Budget: Darling shelves family business tax

Alistair Darling used his first Budget yesterday to put off misery for tens of thousands of jointly-owned company directors who faced hugely inflated tax bills from next month.

Ministers did want controversial new laws to take effect in April to stop business owners 'income-shifting' to get a tax advantage, but the chancellor has set them back until 2009.

In his speech, Mr Darling only alluded to the resulting family business tax, saying the state would stay "vigilant against tax avoidance," thereby leaving it to the Treasury to explain its sudden deferral.

The department said a 12-month period to consult affected parties will ensure the legislation to enact the tax provides companies and their advisors with "clarity and certainty."

Tax, legal and IT contracting experts are relieved, saying last night that the delay to income-shifting laws was "absolutely right" and "common sense", because, as drafted, they are unworkable .

"The positive for IT contractors in this Budget is the postponement of income-shifting legislation," said Martin Hesketh, managing director of Brookson, an IT contractor umbrella company.

"The legislation was not well thought through in principle, nor was it well drafted. Leaving it for 12 months is really helpful because otherwise a huge amount of confusion and lack of clarity would have been heaped onto the small business owner."

The PCG, which campaigned against the family business tax, said it would continue to oppose the draft laws, which require joint-company owners to record the rate and frequency of all tasks they do.

"We've certainly had a positive impact," said John Kell, policy and campaign officer for the Professional Contractors Group.

"But the government is still committed in principle to going ahead with the proposals, and are scheduling them for next year.

"We'll have to speak to them again… to get them to take on board that these are not fair or workable proposals, but it is positive that this message is starting to get through. It's very clear that the officials who've been told [this] for the last three months" have listened.

The PCG hopes it can persuade government to "undertake a full reconsideration" of the decision to legislate against income-shifting, but it cautioned that no such commitment has been hinted.

Yet the prospect of the state simply caving in on 'income-shifting'- a tax practice they spent four years trying to outlaw by chasing Arctic Systems Limited - is realistic, according to one chartered accountant.

"The government can't encourage families and entrepreneurship with a 'family business tax '- which says we don't believe the wife actually does anything unless you can prove it and her market value," explained Simon Dolan, managing director of SJD Accountancy.

"It's a very very difficult area to legislate. I wonder whether it might be one of those proposals that gets put off until next year for review and then they just forget about it".

No such luck, predicts Andrew Hubbard, vice president of the CIOT: He told CUK: "It's pretty clear that the Revenue still has income-shifting in their sights and it is not going to go away.

"Therefore anyone setting up a new business today needs to be very mindful that this area of taxation will come under scrutiny in the following year."

Although the deferral may look like a "window of opportunity," he said if, in the meantime, affected taxpayers try to abuse their arrangements the ensuing "legislation might be that bit fiercer."

"In the short-term, anybody who is involved in family business will know this is a problem area [of tax], and they should not make long-term plans on the assumption that the current rules will last forever," Mr Hubbard advised.

"The income-shifting rules as they were drafted quite clearly don't simply apply [only] to husband and wife, they apply to any relationship" where a person is distributing the company's profits to more than one person.

"One of the things that will emerge next year is the answer to who the [legislation's] targets are going to be. Once there is a greater clarity as to who precisely is in the firing line…then a consultation to come up with the detail of the legislation will be much easier."

The Chartered Institute of Taxation, which was first to call for the 12-month delay to the rules, added that small business tax is in need of a wholesale review to iron out the system's anomalies.

Bauer & Cottrell, an IT contractor legal advisory, agreed, by saying that individuals potentially affected by income-shifting were the best-placed to help frame it in law, which, it stressed, has been postponed, not scrapped.

"It is heartening that the government has listened to the professional tax bodies and trade associations and is prepared to consult further, although it is still firmly set for implementation in whatever form from April 2009," the firm said in a statement.

It added the other major area of the Budget affecting contractors was the further "warning shot" to umbrella companies, a structure used by many contractors in the ICT, Engineering and Construction industries.

In the Budget, the government said it is "concerned at the growing use of structures, such as 'umbrella companies' or overarching contracts of employment with employment businesses, to obtain tax relief for travel expenses that would not be available to other workers."

Such a revived declaration of war against umbrellas included the promise to "monitor the use of these structures and, if necessary, consider action in the future."

"Her Majesty's Revenue & Customs are actively focusing upon these organisations," Ms Cottrell confirmed last night.

"The key point here is that HMRC do not need any new legislation or consultation written into the Budget, they already have the power to withdraw dispensations from umbrella companies and can also do so retrospectively.

"I would not be surprised to see such action being taken by HMRC against some umbrella companies in the coming months. Contractors operating through umbrella companies should start to ask some questions of their providers now to ensure that they are compliant."

According to SJD Accountancy, which owns and runs an umbrella company, the Revenue's targeting of these tax-efficient vehicles is already well underway.

"We know that there is going to be a big clampdown on umbrella companies anyway," Mr Dolan said, responding to questions.

"My thinking is that HMRC may revoke every umbrella company's dispensation and then maybe issue them new ones. We already know that two or three of them are under major investigation at the moment."

Umbrella giant Brookson, which specialises in the IT sector, welcomed a cleaning up of the marketplace – an official policy in the interests of reputable umbrella organisations.

"I don't think there is anything hidden and dangerous coming to umbrella companies from HMRC," Mr Hesketh said, reflecting on yesterday's announcement.

"Rather this is a reaffirmation of the Revenue's intent that they expect compliance across the sector, which we endorse and have been calling for."

Colin Howell, a director at No Longer Limited, an IT sector umbrella provider, testified that most of the IT contractor marketplace would embrace the Revenue's policing of umbrellas.

"All umbrellas companies should only allow contractor expenses that are actually incurred and any expense policy should not be a mechanism to obtain tax relief incorrectly."

He welcomed the "comments from the government" and vowed to work closely with HMRC to ensure that only compliant umbrellas continue to operate in the future, and that clients and agencies can be assured that their workers are being paid correctly, compliantly and on time."

For the PCG, the taxman's scrutiny of umbrellas is a natural consequence of the Managed Service Company rules , which were introduced by Gordon Brown in his final Budget as chancellor .

"MSC users have switched to PAYE umbrellas specifically to exploit the expenses rules they operate under," the group said.

"Some operators in the field are blatant in advertising that contractors should claim expenses for overnight accommodation even when they have stayed with friends, or use similar tactics."

The PCG now plans to work with Treasury officials and HMRC to ensure that contractors can continue to claim "fair reimbursements" for expenses they incur.

"This Budget will have less immediate impact on contractors than last year's Budget, but there is a lot of detail in the full report, including scrutiny on umbrella companies.

"For contractors, 2009 therefore looks like a very big Budget, the seeds of which are being sown at the moment."

Yesterday's announcement, the group added, is an example of a Budget that is full of crucial little details, rather than one with significant changes that pose "an immediate" threat to contractors.

Martin Hesketh, of Brookson, said some of those details could be seen as "potential positives", but he stressed the government did not go far enough to heal its fractured relations with small businesses.

Perhaps the most corrosive effect to relations has come from capital gains tax reform, which officials confirmed will take effect from next month, as initially proposed but with entrepreneurs' relief .

One accountant to IT contractors said most of his clients won't be stung by the CGT reforms, as "there are not too many contractors who would earn anymore than £1m out of their company in terms of its disposal value."

Moreover, some contractors are actually waiting for the single CGT rate of 18% to come in, so they can then cash in on their buy-to-let properties, which currently attract CGT of up to 40%.

Firmer positives for business came in the form of Mr Darling's target of 30% of public sector contracts tended in the private sector to go to small and medium-sized enterprises within the next five years.

More immediately, the government will set up an advisory committee to look into the barriers faced by small businesses in bidding for and securing lucrative state contracts.

To help these firms grow, the government plans to widen their access to finance by making more firms eligible for the Small Firms Loan Guarantee, which it will enrich by 20% for 12 months.

Small to medium-sized firms, typically with a workforce of 10 or under, will also be reviewed to deduce whether or not the government can simplify how their corporation tax is calculated.

In addition, over 500,000 small firms will now be able to write off historical capital expenditure - for instance on computers or office equipment - worth less than £1,000 against their taxable profits in one year instead of doing so over decades.

The pledge came alongside a wider promise to improve "HMRC's services to smaller companies," including simplification of the tax system and lightening of the administrative load on enterprise.

Some IT-led firms may also wish to make their views known in an announced review of the Enterprise Investment Scheme, aimed at appealing to a wider cadre of high-risk firms and investors.

Likewise, some contractors, particularly those in the oil and gas industries, will embrace new legislation under the North Sea Fiscal regime, to offer firms greater access to tax relief and support exploitation of resources over longer periods.

More universally, contractors will turn their heads at the just-declared consultation on the government's bid to "improve the present separate systems for collecting Class 2 and 4 national insurance."

Last night, advisors were generally in favour of the state's desire to "improve the collection of NI from the self-employed", as they were with the Revenue's ongoing policy of tax simplification.

However, one personal service company adviser is worried that the government would use the 'simplification' banner to impose a single tax rate on limited companies and non-incorporated companies alike.

Meanwhile, contractors who drive, smoke or drink face marginal to modest tax rises in the future, while those who use plastic bags at supermarkets can soon expect to pay for the privilege.

Perhaps, some monetary relief will grace them from the likely job creation of new technology initiatives unveiled yesterday: biometric identifiers will be rolled out to Heathrow and other airports, while new ICT will also be developed to potentially underpin national road pricing.

Enterprising women also have a brighter outlook, given a Budget pledge to establish a £12.5m fund to assist female entrepreneurs, supported by a high-profile media campaign - 'Get the Spark.'

For them and existing company owners, the government reaffirmed its pledge to cut red tape for small businesses by a quarter within the next two years.

But overwhelmingly, they will hold the government to what Mr Darling promised yesterday - a "stable business tax regime that is responsive to business needs" – exactly the reason why the chancellor has decided his own current proposals for a family business tax are untenable.

 

Mar 13, 2008