Archive for the ‘Taxation’ Category

Advice given by solicitors and accountants to their clients has always been deemed to be privileged information that cannot be divulged to others. And, while this may still be the case for legal advice given by solicitors, it no longer seems to be true for tax advice given by accountants.

In a recent case involving insurance company Prudential and the Special Commissioner of Income Tax, the High Court ruled that any correspondence with accountants that helped to determine tax liability should not be treated as confidential. A notice issued by HMRC, which required an accountant to share tax planning advice, was valid and professional privilege did not apply. This judgment is likely to apply to all taxpayers and may mean HMRC can require accountants to divulge advice they have given to their clients on matters of tax law.

This development comes at a time when HMRC may reportedly be returning as unpaid any tax payments made using out-of-date pay slips. The agency has recently completed the changeover of its bank accounts to the Royal Bank of Scotland Group and Citi. Anyone making payments using old pay slips that show the previous Bank of England accounts is likely to have them returned as unpaid. This could result in late payments incurring interest and penalties being imposed for late filing.

These cases do illustrate the need to have your affairs organised correctly. Although UKContracting.net is not licensed to give tax advice, it can ensure all your other business arrangements are set up in the best way.

The recent High Court decision that HMRC is entitled to levy taxes retrospectively has come as a great shock to many IT contractors. It is estimated that £100 million may now be recovered from UK taxpayers with around 2,000 IT contractors being affected.

The case goes back to the 2008 Budget, when the resulting Finance Act sought to close a loophole that allowed UK taxpayers to channel their income into an Isle of Man trust fund in order to avoid tax and national insurance payments. The issue in dispute was HMRC’s intention to make the legislation retrospective, backdating it to 1987 when the double taxation treaty with the Isle of Man came into effect. However, assessments where there is no fraud or negligence are capped at six years, so the effect is more limited.

The offshore scheme was run by Montpelier and HMRC’s plans were challenged in the High Court by one of its clients. The allegation was that, since his tax affairs were deemed legal until 2008, the retrospective change breached his human rights.

Throwing out the challenge, Mr. Justice Parker ruled that HMRC had acted properly, stating that the scheme had no genuine commercial purpose and was set up purely to avoid income tax. He also expressed the opinion that a contractor with an artificially lowered tax rate had an unfair competitive advantage.

Accepting that no action had been taken against the scheme for many years, Mr. Justice Parker pointed out that HMRC had insisted that the arrangement did not work and had advised the payment of amounts due. Nevertheless, there is widespread concern at the unprecedented ruling to allow retrospective legislation going back over such a long period, which may well open the way for similar legislation in future. The fear is that taxpayers may no longer be able to rely on existing arrangements and the certainty of the law as it currently stands.

Many contractors are now faced with being unable to meet tax demands and penalty charges. An appeal against the ruling has been promised although, since Mr. Justice Parker refused an appeal, permission will need to be sought from the Court of Appeal.

The judgment does emphasise the need to receive proper professional advice to ensure you meet all your business obligations. Contact UKContracting.net to ensure everything is in order.

IT contractors, like many professionals, understandably seek to limit the amount of tax and national insurance they pay. One popular way has been to channel income into a trust fund based in a low tax country, with the income earner retaining ownership of the money through their position as a trust beneficiary.

This type of scheme has continued for several years with no intervention from HMRC. However, in March 2008, it sought to close a loophole in the UK’s double taxation treaty with the Isle of Man. The main shock that came out from the announcement was the controversial decision to backdate this clampdown to 1987, the year when the treaty came into force.

The decision caused near panic amongst those affected in the knowledge they could be forced to pay large sums in backdated tax and national insurance contributions plus interest charges on those amounts. There were, understandably, fears of bankruptcy, repossession and relationship problems resulting from the decision. It led to the Parliamentary Joint Committee on Human Rights criticising the retrospective legislation.

Representation was made to the Royal Courts of Justice, which undertook a judicial review into whether HMRC acted lawfully in backdating the legislation. Whichever way the ruling goes, it is likely to be appealed to the Supreme Court by the losing party. After all, it is not something that can be ignored, with IT contractors set to lose large amounts of money if the decision goes against them. More worryingly, it can open the way for HMRC to apply for more retrospective legislation in future.

This case emphasises the need to make sure you’ve got your business affairs sorted out correctly. Contact UKContracting.net for the best advice.

The latest of a long line of initiatives to reduce the underpayment of tax is the Tax Health Plan, which is aimed at the medical sector. Medical professionals are being given until 31st March 2010 to register their intent to voluntarily disclose underpaid tax. Providing they then make full disclosure by 30th June, they will incur a reduced penalty of 10% rather than a possible 100% rate and criminal prosecution. Those failing to register are threatened with targeted investigation. Should the approach yield satisfactory results, it is likely to be extended to other professions, so IT contractors need to watch out.

At almost the same time, HMRC confirmed it is to close 130 offices with the loss of 1,700 jobs. This is part of its plan to cut 25,000 jobs and close more than 200 offices by 2011. The moves call into question HMRC’s ability to clamp down further, especially given reports that the amount of uncollected tax is increasing and that there is over £130 billion of uncollected, avoided and evaded tax.

The cuts may make worse the 44 million calls to HMRC that the National Audit Office reports went unanswered in 2008-9. This represents 43% of the total calls received, a figure that rose to 67% at peak periods. Performance is reported to have improved in 2009-10, although more than one quarter of calls still go unanswered against a benchmark of 10% in the private sector. HMRC’s 31 contact centres have the equivalent of 10,500 full-time staff costing £233 million annually.

Avoid possible problems and the need to call HMRC by contacting UKContracting.net to get your business on a sound footing.

Unless you’ve been locked away with no access to TV or newspapers for the last few months, you’ll know that VAT returned to its pre-crisis rate of 17.5% on 1st January. So, if you’re a VAT registered contractor, you need to ensure you show the correct VAT rate on your invoices. Also, if you’re on a flat rate scheme, the rate you’ll use will change (from 11.5% to 13% for IT contractors). There are some less well-publicised changes that you also need to be aware of and these, as you’d expect, involve some extra work.

Any of you with a VAT-exclusive annual turnover of at least £100,000 will be obliged to submit returns and pay due amounts electronically from 1st April. Those who register for VAT from this date will also have to submit and pay online irrespective of their turnover. However, this shouldn’t affect you tech-savvy contractors who obviously don’t send paper forms and cheques through the post.

Of more concern are changes that come into effect from 1st January for those with European dealings. The need to complete and submit sales lists has been extended to the supply of services as well as products to EU companies. You’ll have to complete a quarterly return that shows the value of supplies and the customer’s VAT number, and you’ll need to do this within 14 days of the quarter end (21 days if submitted electronically) as against the 42 days allowed previously.

There are a couple of changes that make life a little easier. The first of these concerns the rule that VAT is charged to the customer in the place where it is established. This means that you didn’t charge VAT to EU customers providing you knew the product or service would be used for business activities. Now, you only need to be sure that the customer is in business (obtaining their VAT registration number will do this) to provide a VAT-free supply.

The second change applies to those working abroad who previously had to reclaim incurred VAT from the state where they worked — a long and frustrating process that could take years. The new procedure is that claims go through HMRC, which passes the refund request to the member state. Payment should be received within four months, or eight months if more information is needed, with interest due on late payments.

Contractors affected by the various changes need to be aware that late submissions will result in penalties. However, HMRC has promised to take a lenient approach in the early months. Signing up with UKContracting.net will ensure you’re fully aware of all the latest changes in legislation and avoid getting into trouble.

HMRC has long been trying to clamp down on schemes that are set up simply to avoid paying tax. However, the average law-abiding citizen is generally a bit in the dark when it comes to distinguishing between sensible tax planning and artificial tax avoidance schemes that are frowned on. So HMRC, being the helpful organisation that it is, has a ‘Spotlight’ section on its website that sets out to highlight the latter.

HMRC’s view is that schemes that are set up simply or largely for tax avoidance purposes will normally have certain characteristics. The more of these characteristics a scheme has, the more likely it is to come under investigation.

The old adage that ‘if something sounds to be too good to be true, it probably is’ applies equally to tax saving schemes as to anything else. Additionally, anything that seems to be artificial, overly complex or which involves secretive agreements should be viewed with suspicion. You should also avoid any scheme where upfront fees are payable, that runs on a ‘no win, no fee’ basis or that has guaranteed returns with little risk.

Be wary of schemes that are supposedly approved by top lawyers, accountants or HMRC but with no evidence of this. Schemes should, generally, be run for commercial reasons rather than have their aims as simply to delay or reduce tax. In general, each scheme needs to be looked at on merit. However, taking on one that has many of the factors that HMRC views with suspicion is more likely to lead to an investigation at some point.

HMRC has particular suspicions about Gift Aid schemes where charitable donations are rewarded with shares that are supposedly worth many times more. It also doubts the effectiveness of schemes that reduce Corporation Tax through contributions to an employer financed retirement benefit scheme as well as those making payments to employee trusts to avoid PAYE and NI contributions. These and others are likely to be challenged by HMRC, resulting in not only the tax being recouped but also much time and expense being wasted.

Whilst we all want to pay as little tax as possible, the message is clear that everything needs to be done properly in order to avoid getting in trouble with HMRC. Contact UKContracting.net to get the best advice on setting up a business arrangement that is best for you, minimises your tax bill and won’t upset the authorities.

Given the state of public finances, the recent Pre-Budget Report was never going to be particularly good news. However, IT contractors should generally be breathing a sigh of relief as their worst fears weren’t realised and they were let off rather lightly.

Some of the changes were already known or predictable, with the standard rate of VAT reverting to 17.5% from 1st January 2010 and the new 50% income tax rate due in April. However, contractors who operate through a limited company will be pleased that the planned 1% increase in the corporation tax rate has been deferred one year until April 2011. In addition, anyone involved in innovation will pay a new corporation tax rate from April 2013 on income derived from UK patents.

Contractors operating as sole traders or though an umbrella company haven’t fared as well, with employees’ and employers’ NI contributions going up by an additional 0.5% from April 2011 on top of the 0.5% already planned. This may cause some contractors to think again about their employment status.

For those putting money into a pension fund, higher rate tax relief is to be capped at £130,000, down £20,000 from the previous earnings limit, which will hardly encourage savings. Of less importance to most contractors is the freezing of the level of the inheritance tax nil rate band, although the restoration of stamp duty to the previous lower property value may be more of a blow.

Given the economic situation, any thoughts that IR35 might be abolished or other restraints on freelancing could be removed were no more than fanciful. Indeed, there were several mentions in the PBR of clampdowns on various practices. A reference to ‘false self-employment’ was directed at the construction industry but can equally apply to IT contracting and it is an area where HMRC has expressed concern. The PBR also covered the on-going measures being taken against offshore accounts while the ‘Spotlight’ section of the HMRC website will highlight schemes that are under scrutiny and may result in future action against them. April 2011 will see a restriction on the tax exemption of free or subsidised meals and employers’ travel schemes to temporary workplaces will also be looked at.

There was confirmation that there are to be cuts in the NHS IT programme, part of an overall reduction in IT spending that is intended to save £500 million. This will have an impact on contractors who are involved in this type of work and will need to be made up by increased activity in the private sector. However, a web portal is to be available from the end of 2010 that will show all public sector contract opportunities with values of more than £20,000.

Some people view the IT contractors’ escape from a worse outcome in the PBR as due to politics rather than anything else. With a general election due in the first half of 2010, many actions have been deferred until after it and so there will certainly be further changes to come. What they are will depend on the party that forms the next government and the state of the economy at the time. The latter is hardly going to be much improved and so it is unlikely that any planned tax and NI changes will be cancelled.

Whatever the outcome, contractors need to be aware of what is happening and plan accordingly. One inevitability, announced in the April 2009 Budget, is that the new 50% income tax rate for those earning over £150,000 comes into effect on 6th April 2010. At the same time, anyone earning over £100,000 will lose £1 from their personal allowance for every £2 of income above that level. The loss of allowance combined with a tax rate of 40% means a marginal rate of 60% in an earnings band immediately above the limit.

If you’re an IT contractor, and particularly one with high earnings, you need to be sure you have the correct operating structure so that you minimise tax and maximise earnings by legitimate and efficient means. And you need to do it quickly because every day lost is potentially money wasted. Contact UKContracting.net if you want to be sure you’re not paying more tax than you need to do.

IT contractors will be familiar with IR35 legislation, which sets out to distinguish between freelance and permanent employees. However, a recent case before the Court of Appeal has brought the subject of employment status to a head once again.

Autoclenz, a Derbyshire-based car valeting firm, used 20 car valeters on a self-employed basis. However, an Employment Tribunal upheld the workers’ claim that they are employees, although the Employment Appeal Tribunal overturned this ruling but granted limited employment rights. Autoclenz appealed but the Court of Appeal decided the workers were actually employees.

The decision was based on a new contract that the workers had signed in 2007. Although the document referred to the workers as ‘sub-contractors’, it was found that the company controlled the workers and integrated them into its business. Crucially, the right to send a substitute to do the work, which was incorporated into the latest contract, was unknown to many of the workers and no-one had ever exercised this right.

Contractors who want to avoid falling within IR35 legislation must ensure that any contract they sign places them under no obligation to accept work and does not make them subject to the client’s control. They also need to be sure not only that the contract they have with the agency gives them the right to send a substitute but that the contract between the agency and the client also has a substitute clause. The absence of the latter, which means the client will not be aware of this right, may result in HMRC viewing the document as a contract of employment.

If you are a client of UKContracting.net, you will receive the best advice and your status will be clear. If not a client, get in touch.

Some contractors with cash to spare have sometimes placed it in offshore accounts in an attempt to reduce their tax bill. However, as part of its drive to increase tax revenues, HMRC is trying to ensure that offshore account holders pay what it calls ‘the right tax’.

Over 300 banks have been asked to provide HMRC with information about offshore account customers so that action can be taken. This is likely to require that penalty charges be applied on tax avoided in respect of these accounts.

In an effort to flush out account holders, some taxpayers were contacted by HMRC in 2007 and given the opportunity to disclose accounts voluntarily. The New Disclosure Opportunity (NDO) gave them until 30th November 2009 to register their intent to disclose such accounts and qualify for a reduced penalty of 10% of the tax evaded. The threat is that those who were contacted but don’t disclose will face the full penalty of 20% on accounts that are subsequently uncovered.

Although there are thought to be up to 100,000 account holders, the Financial Times reported that only 27 were registered by mid-November. Consequently, the deadline has been extended until 4th January 2010, although HMRC claims this is more about being fair to taxpayers who may have been contacted late by their banks.

Offshore account holders who don’t register by the deadline will face a doubling of the penalty rate. Even worse, when the NDO period for full disclosure ends on 12th March 2010, penalties may be higher with HMRC predicting rates of up to 100% of the tax evaded.

Any client of UKContracting.net who has taken advantage of one of their offshore solutions can be assured it is properly structured and tax efficient. Contact us if you need advice.

Anyone coming into contracting for the first time will soon discover that agencies prefer to deal with limited companies since this results in a reduction in their liability. Indeed, many agencies will only deal with limited companies.

Setting up a limited company isn’t a big deal because your accountant or a specialist company can handle most things for you. However, you will have to pick a name, sign some forms and pay the inevitable fee to complete the formalities.

Whether you’re a limited company or a sole trader, you will have to send out invoices for time and expenses, do your own bookkeeping and handle your tax affairs or pay an accountant to do this for you. If you do have a limited company, your accountant’s fees will be somewhat higher because there’s more work to do. Should your earnings go above a set limit, you or your company will also need to be VAT-registered, meaning you’ll be an unpaid collector for yet another of the government’s taxes.

Once you get into a routine, you might find that running your business affairs isn’t too much hassle. However, it is unpaid work that you do in your spare time and you might find it an inconvenience you’d like to avoid.

The one real alternative to setting up your own limited company is to use an umbrella company to handle your affairs. These have become more common since the government introduced IR35 legislation to determine the employment status of individuals.

An umbrella company effectively acts as your employer and the services provided by each one are broadly similar. They will receive your timesheets, raise invoices to agencies and pay you when each invoice is paid. Since you are treated as an employee of the umbrella company, tax and national insurance are deducted and you receive a net salary. Allowable expenses are also paid, with some companies having dispensation arrangements with HMRC. This allows them to pay expenses at set scale rates with no need for receipts, although you will have to retain receipts and be prepared to submit them to HMRC.

The arrangement will reduce the amount of bookkeeping and administration you need to undertake and may also lower your accountancy bills. Some companies will give tax and financial advice, negotiate with an agency on your behalf and provide insurance cover for public liability, employers’ liability and professional indemnity. There may also be other employee benefits such as a pension scheme, private medical cover and saving plans.

Using an umbrella company does reduce the level of work you need to do but there are downsides. There is, of course, a fee to be paid for the service. You also lose a degree of control and your pay is unavoidably delayed because it’s coming through a third party rather than directly to you.

If the arrangement seems attractive, you need to decide if it’s right for you and choose a company that offers the best deal. You should compare the services offered, deciding if they’re useful to you, and the fees charged. Establish if you have to pay whether working or not and if there are set up and termination fees. The fees you pay can be balanced against savings you might make, such as through the non-payment of insurance premiums.

If you’re planning to contract for only a short period, using an umbrella company might be a better option than setting up and then closing down a limited company. For longer-term contractors, the full cost and tax implications need to be investigated thoroughly before making a decision. In the end, it might come down to the hassle factor and how much you’re prepared to pay to avoid or reduce it.