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| CURRENT SECTION :: IR35 / IR591 | UK's most visited IT Contractor Site - 250k unique visitors March 2008 |
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Today’s Budget was expected to herald the most significant changes for freelance contractors since IR35 was announced five years’ ago. There had been much speculation about what form the measures announced in the Pre-Budget report - widely dubbed as IR591 - would take. PCG’s expert team has analysed the impact of the announcements today, and concluded that whilst there were no real surprises for the freelance small business community, it was disappointing that the Chancellor had done nothing to ease the burden on small businesses or to remove the uncertainty and unfairness surrounding IR35 and S660A legislation. PCG welcomes the fact that the Government has shied away from implementing some of the more extreme measures that it could have adopted, but is deeply concerned that the introduction of corporation tax on profits below Ł10,000 distributed as dividends will hit those who are struggling hardest. IR591 The main item of interest to many freelancers in this year’s Budget is the implementation of what has become known as “IR591”. In his Pre-Budget Report in December, Gordon Brown promised “specific proposals ... to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company." Speculation on what this meant has been rife, with widely-varying predictions. The Chancellor could have levied National Insurance on dividends from close companies (as many predicted), removed the tax credit from dividends from close companies, deemed a market salary for freelance companies or removed the 0% starting rate of corporation tax. Instead, what IR591 actually says is as follows: regardless of the rate at which you pay corporation tax, any profits you distribute to individuals on or after 1 April 2004 must have had corporation tax paid at a rate of 19%. Profits retained within the company do not suffer this restriction, so the new measure does not affect reinvestment of profits in the business. So, to give an example, if your company makes a profit of Ł10,000, no corporation tax is due on profits retained in the company, but corporation tax at 19% must be paid on profits paid out to shareholders as dividends. An obvious corollary is that this measure does not affect those whose taxable profit is more than Ł50,000. It will hit those struggling the most the hardest. According to a recent survey, up to 20% of PCG members could be hit by the new measure, and these are likely to be the 20% least able to withstand it. Simon Griffiths, PCG chairman, said, “While we have concerns with the new measure, the fact that Chancellor has shied away from the more extreme suggestions put in front of him pays testament to the efficacy of the PCG’s ongoing contacts with the Government. It provides further demonstration of the way that PCG has matured and developed, especially in the last two years. Clearly, however, this measure will have greatest impact on those freelancers whose businesses are struggling or in their infancy.” Clearly, many owner-managers will be paying dividends between now and 1 April to avoid this new measure. In broad terms, it is unlikely that many freelancers will disincorporate because, in many sectors, it is impossible to find work as a freelancer other than through a limited company. This, ironically, is because the agencies through which many freelancers work do not want to be found to be the freelancers’ employers. Dr Simon Juden, PCG’s legal director, said “One aspect as yet unclear is what happens in respect of retained profits from previous years. Depending on turnover in those years, different rates of corporation tax may have been paid; we are not certain whether some form of apportionment is to be applied. Freelancers who have been prudent and have saved up retained earnings from previous years to see them through lean times are potentially going to be hit hard by this measure.” One of the major criticisms of the new rules has been a failure to consult more widely. The Government’s own Code of Practice on Written Consultation states that “Consultation is a continuous process that needs to be started early in the policy development process." Notwithstanding, no official contact on this measure between the Treasury and any other body has been sanctioned. The Code goes on to state, “Regulatory proposals (including EU legislation) that may create burdens for business … should include a draft Regulatory Assessment.” However, PCG is unaware of any Regulatory Impact Assessment with regard to this measure, or any plans for one. Dave Smith FTII, managing director of Accountax Consulting Limited, whilst welcoming the Chancellor’s professed commitment to investment in small business, expressed dismay at what was not in the Budget. “The Chancellor has done nothing to ease the burden on small business,” he said. “The confusion surrounding IR35 and S660 is untouched by this Budget. All he has done is to introduce another layer of tax, on those companies making small profits; the fledging businesses struggling on the margins of profitability. These are the very businesses encouraged to incorporate by measures originally introduced by him.” PCG’s external affairs director Ian Durrant agreed, saying, “One of the most disappointing aspects of the Budget is that the golden opportunity to abolish IR35 has been missed. IR35 is a Heath Robinson measure, expensive to administer, enormously bureaucratic and unnecessarily costly to business. The sooner it goes the better.” Shadow Paymaster General Mark Prisk MP told PCG’s senior political adviser, David Ramsden, “We are very concerned with the Chancellor’s decision to reverse his previous tax plans for small companies, which will impact on cash flow. These plans fail to address either IR35 or S660A. This is the third time this Government has failed the self-employed.” Many small business owners will have incorporated in response to the Chancellor’s encouragement to do so via the 0% corporation tax rate, introduced two years’ ago. Simon Sweetman of the Federation of Small Businesses said, “It is amazing how quickly a concession to encourage enterprise can become a loophole. This move will hit ordinary family businesses hardest when it is the loopholes exploited by the rich that costs the Exchequer money. In the 2002 Budget, Gordon Brown announced changes to corporation tax which provoked a rush of self-employed individuals to incorporate in order to take advantage of the tax break. It is now unfair of the Chancellor to retaliate with a 19% distributive tax, when this rush was entirely predictable.” Speaking to PCG’s David Ramsden, Liberal Democrat spokesman Brian Cotter MP said, “The devil will be in the detail. Our first calculation is that the Chancellor’s tax plans have added Ł490m to business taxes. He has done nothing to simplify an overcomplicated tax regime.” PCG Director Richard Robson said, “The Chancellor claims that this measure will be worth less than Ł500 million per annum, but our own experts believe that the additional annual tax take could be much higher. Without the detailed data, it is of course impossible to arrive at a precise figure.” Kerry Pollard MP, the Labour chair of the All Party Parliamentary Small Business Group, said in conversation with David Ramsden, “There are many good things in the Budget but I recognise that small incorporated businesses have been put back to the position they were in two years’ ago.” Simon Griffiths said, “We are aware of an increased demand for freelancers, driven by a desire for the high-skill, high-mobility, highly flexible workforce that freelancers represent. The UK model for freelancing is unparalleled in the developed world and we feel that the Chancellor should be encouraging and nurturing this critical sector of our economy. We estimate that there are over one million freelancers and this number is growing. As it is run by freelancers, PCG has a unique understanding of this way of working, which employment trends expert Professor Richard Scase estimates may encompass up to 40% of the UK workforce by 2010.” VAT The VAT threshold has been increased to Ł58,000 – a level described by the Chancellor as “the most generous in Europe”. Further, 13,000 business will benefit from simplified VAT accounting. PCG director Keith Hogben said, “Flat-rate and other simplified schemes reduce the red tape burden under which our members operate and are broadly to be welcomed.” EMPLOYMENT / SELF-EMPLOYMENT The issue of deciding whether someone is employed or not is one of the most critical – and criticised – parts of IR35. In his Budget, Gordon Brown comments on the difficulty in “[matching] definitions for tax purposes with underlying economic characteristics” – words that will ring very true indeed for many freelancers. He cited “the growth in small owner-managed businesses, as well as the changing nature of employment and contractual relationships” as “creating challenges for the definitions and boundaries in the tax and national insurance systems between income from self-employment and the remuneration of owner-managers.” He went on to state that, “The Government therefore proposes to consider the strategic issues raised by these developments, to ensure that the tax system reflects the realities of today’s changing labour market and business environment. A discussion paper will be issued at the time of the 2004 Pre-Budget Report”. PCG chairman Simon Griffiths said “It goes without saying that PCG will participate fully in the consultation process, and we welcome the opportunity to re-examine the application of nineteenth-century law to twenty-first-century modes of working. Further, we would renew our call for a wholesale review of the difference between earned and non-earned income.” HOUSING The Chancellor announced that Real Estate Investment Trusts (REITs) will be launched following consultation. Historically as stock markets go up, housing goes down and vice versa, so these trusts offer a hedging opportunity for those freelancers with money to invest. CLEVER TAX AVOIDANCE SCHEMES Gordon Brown announced “new measures are being introduced with immediate effect to close down…avoidance schemes [which] usually operate through artificial manipulation of profit shares between UK and offshore partners”. He also announced that accountants would need to register any “avoidance schemes” for paying less tax with the Revenue before they commence operations. Coupled with the recent disclosure of a new IR Compliance Unit dedicated to such schemes, this could spell the end of many of the less reputable umbrellas, “avoidance” regimes using Employee Benefit Trusts and the like. Dr Simon Juden, PCG’s legal director, said, “PCG advice has always been to steer well clear of any scheme which seems too good to be true – they probably are. It comes as no surprise that the Revenue are taking a close interest: indeed it is quite right that they should. Any freelancers who have involved themselves in such schemes should avail themselves of our legal and tax helplines - free to PCG members – as a matter of urgency.” HUSBAND AND WIFE JOINT OWNERSHIP A few commentators have suggested taking joint ownership in shares as a workaround to S660A, using a tax measure known as S282A to declare the joint asset to have benefits in different proportion to the proportion of actual share ownership. The Chancellor announced specific legislation to remove this loophole: forthwith, tax will be assessed according to the actual share ownership and there will be no right to elect to assess it differently. Removing this loophole is expected to have less than Ł3 million overall effect to the Exchequer. MERGER OF INLAND REVENUE AND CUSTOMS AND EXCISE The Chancellor announced that the Inland Revenue and HM Customs and Excise were to be merged. The PCG broadly welcomes the reduction in the number of official bodies with which businesses must interface, and hopes for a concomitant reduction in red tape and bureaucracy. Care is, however, needed in terms of extending the wide powers - rightly accorded to HM Customs and Excise to investigate the worst kinds of criminal activity - to every tax inspector in the land. Another consideration is that the Inland Revenue is already overstretched, with response times to queries often vastly exceeding published targets. PCG director Richard Robson said, “With a reduction in staff of 40,000 and the overhead of the merger to come, we are gravely concerned about the maintenance of service levels. Following the merger of Revenue with Benefits Agency, many low-grade staff were assigned to tasks previously – and more properly - handled by highly trained and competent Inspectors. We call on those managing the merger to pay particular attention to the service taxpayers receive during the transition as well as after it.” YES MINISTER Aficionados of TV legend “Yes Minister” will have noted that two proposals Jim Hacker failed to get enacted, namely a 5% reduction in departmental administration costs (which Hacker wanted to be linked to honours for senior Civil Servants) and relocation of certain functions out of London have been announced by Gordon Brown. We await further measures with interest. For further information, see www.pcg.org.uk. Mar 17, 2004 Email this article Printer friendly page Previous Page
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