Advice on IR35: To Stick or Twist?

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Advice on IR35: To Stick or Twist?

August 20, 2012 2012

This blog post was prompted by a conversation we had with an accountancy firm last week which is similar to other conversations we have had in recent months with other firms.

We were talking about IR35, as you do, and specifically the increased risks to this firm's one-man band limited companies of being caught by IR35 going forward what with all the changes that are happening around this. Our suggestion was that some focus should be given to helping these clients to re-assess their working relationships in relation to IR35 and to help them manage the risks proactively.

The partners of the firm agreed that IR35 is a concern but they quite rightly questioned the appetite of the affected clients in spending money on fees for something that hasn't been much of an issue for them so far, and the potential difficulty in "selling" such a service to clients especially where there is no tangible evidence of "savings" - which is often the sweetener for clients of many firms in agreeing to additional fee-paying services.

This is a problem for many firms in the current climate and, quite often, clients are reluctant to seek advice on tax compliance matters as they are more interested in the latest tax "wheeze" that will save their business a lot of money.

Our response to this firm, and to anyone else who may have this difficulty in convincing clients or is an unconvinced client themselves is this:

Such businesses have two choices: Stick or Twist. Both are a gamble but one is more of a calculated gamble than the other.

Stick - i.e. do nothing. Don't take any (updated) advice around IR35, don't think about those long-term arrangements with your favourite customer and don't change anything around how you do work, or provide services on a day to day basis.

The risk here is that things ARE changing around IR35, e.g. in terms of the Business Tests that were published in May, the recently formed IR35 compliance units within HMRC at Croydon, Edinburgh and Manchester that will have sole responsibility in looking at IR35 cases across the UK and also the increased number of reviews that HMRC are now doing around IR35 from this centralised strategy.

There is absolutely no doubt that certain one-man band limited companies that have previously managed to avoid IR35 will not be able to do so going forward because of the new HMRC approach and so the "do nothing" mentality will be a high risk strategy for many of these businesses who could find HMRC much more interested in their working patterns than before.

Twist - i.e. take advice and be proactive in managing your business' risks around IR35.

Again, this is not risk or cost free. First of all, there is the additional professional fees to pay in receiving the necessary advice with no fail-safe guarantee that the advice will avoid an HMRC IR35 investigation or challenge. There is also no guarantee that the business will come to HMRC's attention in the future thus proving the worth of the said advice - the inference being that the business may have continued to "get away with it" if IR35 was potentially in point and no advice had been sought.

However, there is a significant and increasingly likelihood that those one-man-band limited companies with long lasting relationships with one or two main clients WILL come under HMRC's radar at some point and the difference in seeking advice compared to doing nothing could be huge, either in terms of satisfying HMRC that IR35 does not apply (in which case large sums of PAYE and NI may have been avoided) or, in the case of a successful HMRC challenge, the level of penalties charged for non compliance.

Our advice would therefore always be to "twist". Sweeping the issue under the carpet will just not work, the IR35 issue is not just going to go away. Invest a few pounds in advice now or regret it later for a much higher cost.

PAYE Randoms 25 July 2012

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PAYE Randoms 25 July 2012

July 25, 2012 2012

No, we haven't dropped off the face of the earth, it's just been peak holiday season here at Optimum "Towers" and so we have struggled to keep our blogging going over the last few weeks. We're sure no-one missed us too much though !

Anyways, we were fully anticipating a barrow load of news to report on our return to the fold but have been sadly disappointed with what little has actually happened on the PAYE front in the last few weeks. Yes, there has been plenty action around RTI but this will be the subject of our July article over the next few days and so we don't want to peak too soon !

Blink and you'll miss it but here are the headlines to bring us all up to date:

Restaurants and takeaways

HMRC are still aggressively pursuing this sector, we were involved in another case a few weeks ago where HMRC were challenging fuel payments to delivery drivers and general payroll procedures amongst other things. Yet again, HMRC's technical arguments were weak in this case but the sector does not do itself any favours by not keeping good records. We fully expect more cases to come out of the woodwork in the months ahead.

Withdrawal of Form P38(s)

HMRC confirmed that the P38(S) will no longer apply after 5 April 2013 and therefore employers will need to treat students the same as all other new employees when starting them on the payroll after this date.

Employment Related Shares and Securities Bulletin

A new bulletin was issued by HMRC around share based payments and schemes, some of which is new but other bits have previously been announced. It is worth a glance though if you provide any share based payments to employees.

First Tier Tribunals - Three recent  judgements worth noting from a PAYE perspective are:

Coopers & Ors (Leaside Timber & Builders Merchants Ltd) v HMRC - the involvement of a partnership in providing cars to family members of the company directors was not successful in avoiding company car benefit in kind charges on the directors.

Graham Paterson Ltd v HMRC - another case lost to HMRC around Seafarers Earnings Deduction which involved the usual argument as to whether the offshore rig was a ship or permanent structure.

Hayward v HMRC - another win for HMRC this time in relation to a Payment In Lieu of Notice which the taxpayer had argued was a payment of redundancy qualifying for the £30k tax exemption. This case reiterates the point that a compromise agreement does not dictate the tax treatment of termination payments - it is the normal contractual terms that does this.

That's all for now folks...

 

PAYE related bits n bobs 26 June 2012

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PAYE related bits n bobs 26 June 2012

June 26, 2012 2012

In the absence of any groundbreaking news or Tribunal judgements recently, we finish off this month's blogs with a very brief overview of some things that have maybe not been newsworthy on their own but are useful things to know collectively.

Salary sacrifice guidance

HMRC has recently amended their FAQs on salary sacrifice to accommodate the relaxation of the rules around the opting in/out of pensions salary sacrifice so that salary sacrifice can happily co-exist with the pensions auto enrolment rules.

Whilst we would never recommend that HMRC's guidance is taken as "gospel", these FAQs are worth a read if you're unfamiliar with HMRC requirements around salary sacrifice.

Changes to the NI Manual

A number of pages were withdrawn from the NI Manual last week, all of which related to the NI exemptions around "qualifying childcare" for employees receiving employer supported childcare.

There is nothing sinister about these changes though, HMRC are just revising the guidance so that it is up to date and accurately reflects the revised legislation which came into place on 6 April 2011 around the reliefs that are due for new childcare arrangements.

Share based payments guidance

Yet more revised guidance from HMRC, this time what employers need to do when share based payments are made to departing employees after the P45 has been completed.

This has came about following some confusion from both employers and HMRC on the treatment of payments involving a mixture of cash and shares.

By the time some employers (and HMRC) get to grips with this, it will be time to worry about the situation under RTI where some real fun and games will be happening !

P11D and PSA filing

As Sir Alex Ferguson once infamously said, it's getting to "squeaky bum time" for getting the P11Ds and PAYE Settlement Agreements off to HMRC by the deadline of 6 July. He didn't exactly say this in relation to P11Ds and whatever but you get our drift !!

If you are one of those employers that didn't realise the deadline is next week, or has never seen a reminder from HMRC that the time is nigh, you really need to get moving, and fast, otherwise the 'squeak' could develop into something much worse !

Medical professionals

Reports are coming out, e.g. this Guardian article from a few days ago, that HMRC are currently investigating more than a 1,000 medical professions who are suspected of under declaring tax on income following the tax 'amnesty' that was offered to the sector a while back.

Whether these reports are valid, or whether HMRC has the evidence and gumption, to follow through successfully in some of these cases remains to be seen. There is usually no smoke without fire though so any medical person who thinks they may be "in trouble" needs to pick up the phone to an advisor ASAP.

Okay, next stop July. Hopefully the summer weather will eventually come out next month, before it's time for Autumn. Cool

 

Real Time Information penalty proposals

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Real Time Information penalty proposals

June 22, 2012 2012

Another week, another PAYE related consultation from HMRC to consider. If we were paid for each time we had to analyse these detailed consultation papers we could give up "proper" client work altogether given the amount of time we spend going through this stuff. It is a necessary evil of our job we suppose !

Anyways, what does this latest consultation document tell us ? A few things.

1. Firstly, HMRC like their 50+ page documents. Why use 1,000 words when 1million will do !

2. Secondly, that HMRC is in danger of completely over complicating RTI so that it will be an unmitigated disaster when we go live next year. It seems that no lessons have been learned from past disasters. CIS anyone ?!

3. Thirdly, and probably most importantly, why on earth does HMRC insist on calling these things "consultations" when it is abundantly clear that their mind is made up - see below.

 

So, what is being proposed now ?

Basically, whilst HMRC are making final tweaks to how RTI will work in practice, they are now looking at how to manage compliance of RTI via financial late filing penalties when it comes in. To cut a very lllllooooooooooooonnnnng story short, the proposals on the table are reduced to two options:

Option 1 (called optimistically enough "Basic")

A penalty regime very similar to existing P35 late filing penalties.

i.e. A fixed £100 penalty, multiplied by bandings (e.g. based on number of employees or number of filing defaults) per month with additional fixed penalties of £300 after 6 months and again after 12 months.

Fairly easy to understand and deal with we reckon and not too much legislation needed to get this in place.

Option 2 (labelled "Additional Features")

Most of the above but with some optional extras, possibly some/all of the following:

- No penalty for the first default in a period

- Quarterly penalties, with penalty quarters being staggered across employers

- No penalty charges if these are less than £500

 

While there are lots of "ifs", "buts" and "maybes" around some of the above, some of which is raised by HMRC in their document, it doesn't take a genius to see that Option 2 is likely to be extremely complicated to administer for both HMRC and employers , without necessarily making compliance any better, so why bother ? Especially given that HMRC's key message around RTI is that they want things to be as easy as possible for employers to comply. The smart money is on HMRC going with Option 1 and it brings into question (again) the validity and usefulness of these "consultations" when there really is only one likely outcome no matter how you cut it.

We could go into the technical merits of each option being considered but we'll not unless and until Option 2 (or a variation) becomes a distinct possibility. All we wanted to do at this stage is raise awareness that this "consultation" is out there and that, no matter what, employers who do not do RTI properly WILL be severely penalised, no matter what the penalty rules look like.

Anyway, RTI could be the first tax system to be self policed effectively given that employers who file late will bear the wrath of employees who have had their tax credits (or Universal credits in new speak) stopped. We think this will be a much stronger deterrent to employers than any penalties HMRC threaten, especially in sectors where competition for employees is fierce or where employees have a lot of choice, e.g. because they get paid minimum wage wherever they work.

Tax year-end and the GIGO Principle: Garbage In, Garbage Out

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Tax year-end and the GIGO Principle: Garbage In, Garbage Out

June 13, 2012 2012

Accountants have LIFO, FIFO, IFRS, etc etc. Acronyms we mean. But, here in the tax world, the only acronym employers need to know about for year-end "stuff" is what we call GIGO - Garbage In, Garbage Out.

Unusually for tax, this is a very straight forward principle to understand - if the data you start with is poor/inaccurate then there is every likelihood that what you get out of your system at the other end is going to be equally as poor/inaccurate no matter how good or sophisticated your systems are. The result of which will possibly, or even probably, mean that end of year returns filed with HMRC will be wrong which could ultimately lead to additional costs and penalties for the employer if and when these are uncovered by HMRC.

It's not just about the year-end returns either. HMRC are (supposed to be) following a risk based approach to compliance which involves looking at systems and processes rather than individual mistakes. If the data sources are riddled with holes, or the methods in which data is recorded are not up to scratch then there is no doubt that this will pull the employer's risk rating down heavily. There is also the Senior Accounting Officer rules to consider for the largest companies. How can the SAO properly and confidently sign off his report when the business hasn't even got some of the basics right around the reporting of employee payments ?

We guess it would be useful to provide some examples of what we are talking about here.

Staff expenses

Individual P11Ds, the employer's Class 1A NI liability and the PAYE Settlement Agreement will all be affected if the expenses data is not recorded and captured properly. The most common areas where the "GIGO principle" come into play include:

1) Expense claims being incorrectly completed by employees

2) Errors not being rectified when finance post the costs to accounting codes in the system

3) Claims being made and approved that are not within company policy or tax legislation

4) Finance staff posting costs to the wrong accounting codes either by default, in error or through ignorance or a combination of all three

5) Inadequate analysis and checking of accounting codes at year-end                                                                                        .

 

Company cars/vans

Poor fleet administration can lead to inaccurate data being held for company vehicles, e.g. around vehicle changes, list prices, employee contributions, private fuel use, etc all of which can impact on the P11D reporting. Bearing in mind that company car and van benefits are often chunky figures, errors in this area often result in significant additional liabilities being due by the employer.

Termination payments

HR may think it is necessary to keep senior terminations confidential and only provide Payroll with the bare minimum information on the settlements made during the year. However, this makes it virtually impossible for Payroll to identify which settlements attract a charge to tax and NI when making the payments and then which settlements need to be reported to HMRC at year-end, even if they are experienced enough to properly understand all the tax and NI implications in what is often a very complex area.

Share based payments

The Form 42 is one of the most problematic returns for employers to get fully correct, usually because of a lack of, or extremely poor, data.

Very often, the person responsible for pulling together the Form 42 may have information coming from various sources in connection with any share schemes in place, the format and quality of which may vary hugely. This can especially be the case in larger organisations or those operating overseas with employees moving about a lot. If the Form 42 person doesn't have full and accurate information around the types of scheme(s) in place, which employees have received share options, whether any options have been exercised during the year, etc etc then they may as well not file the Form 42 as it is unlikely to be correct.

 

We could go on here with other examples but the message should be simple - Garbage In, Garbage Out. If you learn anything about tax, learn this phrase, We have been using it for years and no matter what legislation changes or new guidance that comes out of HMRC, the GIGO principle will ALWAYS apply.

To help "recycle" your Garbage (i.e. source data) into usable material give Optimum PAYE a call !

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