Posts Tagged ‘Budget’

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.

One of the big stories that came out of the recent Pre Budget Report was the cutting back on government IT projects in general and the NHS development in particular. This may have a significant impact on IT contractors who rely on this type of work.

This has now been taken a step further with a report in the Sunday Times that the government has plans to privatise up to a quarter of the public sector. In terms of IT, the intention appears to be to centralise the outsourcing of departmental services and, looking further ahead, to sell off these services to the private sector.

At present, each government department handles its own IT contracting, which is seen to be a very inefficient process. The aim is therefore to provide this as a combined function for various departments, quangos and other state bodies. This arrangement is likely to offer economies of scale as well as bringing the required experience together.

Current thoughts appear to be that two outsourcing bodies will be set up and will be modelled on private firms such as Capita and Serco. All government IT contracts will then go through these bodies rather than each of the various departments as at present. Over time, their structure as companies will be established, probably with a board of directors that will oversee the publication of annual accounts. This then gives the distinct possibility of selling off the businesses into the private sector.

The creation of efficient outsourcing bodies is seen as a real alternative to making substantial cuts in government IT projects. And, with the public finances being in a parlous state, the prospect of generating a forecast £16 billion by putting them on the open market is probably too tempting to resist.

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.

The IR35 tax legislation has recently reached its tenth anniversary but whether this is a cause for much celebration among contractors is extremely doubtful. There is a view that the legislation has had some positive effects, if only in uniting contractors against it as well as causing the formation of a service sector that has grown to support contractors.

IR35 is mostly seen in a negative light by contractors since it forces them to take on additional expenses and administrative work to counteract it. All too often, contracts and working practices have to organised with the legislation in mind, protecting the contractor’s status rather than operating in the most effective manner. At a time of economic hardship, when the number of freelancers working has fallen by 12% in a year and turnover has dropped by a third, IR35 legislation is viewed as an unnecessary obstruction to free enterprise.

Another recent revelation is that the EU’s proposed Agency Workers Directive is likely to apply to contractors with limited company status, although this was previously thought not to be the case. Implementation has been delayed to the latest possible date of October 2001. However, when it does come in, it may have a similar scope as IR35 in terms of who is covered.

To coincide with the tenth anniversary, the Professional Contractors Group has been pressing Chancellor Alistair Darling, ahead of his Pre-Budget Report, to repeal the legislation. To substantiate its demand, it states that IR35 is the cause of huge uncertainty for freelancers since they cannot get an accurate assessment of their tax liability with any confidence. The PCG also requested that the proposed family tax, which seeks to prevent ‘income shifting’ between family members who run a business, be dropped and that agencies be allowed to pay contractors gross.

As a result of the PCG’s prompting, an Early Day Motion has been signed by 78 MPs, with 44 being Liberal Democrats, 20 Conservatives, 8 Labour and 6 others. This proposes the abolition of IR35 legislation, which causes the threat of HMRC investigation to hang over 1.4 million freelancers in the UK. To justify the proposal, the motion notes that IR35 raises little money for the Exchequer, with 1462 of 1468 reported cases resulting in no additional tax being owed. It is alleged that the legislation is an unnecessary burden and should be abolished as soon as possible, although the motion is thought to have little chance of success.

21 September 2009

A row has broken out over Conservative claims to have exposed a secret Labour plan to raise income tax after the general election.

The Tories say Treasury documents show Labour will need to find an extra £14.8bn by 2011/2012 – the equivalent of a rise of 30% in income tax.

The Treasury denounced this claiming that the figures were issued at the time of the Budget in the spring and it denies any tax shortfall.

Predictably this was quickly pounced upon by one of the loudest proponents of the campaign claiming that Gordon Brown has hidden the truth from voters: Shadow chancellor George Osborne called it a “tax bombshell”. Just as predictably the tête-à-tête continued with a cabinet minister of accusing Mr Osborne of “trying to mislead the public”.

Chief Secretary Liam Byrne said the increase was explained by an expected recovery in the economy and existing tax plans such as the 50p rate for top earners. Mr Osborne retaliated: “Income tax receipts are set to rise by a third. Are they asking us to believe that this is due only to recovery from recession and the 50p rate?

Mr Byrne said: “Osborne’s claims are false. These Government tax projections are already published and are in the public domain. They simply set out what is raised by our existing published measures as the economy returns to growth. No more, no less.”

Not wanting to support either opposition’s viewpoing, Liberal Democrat economics spokesman Vince Cable said: “The Tories are deliberately putting two and two together to make five. But the Government has a case to answer. It is clear that it is hoping for unrealistic growth, a rebound in tax revenues and a return to business as usual.”

Time will tell if contractors are in for soaring taxes, along with the rest of the British taxpaying population.