Scottish Rate of Income Tax - More Complexity For Employers



Scottish Rate of Income Tax - More Complexity For Employers

May 25, 2012 2012

We appreciate that the technical note published by HMRC this week on the Scottish Rate of Income Tax is not law yet, and that there will be further "consultation" when the draft legislation comes out next year, but the likelihood is that this is going to be in force come April 2016.

In a climate where the Government is actively trying to make the UK tax system easier to understand and administer, hence why they bothered to develop the Office of Tax Simplification headed up by John Whiting, the proposals for the new Scottish tax seem to be going in the opposite direction, more like Office of Tax COMPLICATION !

The technical note is not only a depressing read but it begs the question who exactly were the "representatives of relevant private sector groups" HMRC consulted with in coming up with this nonsense ? Were these people employers at all ? Did they actually agree to the proposals as they are at the moment ? And did they actually have any knowledge or experience of tax ?? We really do wonder !

You couldn't make up some of the complexity contained in the technical note, you really couldn't. The random points below clearly illustrate the sheer stupidity of these proposals

1) The legislation will apply to anyone with a sole or main residence in Scotland. This may involve counting days in Scotland where it is not clear whether the individual has residency status in Scotland.

Who is going to make this judgement each year ? Employers will have to be involved to ensure PAYE deductions are correct but if this is done retrospectively as it will have to be, then how will this work especially in conjunction with Real Time Information ? Could the definition of "main residence" mean that an employee with a family home in Scotland but working mainly in London is liable to Scottish rates and his colleagues are not ? How will the payroll department necessarily know which employees may be affected and who isn't, particularly with larger, multi-site employers ?

2) For those affected by the Scottish Tax, the normal tax rates will be reduced by 10% (i.e.based on current rates to basic rate 10%, higher rate 30% and additional rate 40%) and then the Scottish rate will be added back in, which may be lower or higher than 10%. As the technical note puts it, the Scottish Parliament will only set one rate but this will give rise to three rates, the Scottish Basic rate, the Scottish Higher Rate and the Scottish Additional Rate. Confusing ? Absolutely !!

This is going to be a logistical nightmare for employers and payroll providers. 3 rates of tax for UK employees, 3 different rates for Scottish resident employees. The chances of mistakes being made must be very high !

3) The Scottish Rate only applies to non-savings income. Therefore payments such as dividends are subject to the normal UK tax rates. There may be exceptions "to avoid any unnecessary complexity". Ha !

This could be yet another reason for bona fide employees to consider setting up as a limited company contractor, especially if the Scottish Rates are, as expected, higher than the rest of the UK. Surely the Government should be addressing the huge advantages of contracting v normal employment not making the situation even worse than it already is ?

4) Tax relief on pension contributions will, in most cases, be at the Scottish Rates but any tax charges to restrict tax relief on pension contributions will not reflect the Scottish Rates.

As if pensions isn't complicated enough, this might send some employers over the edge.

5) The Scottish Rates will not be used for the Construction Industry Scheme, i.e. so tax deductions will remain at (the current) 20% and 30%. However, construction workers with a main residence in Scotland will suffer Scottish Rates via their Self Assessment.

Again, it is difficult to see how this will work practically but it will undoubtedly add more complexity to a sector that is already burdened with extremely tight and complicated tax rules.

6) Scottish Rates will apply to PAYE Settlement Agreements and Taxed Award Schemes.

Large, multi site employers, will have a huge headache in working our tax rates for the PSA at the end of the year. The whole point of a PSA is to reduce admin for both the employer and HMRC but surely the introduction of the Scottish Rate into the equation will simply increase the admin and complexity for everyone ?


In a week where tax professionals were urged to stand up and defend our tax system, it is unbelievable that such rotten and ill-advised proposals have been published.

We are sure that there will be more concerns to air once further details of the Scottish Rate (or should that be Rates ?) come through. As if we haven't all got enough to worry about just now around RTI, etc. !



The perception that tax advice is free - it isn't!



The perception that tax advice is free - it isn't!

May 16, 2012 2012

Question: Would it be reasonable for a member of the public to walk into Tesco and expect to get a trolley full of goodies for free ? Or to ask a plumber to fix some dodgy pipes for nothing ? Or to sell their house via an estate agent and not have to pay any fees ? Or to have their car fixed at the garage's expense ?

Answer: Of course it wouldn't !

So why then do people contact Optimum PAYE expecting us to give them highly detailed tax advice for free ?! This week alone we have had Joan asking for advice around car allowances, a chap from Liverpool looking for free advice on his subcontracting situation and a lady employee from England somewhere who didn't really get a chance to explain her "complicated" situation to us properly after we told her several times we only give advice under fee paying arrangements.

This is typical. We usually get 4 - 5 similar calls a week just now, usually after the person has Googled their problem and arrived at our website. The culprits are usually individual employees but we do get the occasional accountant, employer and contractor chancing their luck. Whether this is a direct result of the "moneysaving" culture the recession has brought us or whether there is just a huge pool of chancing freeloaders out there we are not sure but it is disappointing regardless. Especially as you just never know if any of these calls may turn into a genuine opportunity to gain some new business so you have to respond politely - at first anyway, once you establish that they are chancers the conversation goes downhill very fast. Or maybe that's just us having suffered these timewasters long enough !!?

It's not although we don't provide free information as a business. Via our website we do one technical article every month and at least a couple of blog posts a month with a technical slant which not only takes a lot of time and effort to maintain but is also far more than you would normally get from any other advisor out there. In addition, Brian Rudkin is a regular contributor to several online business communities on a free of charge basis such as UK Business Forums, TaxationWeb, AccountingWeb and 4N. We are also happy to do some "freebies" on a commercial basis, i.e. perhaps as a "sweetener" to secure a new high profile client or to demonstrate our expertise before a client signs an engagement letter so it's not as if we are all take and no give.

But enough is enough ! We are a business the same as the ones we mentioned at the top of the page. If you are reading this and thinking of picking up the phone to us or any other tax advisory business with a "quick question"..and not wanting to pay for it... then a word to the wise - buzz off and stop wasting our time !! Or, better still, SHOW US THE MONEY !!

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And if anyone knows why there is this perception that tax advice is free, please let us in on the secret....

IR35 Business Tests Guidance (or not)



IR35 Business Tests Guidance (or not)

May 10, 2012 2012

It's not a good start when a 47 page document published by HMRC states that this is not a comprehensive guide !!

This document which was published yesterday, and the tests within it, has been hailed as the answer to IR35. In other words, it will hopefully remove the whole uncertainty around IR35 and make it clearer who is in or out of IR35 going forward. Just to clarify, however, this has nothing to do with the issue of executives being paid through their limited companies - that is, and always has been, outside of IR35 and is being looked at separately by HMRC to tighten up the legislation around Office Holders.

So does this new guidance from HMRC really do as it says on the tin ? Or does it add further complexity to an already over complicated and over vague piece of legislation and area of abuse by many ?

Our opinion is that it falls way short of meeting its objectives, especially around making things clearer as there are too many contradictions and unclear messages coming out of this paper at the moment. For example:

- the low, medium and high risk bands are "on a spectrum not pigeon holes". What does this mean in plain English ??

- the business tests, and the guidance contained in this document, is a pilot and could well change over the months ahead. Great, more potential tinkering and further "guidance" to contend with once we get to grips with this new stuff !

- the risk bandings are not an indication of whether IR35 applies or not (that depends on each specific engagement), and cannot be wholly relied upon in any event. So what's the point ??

- vague examples with no clear outcome in the majority (thus reflecting real life but not providing a solution)

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You may be inclined to read the entire 47 pages if your business is caught up by the whole IR35 nonsense but if you just want the highlights please read on...


Risk Bandings

The main purpose of this new guidance is to provide each intermediary business (i.e. limited company or partnership) with a risk rating which will dictate the chances of HMRC doing an IR35 review on their business. The bandings are, as you would expect, low (more than 20 points on tests - see below), medium (between 10 and 20 points) and high (less than 10 points). The low risk rating is the most attractive (obviously) as it guarantees that HMRC will not bother you again about IR35 for 3 years if they agree that you fall within this banding. Well, the word guarantee can only be used loosely as there are some conditions attached to this such as the circumstances and engagements of the business not changing during this period. Obviously, those businesses with a medium to high risk rating will be more likely to be reviewed by HMRC and will have to do more to convince HMRC that IR35 does not apply.


The Business Tests

Each business will have to consider 12 separate tests on a scorecard basis to determine which risk banding the business falls into. The tests are

1) Business premises 2) Professional Indemnity Insurance 3) Efficiency 4) Assistance 5) Advertising 6) Previous PAYE 7) Business plan 8) Repair at own expense 9) Client risk 10) Billing 11) Right of substitution 12) Actual substitution


The "Killer" point scorers

These new business tests are a major shift away from the way in which engagements were assessed previously and there is no doubt that both engagers and workers will have to change the way in which they think about IR35 going forward. There is some sense in some of the tests as they place greater emphasis on the actual working practices than what the contractual terms state which we guess is in response to the mass of  "IR35 friendly" contracts which have been used previously to try to avoid IR35. A good example is the right of substitition in a contract being rather insignificant under the new tests compared to a substitute worker actually being used. There are some key areas though that are of huge importance when scoring the business tests, some of the best and worst are as follows


Best for low risk rating and (maybe) keeping out or IR35

35 points - Employing other workers (not directors or shareholders)

20 points - Actual use of a substitute worker

10 points - own business address (not home) /  Extra profits through efficiency / write-off of fees


Worst for high risk rating and for trying to avoid IR35

Minus 15 points - If paid by the same client previously under PAYE as an employee



So, there you have it, at least for the time being. We are not convinced that this new way of doing things is going to make IR35 any easier to deal with or comprehend but we have no choice but to go with the flow and use this new guidance going forward. The only certainty we have concluded from this not-very-useful 47 page "guide" is that there will be plenty material for us to blog about over the months ahead on this subject !




National Employment Tax Forum Meeting April 2012



National Employment Tax Forum Meeting April 2012

April 27, 2012 2012

Brian Rudkin was again in attendance in a rainy London earlier this week at the latest get together of the Employment Taxes Forum to share, discuss and address topical PAYE related matters.

As ever, it was a very useful day for all concerned. Brian didn't even moan (too much at least) about the very early start to his day. And the rotten weather in London, and the late hour he got home, and the tiring day out in Glasgow the next day at a business exhibition, etc, etc. Optimum Grump of the week so he was !!

As well as all the usual stuff, the group had invited HMRC's national Group Leader on Real Time Information to discuss some of the current issues and practicalities behind RTI and how this will impact on all employers. A lot was packed into the day so here are some of the highlights:


Real Time Information - lots of discussion around this which we may need to cover in a separate blog or article over the weeks ahead

1) The main message coming out of the RTI pilot just now is that quality of data is absolutely the key to employers coping with RTI. It has taken some employers in the pilot around 6 months of work to have their data RTI ready

2) The information required and the format of this information for employers to be set up for RTI is extremely specific and employers should not just assume that their data is RTI ready just because it is okay for their internal payroll system

3) HMRC has yet to announce its migration strategy to get all employers on to RTI by October 2013 but the assumption should be that all small to medium sized employers will be invited to join RTI (invite is perhaps the wrong word here as there will be no option to refuse !) for 6 April 2013 with the largest employers joining nearer to the October 2013 deadline.

4) Worryingly, HMRC will not be "vastly" improving its technology to deal with RTI but will be improving this  "a lot". This is such a huge change to the PAYE system that "a lot" may not be adequate enough. Time will tell !

5) The RTI penalty regime is still being worked on but HMRC's intention is that this will be given a "soft landing" when RTI becomes operational in that certain leeway will be given to employers while the new regime is bedding in. HMRC is quite open in saying that it will be extremely hard for employers to make late payments of PAYE and NI under RTI (compared to the £2-3bn of payments currently paid late) so we are certain that the penalty regime will be harsh for those who do not comply

6) One of the biggest pressures on employers to operate RTI properly will be the fact that failures will not only result in penalties but, more importantly, will prevent HMRC from processing any payments due to employees under the Tax Credit system (soon to be known as Universal Credits). A high number of employees receive Tax Credits in some shape or form so this could be a very big issue for those employers who do not fully embrace RTI from the outset

7) It is becoming clear that some tax technical issues will arise through RTI which could be problematic for some employers e,g, around share option payments. One of the biggest concerns at the moment is small limited companies that currently pay its director(s) through low salary and dividends. RTI could effectively make it much more difficult to retrospectively declare dividends.



1) A new unit has been setup by HMRC in Sheffield specifically to focus on IR35 compliance

2) The IR35 forum is meeting next week in order to move forward the recommendations in the Budget to improve IR35 compliance, e.g. by "beefing-up" the HMRC helpline, making it clearer who is in or out of IR35, etc

3) Guidance will be published imminently by HMRC around the definition of "controlling persons" in relation to office holders and IR35 following the Budget announcement around this. Office Holders are automatically caught by PAYE rules just now, and are usually outside the scope of IR35, but with recent publicity around inappropriate use of limited companies by high profile civil servants and others, the guidance and legislation will be improved to make this clearer and less able to be manipulated with greater responsibility on the employing organisation.

Reed Employment Agency

It has been announced that Reed will be appealing against the recent damning ruling by the First Tier Tribunal on their salary sacrifice arrangements. This is not surprising given that there is £158m at stake !

Child Benefit Tax charge

Aside from the strange 7 January 2013 start date for this charge, the biggest discussion point was around the possibility of using salary sacrifice as an effective tool for employees to remain within the eligibility for Child Benefit under the new rules. It is unclear at this stage what will count as income for the purposes of Child Benefit claw-back and how and by whom this will be reported.


HMRC is currently very active in certain parts of the country in challenging the homeworker status of employees in relation to travel and subsistence costs.


PAYE news roundup 20 April 2012



PAYE news roundup 20 April 2012

April 20, 2012 2012

April tends to be one of the most challenging months for us in terms of blogging and updating our website, etc. Not only is it one of our busiest months of the year in terms of helping clients with year-end stuff, which limits the time we have to do some of the admin, but our clients are also too busy to be reading much tax technical bumph, or any bumph for that matter.

We do get many, many positive comments however on our regular blogs and technical articles and it is important to us to keep our website and our clients and contacts as up to date as possible with whatever is happening in the PAYE world. Hopefully this blog post ticks all the boxes we need to at this stage in the month - passing on any relevant news but keeping it short and sweet, i.e. so that it can be read (and discarded !) within a few minutes.

So, without any further ado, let's get on with a quick news roundup:


Pensions auto enrolment

HMRC has confirmed that they will be changing their guidance to ensure that salary sacrifice and pensions auto enrolment rules are compatible so that employees who opt-out of auto enrolment are not out of pocket or put the employer's pension salary sacrifice arrangements at risk.

This is a welcome announcement as it was causing some anxiety in some quarters. Revised guidance to follow on this.

Real Time Information

The RTI pilot has started with a handful of employers which will increase over the next couple of months. This will be a moving feast before the final go-live date of October 2013 with much feedback to be shared and changes announced before the arrangements are finalised we are sure. Watch this space as they say...

Late P35 penalties

HMRC has provided further details in the April Employer Bulletin around the issuing of late filing penalty notices for 2011/12 P35s following much criticism and cases hitting the Tribunal after last year's delays in issuing letters to employers. Hopefully this will mean that any employer who files late this year, either intentionally or by mistake, will be aware nearly straight away that they are in a penalty situation thus avoiding silly situations where disproportionate penalties are allowed to build up before the matter is dealt with.

Tax Cases

The only one of note recently that wasn't to do with penalties and reasonable excuse arguments was the case of G R Solutions Ltd v HMRC. Yet again, this case involved the argument of whether a company car and car fuel scale charge applies where unusual car ownership arrangements exist. And, yet again, HMRC won the case, as they do in most cases involving company cars, by virtue of the legislation that states (quite clearly in our view) that BIK charges apply where 1) ownership of the car does not pass to the employee, 2) the car is available for private use (whether it is actually used or not) and 3) that the car is made available by reason of the employment. When will these employers/directors ever learn ??

Salary sacrifice warning

It was reported this week in the press that Pendragon, the UK's biggest car dealer and also a major car leasing firm, has been hit with penalties for falling fowl of National Minimum Wage legislation when allowing employees to participate in salary sacrifice arrangements - some of which involved cars would you believe.

This is yet another example that a) big employers don't always know best and b) silly mistakes like this can easily be made on salary sacrifice without appropriate tax advice and support from, ahem, someone like Optimum PAYE. Embarassed

We know we keep banging on about the care needed around salary sacrifice but clearly some employers are still ignoring us !!


Ok, that's enough for now. Back to year-end duties !

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