Saturday, October 06, 2012

People averse to paying tax shocker!

Okay, before we start let's get one thing right, tax avoidance is not cheating, it's not fraud and it isn't illegal, tax evasion on the other hand is cheating, fraud etc. Everybody should have the right to organise their affairs so as to maximise their income and minimise their tax liability, after all payments into a pension fund are a form of tax avoidance (at least in the present - the buggers will catch up with you later), tax evasion is not declaring all your income in the first place.

Now whether or not the line between avoidance and evasion sits easily with you probably depends on your personal belief system. You could always follow the Mike Baldwin approach and, "throw the Revenue a bit every now and then to keep them happy," but he was a fictional character so is probably not your best choice of character witness should you need one.  I suspect that if you pay tax via PAYE you probably look on tax avoidance schemes with a mixture of envy and horror and a little jealousy, after all you don't have a say in the matter, or do you?

The most disappointing aspect of this story isn't the fact that people are using legitimate means to reduce their personal tax liabilities but that it even after twelve years nobody in Parliament will publicly admit that IR35 legislation is a dead duck. A bill no longer fit for purpose.

IR35 was originally introduced after it was noticed that people in the IT industry would finish a contract with a company on a Friday then start a new contract with the same company on a Monday passing the income through a personal service company (often referred to as an 'umbrella company') and that they would effectively be employees rather than sub contractors. The fear, in 1999 when the legislation was presented to Parliament, was that the work required for Y2K compliance would lead to a lot of people moving between companies as contractors rather than as employees. The use of a service or umbrella company avoids Employers National Insurance being paid by the 'employer' and also PAYE and Employees National Insurance being paid by the 'employee'. The owner of the service company then draws money out of his service company via a dividend without having any tax liability and the company simply pays Corporation Tax on the pre-dividend profit.  It has to be said that this isn't always driven by the need to save tax in some (indeed many) cases it helps the 'employer' circumnavigate employment laws.

It was one of those wonderful ideas dreamed up in the early, golden years of the last Labour Government and which is probably the only reason that Dawn Primarolo's name is still remembered outside of her house. When the legislation was brought in, with much fanfare it has to be said, the Government proudly announced that their new baby would deliver £220 million a year in tax revenue with a further £80 million in National Insurance as companies took sub-contractors onto their books. In reality for the first nine years of its existence (2000/1-2008/9) it yielded just £1.5m a year, the last published figures (and let's be honest it's not the sort of thing that is going to be trumpeted from the roof of the Treasury) for 2010-11 show that it produced just under £220,000 a year - yes that's right 0.001% of the anticipated annual income at the date of its launch. How much it has cost to collect is anybody's guess but it's never going to appear in a Value For Money Top 50 any day soon is it?

The number of cases that HMRC has been successful in proving that the owners of service companies are actually employees of the company they are working 'for' can almost be counted on the fingers of one hand (actually they have won six and lost just over 1,450). The only industry that followed the IR35 letter to the law was the building industry and even their attitude has changed over the years, I have a client who is self-employed but who 'works' for one of the country's largest contractors and arrives at my office in one of the company vans wearing a Hi-Vis vest with the company name on it, when he arrived with his paperwork recently our conversation went, "So Mike, I see the self-employment is going well." "I don't know how they (the company) get away with it."

The use of service companies is widespread across so many sectors that it is often forgotten in the rush to condemn either BBC employees or television personalities etc, although if HMRC did win a few successful cases against anybody within those groups it might win a few friends among the public. Civil servants should not be using companies to facilitate the lowering of their tax bills or avoiding national insurance, after all like BBC employees they are paid out of the public purse. I know there are people within the NHS who also use them.

There seems to be a general feeling among the public that you have to be rich to use these vehicles but at a time when the deputy leader of the Government is telling us that if you earn £50,000 a year you are rich I can assure you that a lot of people who earn less than that who employ the services of a tax consultant.

There is of course a myth about the level of tax that is saved operating through an umbrella company. What people rarely take into account is the overall 'tax take', that's to say the total of all taxes involved in both scenarios. If you are operating a one man company with no outgoings and on an income of £200,000 - the sort of figure you could be talking about for a top journalist or TV personality then using a company will work out more expensive than the PAYE route. The real savings will be made by the employer, so I suppose in the case of the BBC we should applaud the use of umbrella companies, although if you think about that scenario for too long you will get a headache trying to follow the cash from the licence fee into the BBC and then back to the taxpayer via tax! Anyway in the case of our £200,000 p.a journalist the BBC (other employers are available) would be saving the thick end of £30,000 in Employers National Insurance.

The old 'master and servant' rules are still used by tax practitioners as a guide to whether or not these schemes will stand up to scrutiny or not and it basically comes down to who decides where and when you work, who provides the source of the work, whether or not you are responsible for your own public liability insurance, tools etc. As you can see quite how people working in the NHS can operate under such schemes is a bit of a mystery but generally if you can prove that you are available to work where you like, when you like and potentially for as many people as you like it will be difficult for HMRC to prove that you are actually a shadow employee.

When it comes to the legislation of financial matters the Coalition, as on a lot of issues to be honest, managed to change their minds twice within the first year of coming to office. Firstly in the 2010 Budget they announced there would be reforms to the system making it simpler but not unduly administratively burdensome, then in the 2011 Budget they announced that things would stay as they are but that the HMRC would be asked to change its attitude towards IR35 and a IR35 forum would be launched. Now if the old Labour party was guilty of anything then it was guilty of wasting money but the Coalition are now going down the same road asking a group of civil servants who aren't responsible for writing the legislation, only trying to enforce it, to carry on trying to make something work that has failed hopelessly for the last thirteen years and at huge expense to the tax payer. 

HMRC has almost lost the will in respect of taking cases involving umbrella companies to court, that's not to say they won't try again but I have a feeling that apart from a few 'whizzy schemes' involving people like Jimmy Carr (whose K2 scheme incidentally was HMRC approved) and the Ken v Boris type arguments, over who is paying more tax rather than less, this is a story that will bob to the surface every six months or so like a bottle thrown by a small child into the waters off a Caribbean tax haven.


Span Ows said...

well I read all of that (honest!) and understood it. I'm glad you mentioned Jimmy Carr as I was trying to remember which 'modern comedian' it was: I was 'on his side' because as you say from the first sentence he did nothing wrong EXCEPT (apparently) slag off rich people. Trouble is for politicians to then come out slagging him is just more hypocrisy.

Anyway, slight tangent same subject: could all government employees just be paid net, would that work?

Paul said...

Thanks Span, I did cut it down a bit but didn't want to lose the point.

I don't see why it wouldn't work, there just needs to be the will to do it.

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