Well that’s not for me to decide. All I know is that it truly takes the mickey out of Her Majesty’s Revenue & Customs that it’s missing out on so much revenue, and the taxman has started to lean on the BBC quite heavily to get more of its presenters as employees instead of contractors.

Of course the transition to a full employee does bring its fair share of benefits for presenters. Unfortunately to afford all these new employees, Auntie Beeb is slashing salaries by as much as 25 per cent for some former contractors, and it’s created quite a row between the BBC and all the agents for these stars.

On the one hand I can see the problem clearly, as a massive pay cut like that is more than a little hard to swallow. Then again, shedloads of these stars have been living high on the hog for several years by only having to pay corporation tax, so in the end my sympathy doesn’t really run deep. These top-tier presenters get paid whole lot more than most of us do, so I’m a little gleeful to see them getting cut down to size a bit. I suppose I’m just a terrible person, eh?

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Tax avoidance is top priority on the agenda for government

The government’s top priority is dealing with tax avoidance when it comes to their agenda, according to Prime Minister David Cameron.

The government has been on a crusade to stamp out any and all forms of tax avoidance after reports emerged that Ed Lester had been up to some funny business by using a personal service company to receive his pay. The exposure of student loans chief and his tax avoidance scheme led to a government review in order to investigate off-payroll arrangement abuse – and a raft of tax avoidance headlines for the rest of 2012.

The government may have eventually declined to adopt any proposals that emerged from its consultation with tax industry experts, but IR35 rules were indeed amended with an eye towards no longer allowing ‘office holders’ to use personal service companies to their advantage. However, IR35 has been criticised for it ineffectiveness in this case due to the fact that contracts made with the personal service company are in compliance with disguised employment rules, provided that the payee is the same personal service company.

Instead, Her Majesty’s Revenue & Customs says they will be actively targeting individuals attempting to cower behind the aegis of a personal service company in order to avoid paying their fair share of tax. However, the taxman will undoubtedly have its hands full in its struggles to ensure that any and all suspected non-compliance is investigated thoroughly.

Of course, it is to be noted that these new ‘office holder’ amendments for IR35 only address those working in the public sector. Contractors and freelancers working private sector jobs have not experienced any changes to their IR35 regulations.

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New statutory changes are just a ‘tidying-up exercise’

The new statutory changes to the disguised employment rules have been categorised as nothing more serious than a ‘tidying-up exercise’ by accountancy experts.

There’s no reason to reach for the pint glass with a shaky hand in the small hours of the morning in fear at the new IR35 changes coming in the Finance Bill 2013, experts say. This is because the recent Treasury-published update is keyed towards eliminating the ability of office holders to avoid taxation by using a personal service company – something that has been very much on the mind of the Government this past year.

Office holders that are paid as contractors through their own third party company (oftentimes owned by the office holder) will now have to make sure they comply with IR35 rules. Likewise will disguised employment tests need to be passed by any third party that holds the office directly.

This simple change was made in order to equalise the way office holders are treated under tax law, especially when they are engaged through personal service companies and other related third parties. This is important because firms using contractors are not required to pay the same amount of National Insurance as they would if they hired a permanent employee.

This means that regular, workaday contractors and freelancers are in no danger of being impacted by these new changes. In fact, if you are not in danger of being classified under IR35 right now you are still safe, as the only noteworthy change to the legislation is to add this extra measure of enforcement regarding office holders working in concert with third parties.

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New disguised employment change not a threat to contractors?

The new changes to “disguised employment” IR35 rules – the first ever – pose no danger to honest contractors, according to some contractor accounting experts.

Published early last week alongside other Finance Bill 2013 draft legislation by the Treasury, the new statutory changes will see an extension made to IR35 in order to apply it to office holders even if they use third-party intermediaries, such as personal service companies. According to the Treasury it will be a two-way street, applying to both an intermediary named as a client’s office holder or if a worker is directly named office holder yet receives his or her salary through an intermediary.

In other words, the statutory change is aimed directly towards stamping out the practice of high-level executives, especially in the public sector, from avoiding tax by being paid through a personal service company or some other third party intermediary. These changes were necessary in the eyes of many employment experts, based on the furore over the practice this year,

While the news of a new legislative measure being added to IR35 – already Byzantine in its complexity – could send many freelancers and contractors reaching for their anti-anxiety medication. However, the rest of the disguised employment law remains the same, meaning that genuine, honest contractors that already lie outside the scope of IR35 have nothing to worry about from the new legislative changes, provided they aren’t engaging in the practice now proscribed by the addition to the statute.

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Government announces new IR35 rule statutory changes

The Finance Bill 2013 will contain the first statutory changes to be made to disguised employment rules in the better part of a decade, the government said.

Contractors and freelancers were relatively ambivalent about the news, given how George Osborne had already prefaced the announcement during his Autumn Statement last week. The chancellor did say that he had decided to dismantle a handful of proposals to tax ‘office holder’ contractors in the Statement, warning that he would ensure that the issue would instead be dealt with by strengthening and possibly expanding the scope of IR35 instead, and now with the new announcement yesterday concerning the expansion of the disguised employment rules, few freelancers were taken by surprise.

The new changes as proposed by the Bill makes the intent of the government very clear when it comes to treating any office holder that uses a personal service company in the same manner other professional contract workers are treated, industry experts say. In fact, there is some thought that the new legislation could see the public service companies employed by office holders become the responsible party as far as employment taxation is concerned in lieu of the firm contracting with the freelancer, though the current particulars of the expanded statutes are yet to be revealed in any coherent way.

This could end up being a major boon for employers who would no longer have the spectre of being accused of tax avoidance hanging over their heads, though again it is simply too early to understand the full ramifications of the announcement.

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BBC payroll review may lead to bad news for contractors

UK freelance community members say that the BBC’s decision to review pay arrangements for more than 800 of its contractors may lead to bad news across the board.

The Beeb is looking into any of its freelancers who use their own personal service company to receive their pay and subjecting them to a new employment test. Most say that this step might lead to other public organisations following in the broadcaster’s footsteps, though there are many industry experts that dispute this possibility.

BBC chief financial officer, Zarin Patel, released a statement recently on the issue, remarking that the BBC has received confirmation from Deloitte that it was both ‘legal and appropriate’ to use a freelancer through their own PSC. However, even in this case, some of the broadcaster’s talent may be unable to pass Her Majesty’s Revenue & Service’s IR35 ‘disguised employment’ test, ending up being re-categorised as employees instead of freelancers.

For any BBC staff member that earns £50,000 or more in a year – or anyone who receives their pay through a personal service company – the broadcaster will be applying the new test. Around 131 people may end up being given the opportunity to become permanent employees of the company as a result, once their existing contract runs its course.

HMRC has been pushing IR35 quite strongly over the past few months after reports have emerged that many freelancers could be abusing personal service companies as a way to avoid paying higher income tax. Employers may be complicit in the arrangement, the taxman says, since paying a freelancer results in lower National Insurance payments made by the employer as well.

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Workers could be victimised by IR35 due to ignorance

It’s unfortunate, but many workers may run the risk of being victimised by IR35 rules because they were ignorant of the consequences of incorporating.

The Low Incomes Tax Reform Group says that many contractors are being told by quite a few end-users that the only way these freelancers will obtain work is to become a limited company. However, these same end-users now stand accused of not furnishing these erstwhile contractors with the consequences of working in this manner, particularly the tax implications of such a change, said the campaign group.

Firms are most likely pushing their contractors to change to personal service companies in an effort to reduce their tax liabilities in the still sluggish economy, the group believes, and has called for those abusing system loopholes to be investigated by Her Majesty’s Revenue and Customs. Group chairman, Anthony Thomas, warned that workers are caught between a rock and a hard place, as if they end up being coerced into working upon terms that allow their employers to reduce their tax burden they risk challenge by the taxman, yet refusing to work could lead these contractors to be refused benefits as a result.

The true problem is that workers are not being given the requisite information to make an informed decision, Mr Thomas added. Without being given the costs and implications inherent in the decision to become a limited company, the group chairman believes that too many workers are walking into the situation blind and possibly exposing them to tax liabilities.

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If you think a professional accountant is expensive, wait till you hire an amateur!

For some reason I’ve seen a whole raft of questions and complaints about that most retiring of professionals, our friend the humble accountant. What is more, the questions and complaints being raised tend to demonstrate why they need an accountant in the first place.

There are two basic themes, best summarised as “How much?!” and “My accountant won’t let me…”.

The “How much” brigade really amuse me. They usually ask for recommendations for a good accountant who only charges £50 a month. Well look, I used one of them when I started out in contracting, on the recommendation of someone who knows about these things and I was young (ok, youngish) and naïve. After a couple of years, when I’d learned what I was doing, I worked out he’d cost me a few thousand in unnecessary taxes, late filing penalties and generally weak advice. Rather more than I‘d paid him for his services, in fact. So I switched to one of the contractor specialist accountants who recovered that money over the next year or two by giving rather more appropriate advice and stayed with them ever since.

I’ve always said that a good accountant is free anyway. Let’s face it; I do two kinds of stuff. Some stuff is for clients and I get paid for doing it, at an hourly rate well above what my accountant charges. The other is stuff I want to do – well, OK, more usually stuff that She Who Must Be Obeyed wants me to do – and I don’t get paid for it (usually quite the opposite, in fact!). And doing accountancy beyond the bare minimum of logging what money went where does not fit into that category. So as far as I’m concerned the accountant is doing stuff I don’t want to do that has to be done, more accurately and far more cheaply than I could do it. So something of a no-brainer.

On the other hand, the members of the “Won’t let me” brigade are seriously deranged. In the last couple of days I’ve seen someone trying to claim spending £5500 on a single PC (including £2400 on two monitors) as a business expense, someone asking about charging his MBA course as a necessary business cost and someone asking about making his three year old a shareholder to save tax, then having a go at their accountant for asking questions. There are others – just wait a day or two and another one will be along…

OK, the first guy might have a point (he’s certainly got one hell of a home entertainment system …) but the other two not only don’t know the relevant laws, they’re actually complaining that their qualified, expert, paid advisor is telling them why it won’t work. Totally barking.

And just going back to costs again, I was challenged today on why I need to spend any more than £50 a month for a simple business model and can’t I see I’m being ripped off when his high street guy does all he needs doing. Fine, I replied, just ask him about a few contractor-related basics, such as what is the definition of a PSC, what’s IR35 and how it is assessed, what is the tax treatment of training to expand your skill set, how to correctly answer the questions on the P35 and why, and why he isn’t an MSC. He may well know all the answers, in which case well done him, but I know more than a few ACCAs who don’t.

As Red Adair said, “If you think a professional is expensive, wait till you hire an amateur”.

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.

Image: Cartoon Man by TheNickster

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The important question framed by HMRC that is, of course, totally ambiguous

When is a question not a question? Now there’s a question. And the answer is, apparently, if it’s a notice under TMA 1970 Section 8 which, as ony fule kno, is not a notice under FA2008 Schedule 35 paragraph 1. Until the situation is changed at which point we will be informed of the change. So that’s perfectly clear then.

Who said tax had to be taxing…

Let me explain. There are two questions on the Self Assessment return we have to complete every year that ask “Are you a Service Company?” and “Have you applied the Intermediaries Legislation?” Needless to say, you have to answer either Yes or No to both.

But since this question has been framed by HMRC, it is, of course, totally ambiguous.

Firstly, exactly what is a “Service Company”? Such a beast is not actually defined anywhere: trawl through the labyrinth that is the HMRC website and you will find many references to the now outlawed Managed Service Companies, but nothing on simply “A Service Company”. Which is useful.

Of course we know they mean a Personal Service Company – something else that doesn’t exist in law – and that by common usage is understood to be a company through which one or two individuals sell their services to a range of clients. Otherwise known as a totally ordinary business. Or, if you really have to particularise things, a nano-business.

So that’s easy then: is my company a non-existent undefined entity or not. So we can safely say Yes since it is. Or it isn’t. Sue me if I’m wrong.

Then we get to the second question, “Have you applied the Intermediaries legislation?” Well yes, I have and I have concluded it doesn’t apply. So do I answer Yes because I have applied it or No because it doesn’t apply? Which one will lead Hector to believe I am liable for IR35? Well, we know the answer to that one; any combination of answers since I am caught until proven otherwise. But I digress.

Apparently the real answer, according to people who have more time for this nonsense than I do, is to answer Yes to the first and No to the second since that is a defensible combination no matter what HMRC try to stick you with.

And, just to add to the confusion, there is an argument that says you don’t have to answer the damned question at all. That gets a bit convoluted (well it was a barrister that raised it) but basically in 2009 HMRC sought to prevent people not answering the question by making it no longer ultra vires, meaning you could be penalised for not answering it. Which is where we came in. Honestly…

The barrister in question argued that a question on a tax return is not a notice, i.e. something you are obliged to answer. And eventually he got the answer back from HMRC as per my opening paragraph: it’s a question not a notice. So you needn’t answer it.

Except of course the barrister in question is, as I understand an already confusing situation, not a nano-business so the question doesn’t actually apply to him anyway: he was merely seeking clarification that he didn’t need to explain not answering the question. I don’t think people like me can be quite so sanguine about it.

So do I answer Yes then No? Now there’s a question…

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

Image: Stress by Dave-F

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