PCG special Budget newsletter 2006 - 22 March 2006

IN THIS ISSUE

• Budget heralds opportunities for freelance businesses: the end of IR35?

• Tax-motivated incorporation

• Income tax and NICs

• Reducing administrative burdens in the tax system

• HMRC – powers and relationship with business

• Anti-avoidance measures

• Better regulation

• Public sector procurement

• Global economy

• Transport

• Small Firms Loan Guarantee

• Give your verdict on the Budget

Budget heralds opportunities for freelance businesses: the end of IR35?

Today’s Budget offered many opportunities that could be advantageous to the UK’s freelance consultants and contractors. PCG will engage closely with the Government during the development of these policies, seeking to ensure that they are implemented in a positive and constructive manner which protects and enhances the competitive advantage that freelancers offer the economy. In particular, PCG will focus on the review of so-called “disguised employment” and of income tax and NICs.

“This offers a clear opportunity to address the unfair and inconsistent intermediaries legislation, known as IR35, as well as the enormous complexity of the taxation of freelance consultants and contractors,” said PCG chairman Simon Juden. “We look forward to engaging positively with Government on these issues, as we have long campaigned for consistency, clarity and common sense in the taxation of freelancers.

Tax-motivated incorporation

The Budget report refers to employment income being disguised as dividends by “mass-marketed managed service company schemes”, which almost certainly means composite companies. The Government will bring forward proposals for discussion to consider how, in this context, it can make sure that everyone pays their fair share of tax and NICs, irrespective of legal form. This means that the Government is preparing to attack “disguised employment” via managed service companies.

It has long been PCG’s stance that if a scheme for reducing tax bills seems too good to be true, it probably is. Companies wishing to hire contractors should do so on proper business-to-business terms; conversely, they should not be hiring workers as contractors and then forcing them to work as if they were employees. PCG is therefore very pleased that the Government will be considering how to prevent this kind of abuse and will engage fully and constructively to inform its understanding of this issue.

This review process will inevitably involve looking at issues surrounding IR35. PCG argued ahead of the Budget that as a tax measure, IR35 had proved to be a failure. Its survey of members found that IR35 remained the issue above all others that members wished to see addressed. The Government should take this opportunity to remove the gross complexity and unfairness created by IR35.

The Budget report also stated that some agencies, contractors and employers have been requiring employees to adopt corporate form. This echoes issues raised by the recent Muscat case and PCG reiterates that contractors should not be hired to work as employees – this constitutes abuse. By the same token, the Government should appreciate that many people work as contractors out of a positive choice, are not forced to incorporate, and categorically do not want employment rights.

Income tax and NICs

The Budget report specifies that the possible alignment of income tax and NICs will be directed at low-paid workers. PCG believes that this consideration should be extended to aligning the two systems completely. “This represents an opportunity to remove distinctions which are meaningless in practice,” said Dr Juden.

Reducing administrative burdens in the tax system

The results of KPMG’s study of the administrative burden on business of complying with the tax system were also announced as part of the Budget package. The figure of 0.41 per cent of GDP is difficult to assess, as international comparators are limited. Nonetheless the Government has set targets for reducing this burden: a 10 per cent reduction in the costs associated with forms and returns over five years; and a reduction of at least 15 per cent over five years in costs associated with audits and inspections.

Commenting on these targets, Francesca Lagerberg, Chair of the ICAEW’s Tax Faculty, said, “It’s good to see the Chancellor setting a benchmark for cost reductions with these two quite aggressive targets. While it remains to be seen whether the targets can be met in practice, the fact that they have been set is broadly welcome.”

Also following on from the KPMG report, the creation of an independent business-led Administrative Burdens Advisory Board was announced today. This Board will seek to identify solutions for the long “tail” of administrative problems that cause significant difficulties to relatively small numbers of businesses.

“This new independent body is a welcome announcement: there remain many problems in the tax system that, although small, can cause owner-managers of small businesses a lot of frustration and anger,” said Lagerberg. “Addressing these issues may not be easy, but it can only be a good thing that the Government is aware of the problem and seeking solutions.”

HMRC – powers and relationship with business

A further review of HMRC’s powers was announced in today’s Budget, with a consultation document to be published shortly. This plans to consider reducing costs for the compliant and creating a more responsive penalty framework. PCG welcomes the review and will respond to it. Concerns remain, however, over HMRC’s increasing use of terms such as “compliance” in an apparent effort to blur the distinction between avoidance and evasion of tax; PCG hopes that this exercise will not result in law-abiding businesses being unfairly targeted as “non-compliant”.

PCG will also study the latest document derived from the creation of HMRC last year, Progress towards a new relationship. As PCG stated before the Budget, a new relationship between the taxpayer and the tax authority would certainly be welcome. Its members’ survey revealed, however, that HMRC’s conduct towards businesses has become a serious concern and highlighted a perception that its methods are becoming increasingly aggressive and invasive.

Anti-avoidance measures

As prefigured in last year’s Pre-Budget Report, the Budget contains numerous measures intended to “protect tax revenues”, essentially by attacking elaborate avoidance schemes used by larger companies. PCG believes that the Treasury’s continued focus on avoidance rather than evasion must be questioned.

The Budget report states that HMRC and the Treasury remain committed to tackling avoidance by using legislation and litigation in a proportionate and fair manner and while maintaining the competitiveness of the UK. HMRC’s spectacular failure rate in IR35 investigations (1,211 successfully defended by PCG’s approved suppliers and only 3 won by HMRC – the only figures available for IR35 success rates) suggests that much of this anti-avoidance work is neither proportionate nor fair and that it does not represent good value for money for the taxpayer. Similarly, HMRC’s continued pursuit of its reinterpretation of the settlements legislation cannot be said to be proportionate.

Better regulation

The Budget report sets out the Government’s five key areas of reform directed at business: two of these are regulatory reform and simplification of business tax. These are certainly the right areas to be looking at, but the concern expressed by PCG members over the complexity of the tax system in the pre-Budget survey strongly suggests that the Government has a lot more work to do before it can be said to have made any significant progress.

The outline of progress on the Better Regulation Action Plan presented in the report is a welcome table. In particular, PCG is pleased to see that the draft Code of Practice for regulators is to be set on a statutory footing; we will consider the draft published today and respond in full in due course.

It must also be observed at this stage that another plank of the Action Plan, the Legislative and Regulatory Reform Bill, has attracted much controversy over the potential for the proposed new Regulatory Reform Orders to bypass parliamentary scrutiny. PCG expressed concerns over this at the consultation stage and these concerns remain.
 
The proposals elsewhere in the report for aligning the dates on which corporation tax returns are to be filed and accounts are to be delivered to Companies House strike PCG as sensible and a potentially useful regulatory gain.

Public sector procurement

The Budget report outlines progress made in making public sector contracts available to SMEs: specifically, 59 per cent of local government contracts went to SMEs in 95 authorities studied for the survey. There clearly remains, however, a long way to go in terms of removing the excessively restrictive barriers to SMEs in tendering for contracts with national government. PCG maintains that there is a potential role for freelance contractors and consultants high up supply chains that could enhance their effectiveness considerably. Currently this role is unfulfilled.

Global economy

The opportunities presented by a global economy and the necessity for a vibrant enterprise culture within the UK are recurring themes within this year’s Budget. This begs several questions, however, not least why the Government has committed no resources to studying the economic impact of offshoring on the UK, despite encouraging the trend.

Transport

PCG’s pre-Budget survey of members showed that the UK’s freelance consultants and contractors would favour an increase in public spending on transport over any other area. It is disappointing therefore that the Budget was largely silent on this issue. That said, a consultation was announced in the report on possible reforms in the area of capital allowances for cars, which PCG will monitor. The deferral of the inflation-based increase in fuel duties to 1 September 2006 will also be welcome for PCG members.

Small Firms Loan Guarantee

The Budget report states that the Small Firms Loan Guarantee is to be extended to all sections of the small business community, which could make it available to freelance contractors for whom it was previously inaccessible. PCG will be interested in viewing the detail of this development as it becomes clearer.

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