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What is IFA?
The International Freelancers Association (IFA) is a recently launched organisation which will be the voice of the global freelancers. Its mission is to define and provide the infrastructure for the development of the global freelancer market. The structure enables all stakeholders, whether freelancers, service providers, end user clients, agencies, associates or others, to provide services to each other with an ease and clarity that is not available anywhere else.
What can the IFA do for freelancers?
For the freelancers, we provide jobs, low cost insurance, low cost financial services, bespoke freelancer business software, agency and client list, forums, guidance on tax and method of trading, bulk buying power, providers of accountancy services, international working and how to maximise your wealth and more in essence, all you need as a freelancer.
What can the IFA do for companies?
For companies, we provide the facility to advertise your jobs, manage freelancer responses, advertise your company, bespoke business software, eMarketing, forums, networking, low cost insurances and the opportunity to shape the freelancer market.
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HM Revenue and Customs (HMRC) has issued a reminder to anyone filing a Self Assessment tax return this year - that the deadline for paper returns is now October 31 - just a few weeks away. In the past, both paper and online Self Assessment tax returns had to be filed by January 31. But from this year, paper returns must be with HMRC by October 31, with the prospect of a £100 penalty for late filers. The deadline for filing online returns remains January 31. Once you've filed your return, any tax due has to be paid by January 31, whether you file on paper or online.
The majority of freelancers choose to assess their own IR35 status or don't bother to check it at all according to a recent survey.
According to Brookson, providers of accountancy, tax advice and other support services to contractors, who commissioned the survey, this could put many freelancers at risk of hefty tax bills in the event of an enquiry by HM Revenue & Customs.
Since IR35 was introduced eight years ago, freelancers and their advisors have been critical of the lack of clarity and certainty in the 'grey' areas of the legislation, leaving them open to challenge from HMRC as to their 'emploment status' and subsequent tax position.
A number of companies offer contract review assessments or advice on contract wording. And a new market has emerged offering insurance and professional representation in the event of an investigation.
Several recent high profile cases have illustrated the uncertainty and unpredictablity of the IR35 legislation, as the Commissioners reach seemingly conflicting decisions and the goal posts constantly shift.
The survey of 700 freelancers found that: *50 per cent of UK freelancerss are not seeking professional advice on their IR35 status, instead choosing to assess their own compliance *13 per cent of UK contractors do not bother to check their IR35 status at all. * 27 per cent use a specialist accountancy or legal service provider to verify their IR35 status.
While some contractors follow IR35 changes and issues in great detail, for many it is impossible to keep abridge of all the technical and case law changes which affect employment law status on a regular basis. For those, professional advice is essential.
Determined entrepreneurs whose businesses fail are dusting themselves off and getting straight back in the saddle, according to a survey of small business ownersin the North West by Barclays Local Business.
The research shows that small business owners wait just four months after a business fails before they get started with their next venture.
The survey also found that men were more likely than women to have run another business, with 36 per cent of those surveyed having owned another enterprise, compared to 17 per cent of female respondents.
First, freelancers had to deal with being 'disguised employees' under IR35; then composite companies were effectively closed down with the Managed Service Companies (MSC) regulations; now the UK Government's spotlight has shifted to umbrella companies.
Umbrella companies have been seen as a popular, tax-efficient way for some contractors to provide their services. But now the Government is set to take action against them, as it criticised the over-generous expenses claims which some have operated.
HM Treasury has launched a consultation paper which seeks to analyse the umbrellas and in particular the circumstances which 'enable some temporary workers to gain tax relief for travel expenses not available to others working in similar circumstances'.
It said: "There is also evidence of widespread abuse of the travel expenses rules by these structures. Non-compliance and the use of these structures to pay less income tax and national insurance contributions (NICs) lead to a loss to the Exchequer, as well as further problems."
Travel expenses
Central to the issue is the use of travel expenses. The cost of travel between home and work is normally regarded as a personal expense, putting an individual in the position to do his job, rather than an expense incurred in performing his duties. Travel between home and a permanent workplace does not attract tax relief, whether the engagement is short or long term, or the worker is engaged on a temporary or permanent basis.
However, a distinction is made for temporary workplaces where the worker goes to perform a task of limited duration, or for a temporary purpose. Tax relief is given for travel between home and temporary workplaces.
The Government has highlighted its concern at evidence that umbrella companies and employment agencies using overarching employment contracts often abuse the travel expenses rules by encouraging their workers to claim expenses which were not genuinely incurred or for which no relief is due.
Industry bodies and interested parties will be responding to the Government's consultation during the summer.
Freelancers who set up their business with their husbands, wives or partners have had an anxious few years waiting to see if the Government viewed the arrangement as a legitimate business exercise or a tax dodge. And that wait is still continuing.
Section 660 - or income-shifting - has become a thorn in the side of many freelancers who established their businesses on a 50-50 basis with their partners. In short, the Government wanted to stop the process by which an individual transfers part of their income (in dividends or partnership profits) to another person who iss subject to a lower rate of tax. The Government wanted to tax the shifted income as if it had been received by the higher tax payer.
The subsequent legal and political battle seems to have been like a long-running soap-opera. Centre stage was an IT business, Arctic Systems, owned and operated by Geoff Jones and his wife Diana.
HM Revenue and Customs contested that the dividends received by Diana should be taxed, at a higher rate, as if they had been received by her husband. Leaving them - and possibly thousands of others who operated in a similar manner - with a tax bill of over £40,000.
The victories and defeats in the court system culminated in a decisive win for Arctic Systems in the House of Lords, but the collective sigh of relief from the UK's freelancing community was short-lived. A day after its defeat, the Government announced its intention to change the law.
Its proposals were met by universal criticism and the Government was forced to U-turn on its plans. But only on a temporary basis, as it announced it would delay implementation of any new proposals until 2009.
Many now hope that this means it has been well and truly kicked into the long grass for the foreseeable future. Particularly as this common practice was advocated not only by accountants, but by one of the Government's own small business advisory bodies!
Don't miss out on VAT refunds
Businesses across Britain could miss out on a chance to claim VAT rebates ranging from tens of thousands to several million pounds, according to accountants KPMG.
It stems from a decision in the House of Lords in January this year which said that the introduction of a 'three year cap' on back-dated claims in 1996 was invalid in so far as it failed to include transitional arrangements for taxpayers making any claims relating to periods prior to May 1997.
The opportunity for refunds relates to VAT either mistakenly overpaid or rebates that were under-claimed between 1973 and 1997.
Submissions need it be in by the end of March next year and with claims typically taking several months to compile and agree, companies risk running out of time to apply for refunds.
Many businesses are unaware of the opportunity to claim rebates over this 24 year period. Stuart Hindle, indirect tax partner at KPMG in the UK, said:
“The door is open for 24 years worth of VAT claims ñ from 1973 when the UK joined the EU to 1997 when the law was changed.
ìBut if businesses donít act quickly, they run a risk of losing out as all claims must be submitted by the end of March next year”.
With the deadline for claiming Small Business Rate Relief (SBRR) just weeks away, a small business group is urging business-owners hit by higher rates to apply for some of the £200 million of relief that goes unclaimed each year.
Some small businesses eligible for a rates rebate are not aware of the scheme and many business-owners are paying additional property taxes, including supplementary business rates, as part of the nationwide Business Improvement Districts (BIDs) programme, but are seeing few of the proposed benefits in return for their money.
The SBRR scheme was introduced in April 2005 to give businesses based in properties with low rateable values the opportunity to ease the burden of their rates.
Research from the Local Government Association suggest that fewer than half of the 870,000 small businesses across England which qualify for the scheme have applied for it.
Small business group, the Forum of Private Business, is encouraging all small businesses which have properties with low rateable values to contact their local councils to ask about Small Business Rate Relief. The average processing time for applications is two weeks.
IT supports jobs up; management down The number of IT support jobs being created is almost 20 per cent higher than two years ago, despite fears that offshoring would further erode demand for entry-level IT positions in the UK,according to research by ReThink Recruitment, the IT staffing company.
The research also suggests that for some senior level roles the number of jobs advertised has either declined or remained static over the last two years. The number of jobs advertised for management roles in IT has declined by 30 per cent since 2006, whilst the number of new software development roles has fallen by 18 per cent over the same period.
Few UK small businesses are ready to bounce back if they have a business disruption, even though it would lose them business.
A recent survey shows that four out of five respondents would walk off to another supplier if they could not get the goods or services they wanted immediately, but only a third of managers of SMEs in the UK are taking steps to ensure that their business can continue to operate normally under any circumstances.
September 2009
There was a time when tax avoidance was seen as legitimate and acceptable by HMRC. HMRC’s attitude has changed, however, over recent years to the extent where they view avoidance and evasion in the same light, albeit that avoidance is legal and evasion is illegal.
Brief History
In the 1935 court case of CIR v Duke of Westminster it was cited that, “A taxpayer may have a choice between two or more alternative methods of achieving a desired result. He is entitled to select the method, if otherwise lawful, which avoids altogether or reduces the amount of tax which he would pay if he adopted one of the other alternatives. He is not to be taxed on the basis that a more normal or obvious method would attract a heavier tax burden. The selection of a tax-effective method is called tax avoidance”.
Legitimate tax avoidance has developed through the passage of time and evolved into the creation of intricate and artificial schemes that involve a series of transactions with the primary aim of reducing the tax burden. To combat the rise in this activity, tax legislation has been introduced since the 1960’s to specifically counter schemes whose chief purpose is to avoid tax and, also, some schemes have been successfully challenged in the courts.
In Ramsay Ltd v IRC (1981), a company executed a number of pre-arranged steps to create a loss to set against its gains. The court was entitled to examine the scheme in its entirety and it was clear that the sole motive was to avoid tax. As such, the taxpayer lost and the Ramsay principle was born.
Furniss v Dawson (1984) involved a capital gains tax deferral scheme but it was held that the Ramsay principle applied. As a result the House of Lords developed a new approach:
In Ensign Tankers (Leasing) Ltd v Stokes (1992), it was held that even where a commercial purpose is present, if tax avoidance is the main driver then such a scheme is still open to challenge. This case typifies the courts’ approach to tax avoidance schemes, as it was considered that there is a fundamental difference between tax mitigation and unacceptable tax avoidance.
Disclosure of Tax Avoidance Schemes
HMRC’s increasing frustration with the unacceptable face of tax avoidance led to the introduction of the Disclosure of Tax Avoidance Schemes rules on 1st August 2004. The rules are designed to discourage the use of schemes that are abusive or involve artificial transactions, or exploit loopholes in legislation that parliament never intended. Taxpayers can, however, still minimise their taxes provided this is done within the letter of the law and are not abusing the law.
Initially the rules were limited to the reporting of financial products and arrangements connected with employment but from 1st August 2006 were extended to any arrangements that provided a tax advantage in income tax, corporation tax or capital gains tax. This was extended to NICs on 1st May 2007.
The definition of ‘arrangements’ is widely drawn and includes any scheme, transaction or series of transactions.
For corporation tax, income tax and capital gains tax, schemes have to be disclosed if they meet certain conditions or ‘hallmarks’ which are as follows:
Where any one of these hallmarks apply the scheme promoter must notify HMRC within five days of the scheme becoming available. The scheme is then issued with an eight digit reference number, which scheme participants must disclose on their tax returns. If the promoter does not disclose the scheme then the onus is on the user to do so within 30 days. Failure to disclose a scheme results in a maximum penalty of £5000 plus £600 per day thereafter.
HMRC Spotlights
Whilst HMRC do not generally make public comments about avoidance activities they do highlight a selection of activities on their website which, in their view, will not achieve the desired legal effect the participant was seeking. There are currently six spotlights listed and spotlight 5 may be of particular interest to those freelancers who are members of schemes that promise high net income returns through the use of Employee Benefit Trusts (EBTs). Spotlight 5 concerns ‘Using trusts and similar entities to reward employees – PAYE and NICs, Corporation Tax and Inheritance Tax’. HMRC have commented that they consider this type of tax avoidance scheme to be ineffective. As a result, they are likely to “investigate tax returns where these schemes have been used and seek full settlement of the tax due, plus interest and penalties, where appropriate.” Furthermore, use of these schemes “may give rise to unexpected tax consequences”.
HMRC go on to say, “We’re aware that companies have been seeking to reward employees without operating PAYE/NICs by making payments through trusts and other intermediaries that favor the employees or their families. The arrangements usually seek to secure a Corporation Tax deduction, as if the amounts were earnings at the time they are allocated, and also defer PAYE/NICs or avoid them altogether. Our view is that at the time the funds are allocated to the employee or his/her beneficiaries, those funds become earnings on which PAYE and NICs are due and should be accounted for by the employer.”
We are left in no doubt that HMRC wish to bring an end to any further usage of these schemes and, as part of that process, they are “actively challenging examples of such arrangements and considering legislative options.”
The Future
HMRC despise aggressive tax avoidance schemes with a passion. They are seen as being no more than raids on the public funds at the expense of the majority of law abiding taxpayers.
In the first draft of HMRC’s Charter for taxpayers, appeared the controversial phrase that they would “Pursue relentlessly those that break or bend the rules”. This has since been amended to “Tackle people who deliberately break the rules and challenge those who bend the rules”, although HMRC’s sentiment still remains the same. This attitude set against a backdrop of economic recession, where the government needs to raise revenue wherever it can, is an indication that both promoters and users of tax avoidance schemes can expect rough passage.
It is understandable that a contractor will have their head turned by the promise of greater income retention through tax mitigation, even if it does mean relinquishing a not insignificant amount of their fee’s to the promoter. We have seen too many examples of contractor’s naively signing up to schemes without carrying out their own due diligence and simply accepting the promoters assurances that their product is kosher only for it to all end in tears. It takes a fair amount of time for even a professional adviser to come to a full understanding of the workings of a structured tax avoidance scheme, which is why careful deliberation must be exercised before deciding whether or not to take the plunge.
Independent expert tax advice should always be sought before deciding to jump. That may come at a cost but the costs of getting it wrong will be far greater and more distressing.
Test the promoters’ confidence in their scheme by posing the acid test question of whether or not they are prepared to indemnify you against professional fees, tax, interest and penalties should HMRC mount an investigation. That may seem a little unfair given that tax legislation is not always black and white but many promoters boast their scheme’s worthiness off the back of Counsel’s opinion. It is however only an opinion and your money is on the line.
For those that are fearless and undeterred, then wade through the waters of tax avoidance schemes very carefully otherwise you could find yourself up to your neck before you realise!
For all enquries relating to tax avoidance schemes contact one of our IFA-Voice team on 08450 525 121 or by email: info@ifa-voice.com
We now know, by way of the Freedom of Information Act, that HMRC managed to yield the pitiful sum of £9.2M from IR35 in the six years between 6th April 2002 – 5th April 2008. To put this into perspective, the income tax and NICs yield alone in the same period was £1.25584 Trillion. IR35’s contribution during this time has therefore been a mere drop in the ocean.
What we do not know is the associated costs in terms of HMRC time and manpower devoted to pursuing IR35 enquiries but I think most of us would hazard a guess that this exceeds the income.
Given this pathetic track record and the inconvenience, disturbance and needless worry caused to contractors you would have thought that the death knell would be sounding for this unworkable and ill thought piece of legislation. Apparently not and not even the Tories seem willing to relegate it to the scrapheap should they depose Labour at the next General Election.
Even if IR35 were to be banished from the statute books it would be replaced by some other piece of legislation which, if MSC be the yardstick of legislating against the freelancing market, could be more swinging. Given this, is there an argument then for simply accepting IR35 as a well known adversary rather than clambering for an unknown evil lying in wait? At least with IR35 we know our enemy.
IR35’s dismal failure is attributable to a number of factors, such as the freelance community’s heightened awareness of status issues and expert professional representation when faced with an IR35 enquiry. Contractors are reassured by the fact that, with IFA-Voice by their side, IR35 is not so foreboding.
So whilst IR35 is not so much the roaring lion but rather a yappy little dog causing a nuisance, it does not mean that contractors should be less vigilant and the message should be to continue to arm your companies with the best defenses such as Fir35Guard and Fir35Wall Insurance packages.
To find out more of how IFA-Voice can both help and protect your business either visit our website; www.ifa-voice.com or contact the IFA-Voice Team on 08450 525 121.
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