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Contractor Taxation

Advice and information on Contractor Taxation topics. For further guidance call Freelancer Accounting on 0800 135 7157.

Are HMRC getting more powerful?

The Inland Revenue were once the least least frightening of the all the UK tax authorities, lagging behind the VAT people who had inspection powers comparable to the police service.

Now that Inland Revenue and HM Customs and Excise have joined forces to become HMRC the old Inland Revenue departments have started to get or are pending seriously increased powers, added to that powerful computers called Connect which can data mine information from a variety of sources, from the taxpayers information, the internet, credit card/bank information and land registry information which can pick-up perceived irregularities on tax payers returns and disclosures. The balance of power is definitely shifting between the authorities and taxpayers who evade or avoid taxation.

Whilst the accountancy and legal profession generally welcome any effort to support the Governments attempt to tackle  evasion there are concerns that HMRC does not have the best record in making accurate tax assessments.

This was highlighted just last week when it sent out about 200,000 incorrect income tax calculations which it put down to a computer error.

The powers which are now in force are demanding without appeal, upfront payment from any individual who participated in any arrangement deemed to be a tax avoidance vehicle (what is a tax avoidance vehicle is determined by HRMC’s judgement) this concerns many accountants.

Another pending power is the ability to recover tax debt directly from a taxpayers bank account. The taxpayer must have a balance of over £5000 in their account before any recovery of the amount over £5000 can take place. HMRC would not need to notify the taxpayer before recovery takes place.

Plus there are now added pressures in the system, as the Government has a  public finance deficit which will increase pressure on HMRC to collect tax and recover tax debts.

The regular tax paying member of the public shouldn’t have much to fear about these increases in HRMC’s powers, but the balance of power between the tax payer and HMRC is changing and HMRC will make mistakes which unfortunately accountants will be less able to stop.

Has your bonus been reclaimed?

If you have been paid a bonus and your employer reclaims it through your contractual obligations, rather than a breach of contract then you may be able to claim income tax relief of the amount reclaimed.

There has been a recent tribunal case involving Julian Martin and a signing on bonus, which he had to repay when he left his employment after a year. The sum involved was higher then the amount he received. The tribunal case was found in the tax payers favour.

Automatic exchange of financial information

The Organisation for Economic Co-Operation and Development, OECD, an organisation which promotes policies which will improve the economic and social welfare of people around the world which has published, on the 21 July 14, a publication outlining the standards agreed for the automatic exchange of financial information in tax matters between key tax authorities worldwide.

The G20 leaders met in September 2013 and endorsed the OECD proposal for a global model for automatic exchange of information to fight tax evasion and ensure tax compliance.

The standard was approved by the OECD council on the 15 July 14. The standard calls on jurisdictions to automatically exchange information between their fiscal authorities on an annual basis and outlines common due diligence processes which will need to be followed by financial institutions.

It is a big move towards automatic exchange of information in a multinational context and a tool in the global fight against tax evasion.

Tax Avoidance

Tax avoidance is an all too common headline in the papers these days, it seems as though almost every celebrity is at it to some degree or another, while the man or woman in the street is struggling to make ends meet.

With tax paying being an almost moral question, how to pay one’s fair share of tax, and what is ones fair share? The papers have always taken an interest in celebrity tax payers, be it the Beatles or the Rolling Stones it has always made good headlines, so is today any different? Is tax avoidance by the rich and famous any more prevalent these days than in the past, probably not, according to HMRC’s figures the top 1% of earners now contribute 30% of the UK’s income tax, whereas in 1999 it was just 21%.

Well media scrutiny is much more intense these days, with the rise of the internet, twitter and Facebook as well as the traditional channels of television and newspapers have increased the spotlight on tax avoidance and also the new phenomenon of  ‘celebrity’ where you only need to go into the newsagent and see magazines devoted to people who are famous for being famous.

Plus HMRC has more powers and access to information than it ever has, and with more powerful computers and data mining techniques the playing field is changing. An interesting example of this may happen in the next few months when HMRC will be allowed to demand tax on disputed tax amounts, and then the tax payer will be allowed to contest the disputed amount in the courts.

This will no doubt cause some tax payers significant cash flow problems or maybe bankruptcy, the playing field is definitely changing and it it towards HMRC.

One thing wrong with the tax system?

One thing most people would agree on is tax is complicated. The detail of tax is where people will disagree and politicians spend an awful lot of time debating, amending, rewriting and tinkering with tax laws.

An aspect or idiosyncrasy of the personal tax system is the oddity that exists on personal income between £100,000  and £121,000 where income between these bands is taxed at a marginal rate of 60%.

Obviously this is nonsense as everyone knows the top rate of personal tax is 45% which starts on income of over £150,000. But what happens when your income reaches £100,000 the Government starts to restrict your personal allowance which reduces down to zero when your income reaches £121,000.

How this situation ever came to exist is anyone guess, but to someone looking in, it would seem like it was an idea raised in a discussion focus group that went too far without somebody looking at how the numbers feed through, because its hard to believe anyone wanted the highest marginal rate of tax to be in a band between £100,000 and £121,000 as band rates are generally progressive in nature.

HMRC's plans to recover tax debts direct from taxpayers bank accounts

HMRC published a consultation document this week where it discussed proposals on how to recover tax debts directly from tax payers bank accounts without the need for a court order.

This would be used to target any taxpayer who owes over £1000 in taxes and would not require the taxpayers consent.

Like a lot of consultation documents, the important bit is if and when this comes into legislation, then the devil will be in the detail.

At the moment this consultation document is causing concern amongst some advisers and accountants on, amongst other things, the ability for HMRC to take money from joint accounts or the sale of stock and share ISA’S to cover tax debts, also what should be the level of savings to which HMRC can take up to, but not go beyond.

Whilst most people would not argue that people should pay the correct amount of tax, and people that do not pay should be held accountable for non payment. It is a step to far for some people that HMRC, who do not have a perfect record on getting things right, intend to act both as calculator of tax liability and collector/enforcer.

Tax Free Childcare

Childcare can be a headache for working people and every little bit of help with costs is appreciated by working parents.

HMRC currently offer a childcare vouchers scheme which will continue, but here is also a new scheme, Tax Free Childcare, which will be introduced in the autumn of 2015.

The key features of the scheme is eligible parents will receive a government top up of 20p for every 80p towards their childcare cost up to a limit of £2000 per annum per child.

The intention is to try to make the scheme simple with just one scheme provider National Savings and Investments and to make it available to a much wider range of working parents with income of up to £150,000 per annum which is expected to make it available to up to 1.9m working families.

ISA reminder

A last minute reminder for 13/14 personal tax year. The personal tax year ends on the 5 April 14, if you have not already done so, then you should consider making use of your ISA allowance before it is too late.

You should of course also review any previous ISA investments regularly to ensure you are getting the best returns for your investment. It is generally possible to transfer your ISA’s to a new cash or investment ISA.

How do I set up as a freelance contractor?

This is a question we often get asked as we are specialist freelancer accountants and look after the accounting and taxation affairs of many freelancer and contractors.

First thing is find out whether there is any demand for your services? Do you work in an office where they use other freelancers or contractors? Maybe chat with them to see how they find the market. Register with a recruitment agency who specializes in the area of work you do, who covers the geographical area s that you will be prepared to work in, and also ask them about the state of the market, then wait for the offers to arrive.

One you have tested the market, perhaps have an offer of work, then it is time to consider how you should set yourself up from a tax and accounting perspective.

Your options are sole trader, partnership, limited liability partnership, limited company or umbrella company.

Most freelancers and contractors would use a limited company as some companies will not allow you to contract as anything else or use an umbrella company.

Umbrella companies can be useful if the contract is inside of IR35 or is a short term contract, they tend to be very practical vehicles for getting contractors, contracting quickly, the downside is they are not particularly tax efficient especially if you are outside of IR35.

The option most freelancers or contractors take is form their own limited company and use that vehicle for their contracting. A company can be formed relatively quickly but will need its own business bank account and the appropriate registrations with HMRC for corporation tax, payroll and VAT, so if you are wanting to use a limited company for your contracting then it is better for you to start this process three to four weeks before you need the company so that it is ready for you to use with all the necessary registrations completed. You may also need your contract and working practices reviewed for IR35 purposes, which is something which as accredited professional contractor group accountants we have received additional training in, as well as being Certified Chartered Accountants.

If you are thinking about contracting talk to us as we will be able to advise you on the most appropriate vehicle to undertake your contracting and set it up correctly, so you can make your contracting more enjoyable and financially rewarding.

Tax concerns prompt 'control' test for BBC freelancers

The BBC is set to run a much-anticipated employment test on its freelance professionals, both high-profile and obscure, as it seeks to clamp down on personal service companies (PSCs). Clients of Richmond accountants may remember the corporation promising to carry out the test a year ago, following negative national press coverage of its use of PSCs and a critical report from the Public Accounts Committee.

Back then, the BBC had said that it would undertake the test on more than 800 ‘on-air’ workers who were paid not as individuals, but through their own limited companies. The report had said that the government and the BBC had too many staff making their own arrangements for the payment of tax and national insurance, potentially equating to a lesser contribution to the exchequer.

The new test will scrutinise the amount of editorial ‘control’ that the broadcaster has over the activities of each of the freelance workers, which are expected to be predominantly on-air. Should the assessment find a “significant” amount of BBC control of certain presenters and newsreaders, they will be asked to join the payroll, enabling them to be taxed at source rather than allowed to continue with their PSC.

The BBC stated in a news item outlining the assessment that it could not accurately gauge the number of ‘to camera’ freelancers set to be affected, given the “case-by-case basis” on which the test will be run, although top BBC talent, such as Jeremy Paxman and Fiona Bruce, could be within scope. Users of Richmond accountants may be interested to read that so-called ‘off air’ BBC freelancers are already being assessed for the appropriateness of their use of PSCs.

It is estimated by the corporation that around one fifth of its 16,000 production freelancers presently operating through their own limited companies could be requested to join the payroll as employees of the BBC.

The trade group PCG, which represents many freelancers using Richmond accountants, expressed its disappointment at the corporation’s measures against its freelance talent, pointing out that a distinction between employed and self-employed was already made by existing tax rules like IR35. It said: “If there are concerns about tax, it is the tax system that should be reformed, not the way these experts are working.”

The group continued: “Rather than taking the retrograde step of pushing back against these vibrant, successful and rewarding working practices, the government should instead be embracing it.”

The BBC has described the employment test as its response to the criticism of the Public Accounts Committee, despite “no evidence” being found last November that PSCs were used by the corporation to assist tax avoidance. That the test is going ahead will doubtless concern many present and prospective freelance clients of Richmond accountants.