April
2006 NEWSLETTER
Contents:
- BUDGET 2006 - THE BITS YOU MAY HAVE MISSED!
- IN THE WAKE OF THE BUDGET - WHAT HAPPENS NOW?
- INCOME TAX DEADLINES REVISED
- IR35 - THE LATEST TWIST
BUDGET 2006 - THE BITS YOU MAY HAVE MISSED!
Gordon Brown's tenth budget was popularly seen as a package of half measures by an 'outgoing' Chancellor. Pundits didn't so much damn it with faint praise, as condemn it with disinterest. Nevertheless, it still contained much of interest, particularly if you were willing to dive below the surface sheen of educational reforms and environmental concessions.
The hidden tax hike
It's true that the much feared middle-income tax hike
failed to materialize, but then it's no secret that
the overall tax levels continue to creep up anyway.
According to Ernst & Young, taxes are actually fast
approaching 38 per cent of GDP, taking them higher than
early eighties levels.
Whilst the income tax thresholds have increased with
inflation, earnings have continued to rise beyond the
rate of inflation, making for an awful lot of higher
rate taxpayers by default. That's one sure fire way
of increasing tax revenue, without having to publicly
acknowledge it.
So that accounts for at least some of the cash that
Gordon Brown (or successor) is going to need to raise
over the next few years, to honour his pledge to the
nation's schools. But where's the rest coming from?
Typically, tax avoidance is high on the agenda - and
seen as a watertight way of raising a little extra revenue;
as much as £1bn in extra revenue - assuming the
Chancellor's figures add up.
HMRC in the firing line?
But it's not just the tax avoiders that need to be wary.
Even HMRC have been told to brace themselves for cutbacks.
Quite how they'll cope with the mandate to cut waste
and improve efficiency remains to be seen; but in the
short term they've responded by launching a broadside
of their own - against umbrella companies no less!
HMRC have expressed their concern that umbrella companies
are avoiding and / or evading responsibilities to pay
income tax and national insurance contributions. As
a result, they're reportedly in the process of consulting
on new legislation to prevent any such avoidance tactics
in the future.
No matter how much HMRC may huff and puff, we're happy
to reiterate that CPM will continue to provide the very
best levels of informed service to our customers. We're
sufficiently well apprised of the requirements of UK
tax law to secure the very best deals for our clients,
without ever having to resort to inappropriate avoidance
of your responsibilities.
Bad news for employers
There is plenty for employers to chew over too; particularly
if they're in the habit of lending computers to their
employees to encourage remote working practices. While
they might have felt that such practices were actively
encouraged by a recent Department of Trade and Industry
(DTI) campaign, it seems that the DTI and the Chancellor
don't see eye to eye. From 6th April 2006, new computer
loans will attract a tax charge of up to £200,
plus national insurance, effectively scuppering the
DTI's ambitions.
Limited company contractors have been warned to watch
out for the new ruling. IT watchdogs and trade bodies
have roundly dismissed the move and expressed their
collective dismay. Far from furthering the cause of
digital inclusion, once heralded by Tony Blair, the
rescinded exemption will predominantly affect workers
on lower income, effectively curtailing their computer
access outside work.
The bottom line
So for an ostensibly innocuous budget, there's more
than enough to keep us on our collective toes. Stealth
taxes and clampdowns on tax efficiency are the hidden
features of this budget; and there are further implications
to be considered too. (See below.) But while budgets
come and go (as do Chancellors,) we're still here, working
to make your working life easier. Stick with CPM and
we'll see you through the budget fallout to best financial
advantage.
So now that the budget has been and gone and we've picked over the bones, what does the future hold for umbrella companies, contractors and IR35?
Contractors will have taken note of Gordon Brown's intent
to review the national insurance system for freelance
companies, as part of his putative revitalization of
Britain as a "leading business location."
In practical terms, it means that the government are
looking to review the complex tax laws governing freelance
consultants and contractors. It might even lead to a
review of IR35. But that is by no means certain. (So
don't hold your breath!)
However, it's likely than any reforms will form part
of a new wave of attacks on drawing dividends as a means
of masking true employment income. This seems to have
been at least partly inspired by the Arctic Systems
case, as reported in previous issues of Freelancer.
Owners of limited companies will now be made aware that
corporate profits of less than £300,000 will be
taxed at 19 per cent, irrespective of payment of dividends.
Previously, reductions in corporation taxes were often
applicable in cases where profits were less than £50,000
and not paid out as dividends.
Umbrella Companies
It is surely a back handed mark of respect to CPM, that
the government are suddenly so keen to ensure the very
best deals for legions of IT contractors and hardworking
freelancers. Accordingly they've taken note of the highly
tax efficient manner in which companies like CPM operate
and are seemingly looking for ways in which to compete
with the sort of benefits that only we can offer.
How can they accomplish that? By restricting contractor's
options to operate flexibly. By transferring the burden
for all employee earnings potential and privileges right
back to the employing organisations, thereby increasing
their level of responsibility to permanent and freelance
staff. The government clearly aren't opposed to advantaging
our skilled freelance workforce, provided they're not
footing the bill. So by transferring responsibility
to employers, they cut down on their own potential expenditure
and stand to reclaim some of the tax savings that composite
companies regularly and legitimately pass on to their
contractors.
Whilst the implications may appear worrying at first
glance, we have no doubts that CPM will continue to
be able to provide the same efficient service to our
clients. We will continue to pass on very significant
savings to you all.
Will the proposals signal the end of composite companies
and umbrella companies? Absolutely not. There will be
an increased requirement for organisations like ours
to simplify the contracting process; to manage tax requirements
and secure the best deals for freelancers, irrespective
of what the chancellor or HMRC may do. Because CPM operates
from inside the industry, we know what this industry
needs - and we will continue to satisfy that need.
From 2008, taxpayers will have to adhere to much tighter deadlines when returning their self assessment forms.
Following our report last month, it seems the government
have come to some of the same conclusions. Following
the customary January submission free-for-all, they're
taking some of the weight off HMRC by bringing forward
the submission date for both the paper based self assessment
forms and the online returns.
Written respondents will now have to complete and submit
their forms a whole four months earlier; bringing the
deadline forward to September, whereas online returns
will now be required by the end of November.
The news didn't elicit much of a response at the time
of the budget, coming under the same 'small print' bracket
as news of attacks on umbrella companies. For their
part, HMRC have accepted the findings of Lord Carter's
review of their online filing service.
It is hoped that the news will encourage more taxpayers
than ever to sign up to the online tax returns systems.
It is also hoped that being forced to file their returns
closer to the end of the tax year should simplify the
whole process, making it easier for respondents to access
the information they need.
British companies have been warned to steel themselves
against a potential IR35 backlash in the wake of a recent
court ruling. The Court of Appeal found that contractors
engaged through their own personal service companies,
can be deemed to be employees of the end client. The
Court upheld this ruling in the case of Muscat v Cable
& Wireless, thereby giving Muscat employment rights
with Cable & Wireless; thereby setting a precedent
and paving the way for contract workers to shift their
tax burden to their employers.
Having been sheltered from tax and national insurance
risks for so long, many businesses are getting understandably
antsy! After all, they've had all the rights, while
their contractors have had all the burdens. Many of
the biggest organisations are concerned that they'll
be landed with employment rights for scores of employees
that they didn't even think they had! It's going to
mean a lot of sleepless nights for an awful lot of company
accountants. If only they'd talked to CPM first!
Needless to say, if you have any doubts about your employment
status; if you're concerned about IR35; or if you need
to talk about tax, please get in touch. We'll be happy
to advise you.