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Lords open inquiry into 'clumsy' IR35

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26th Nov 2013
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A leading tax expert told peers reviewing the controversial IR35 legislation that its original design, based on contract by contract policing, was “innately clumsy”. Andrew Goodall reports on Monday's hearing.

John Whiting, director of the Office of Tax Simplification (OTS) and a non-executive director at HMRC, was giving evidence to the House of Lords personal service companies committee investigating “the consequences of the use of personal service companies (PSCs) for tax collection”.

In the inquiry’s first public hearing on Monday, the committee also questioned Rowena Fletcher, HMRC’s deputy director with overall responsibility for employment status matters, and Robin Wythes, employment status team leader at HMRC.

The committee is led by Baroness Noakes, a former president of the ICAEW. “We need to ensure that our tax system does not place unreasonable burdens on taxpayers,” she said earlier this month.

HMRC estimates the current PSC population at around 200,000, unchanged from 2010, Rowena Fletcher told the committee. When IR35 was introduced in 1999 the estimate was 90,000. The increase reflected changes in the labour market, with more people choosing to provide services through a range of intermediaries including PSCs, she said.

Asked how many of those 200,000 intermediaries apply IR35, Fletcher said HMRC had not recently analysed the PSC population. IR35 is applied on a contract-by-contract basis, and estimating the number of PSCs to which IR35 might apply would not necessarily help HMRC target the risk. The department targeted compliance activity towards companies where, effectively, the worker’s relationship with the client was an employment relationship, Fletcher said.

Noakes asked Fletcher to estimate the size of this group. “We don’t routinely estimate how many PSCs we think IR35 applies to,” she replied, adding that an impact assessment on the introduction of IR35 suggested that it might apply to 50,000 of the estimated 90,000 PSCs.

There was no recent estimate based on the same methodology, Fletcher said. But a 2012 “exchequer risk” estimate of the tax take from IR35 and its wider “deterrent effect” was “broadly the same” as an estimate of £475m produced in 1999.

Lord Levene asked later whether any assessment had been made of “how much additional tax has accrued to the Revenue which would not otherwise have come in”.

Fletcher replied: “We don’t hold separate data about the amount of tax we collect from people who are operating IR35, because part of the impact of IR35 is its deterrent effect.” HMRC could not “disaggregate” the two elements, she suggested. Compliance activity during the last couple of years, dealing with cases where IR35 had not been operated correctly, had yielded just over £1m a year.

However, Whiting told the committee later that “in terms of the actual hard cash that IR35 has yielded, the amounts are relatively derisory – under £10m or thereabouts in its life in terms of what has been paid”. He agreed that the amount of tax protected, or the “deterrent effect”, was significant.

Whiting suspected that the overall cost of monitoring and complying with IR35 could equal or exceed the actual cash yield, but it would come “nowhere near” the amount of tax protected. Abolishing IR35 would open up the risk of “more abuse”.

Robin Wythes said HMRC had opened 256 new IR35 enquiries in 2012/13, and a further 112 in the current tax year. All of these were “high risk” cases in which HMRC believed that all contracts would be caught. HMRC anticipated that five current IR35 disputes would proceed to a tribunal.

Lord Hope asked about the “low to medium risk” cases. Were they being left out? Wythes replied: “There is a spectrum of risk that we look at. We have a finite resource that we can deploy to IR35. Currently we have 40 staff deployed to this area… We deploy that resource where we think it’s most effective in terms of exchequer yield and the greatest deterrent effect.”

Coverage across various industry sectors would ensure that no taxpayers felt they were immune from investigation.

Fletcher told the committee that 1,200 calls were made to HMRC’s IR35 helpline in 2012/13 and 80 contract reviews were sought. During the current tax year a further 65 contract reviews had been requested. HMRC and the IR35 forum were considering how take-up of the contract review service could be improved.

Whiting told peers that the OTS had not formally done any further work on IR35 since it recommended in March 2011 that the government should either suspend the legislation “with the intention of permanent abolition” or retain it and improve its administration.

Whiting said the “suspension” route would have had a “greater simplification dividend”. The OTS report said a commitment from the government to integrate income tax and national insurance contributions would have led to a reduction in the “tax motivation for incorporation”.

But he did commend the HMRC business entity test and guidance introduced last year as a good start towards improvement. The system needed to be run with a “light as possible” touch, he argued. A very large number of people were potentially exposed to IR35, and the challenge was how to target the small minority at risk without burdening the majority.

Martin Hesketh, managing director of Brookson, an accountancy firm providing services to contractors and freelancers, told AccountingWEB he saw the hearings as an opportunity to put the case for lessening the burden on legitimate freelance workers.

“The flexible labour market doesn’t need more tweaks or sticking plasters to cover cracks in existing legislation,” he said. “We just need better enforcement of what we have got. This is what the Lords committee should focus on, and avoid causing further uncertainty and confusion for the freelance sector with more legislation.”

A call for evidence published on 20 November poses several questions that the inquiry will consider, including whether a business insisting on use of a PSC should have to decide whether a transaction is caught. What evidence would you bring to their lordships' attention? 

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Replies (97)

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By justsotax
28th Nov 2013 16:26

little actual capital risk...

so....i am guessing the bigger risk for anyone contracting is the cessation of the contract....that makes paying the mortgage v difficult....

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Replying to FirstTab:
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By frustratedwithhmrc
28th Nov 2013 16:33

True

justsotax wrote:
so....i am guessing the bigger risk for anyone contracting is the cessation of the contract....that makes paying the mortgage v difficult....

True, but that's a personal risk unrelated to the company.

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By justsotax
28th Nov 2013 16:38

but isn't

this whole argument about...'personal service companies'....its about personal reward...but also risk....

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By adiaz73888
28th Nov 2013 18:23

Tax by Design

What did the politicos & bureaucrats do with the Mirrlees Review? 

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By Vaughan Blake1
29th Nov 2013 10:26

Yes but...

My fundamental point is 'why should investment income be taxed at a lower rate than earned income?'

HMRC want more tax from the low salary high dividend folks.  IR35 is the wrong weapon to acheive this for two reasons:

1) It is too complicated and has only collected a fraction of the tax that it should have done.

2)  It does not address the general use of low salary high dividends.  Indeed we have seen an abortive attempt to counter this by more doomed legislation.

My suggestion is therefore, bin IR35 forget anti-income splitting rules and replace it with a new CT element.

CT600 to be as follows:

1)  Is the company a 'close company'

2)  If yes enter the dividends paid.

3) Then enter the salaries paid.

4) Take 3) from 2) and if it is a positive number multiply it by say 15% and add that number to the CT charge.

Sorted!

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Replying to Cantona1:
By cfield
29th Nov 2013 10:34

No but...

Vaughan Blake1 wrote:

My suggestion is therefore bin IR35 forget anti income splitting rules and replace it with a new CT element.

CT600 to be as follows:

1)  Is the company a 'close company'

2)  If yes enter the dividends paid.

3) Then enter the salaries paid.

4) Take 3) from 4) and if it is a positive number multiply it by say 15% and add that number to the CT charge.

Sorted!

What about the companies run by pensioners who wouldn't have had to pay NI on a salary anyway? Aren't you penalising them with your CT surcharge?

What about sleeping partners for whom dividends really are investment income? Is it fair on them?

What about family run firms who already pay their directors a commercial salary? Is it fair on them to attack their dividends?

No it's not sorted. There are no simplistic answers to a problem like this. Personally, I don't think it is a problem. I can't understand why people get so uptight about individuals saving themselves a few quid when there are so many other (far more serious) tax avoidance problems to address.

It's their own fault for converting what was meant to be a contribution-based social insurance system into a back-door tax.

 

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Replying to Cantona1:
Locutus of Borg
By Locutus
29th Nov 2013 12:52

Surcharge on close company dividends

Vaughan Blake1 wrote:

My fundamental point is 'why should investment income be taxed at a lower rate than earned income?'

HMRC want more tax from the low salary high dividend folks.  IR35 is the wrong weapon to acheive this for two reasons:

1) It is too complicated and has only collected a fraction of the tax that it should have done.

2)  It does not address the general use of low salary high dividends.  Indeed we have seen an abortive attempt to counter this by more doomed legislation.

My suggestion is therefore, bin IR35 forget anti-income splitting rules and replace it with a new CT element.

CT600 to be as follows:

1)  Is the company a 'close company'

2)  If yes enter the dividends paid.

3) Then enter the salaries paid.

4) Take 3) from 2) and if it is a positive number multiply it by say 15% and add that number to the CT charge.

Sorted!

A close company is one that has five or fewer participators (so long as they are not directors).  So all the freelancer needs to do is to issue small shareholdings to five of his family or freelancer mates, to keep it all above board pay them all their piddlingly small dividends and save your 15% surcharge.

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By johnjenkins
29th Nov 2013 10:46

Had Gordon Brown

 not tried to destroy the self-employed status then most subbies would never have gone down the Limited Company route, they were quite happy as they were. Investment income has already been taxed at source so you are taxed on your "dividend".

It is only the greed of governments that cause these problems. I bet if HMRC said they weren't going to get involved in employment status 50% of one man band limited co's would revert back to being self employed.

If Government want to raise money for their pet projects then they should put up the basic rate not mess about with peoples work ethics.

I'm going to stick my head on a chopping block now. Most workers need perks of some kind in order to function efficiently. Take those perks away and you will end up with a stagnant workforce. Just as well The Eastern block workers are coming to liven things up a bit.

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By Vaughan Blake1
29th Nov 2013 14:33

But..

Ers NI is rightly or wrongly payable on pensioner's salaries.

Re 'sleeping partner's' dividends, why shouldn't investment income be taxed at the same rate as earned income?

Locutus, don't forget that the rule for close companies is for 'control' by 5 or fewer and that brothers, sisters, parents, grandparents, children & grandchildren etc wouldn't count.

Also, note that dividends equal to salary payments wouldn't be hit by the 15% charge.  So if a commercial salary is paid the dividend can equal it.  I suspect most businesses truly paying a commercial salary wouldn't therefore be hit.

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Replying to Tony Margaritelli:
Locutus of Borg
By Locutus
30th Nov 2013 16:47

Fair enough ... but

Vaughan Blake1 wrote:

Locutus, don't forget that the rule for close companies is for 'control' by 5 or fewer and that brothers, sisters, parents, grandparents, children & grandchildren etc wouldn't count.

The freelancer will just have to find 5 mates to become shareholders. If he / she can't find 5 then I'm sure the Professional Contractors Group website will be full of postings from freelancers offering to "chat with each other" about ways to minimise their tax respective tax liabilities. Don't be surprised if following these chats, each of the freelancer companies acquire 5 new shareholders.

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By johnjenkins
29th Nov 2013 16:06

@Vaughan Blake1

So who decides the "commercial" salary, HMRC or you. You're totally missing the point. We have had limited companies and dividends for donkeys. It's only since HMRC started messing about that we are having these problems. HMRC do not have the right to decide employment status. That has been proved more times than not.

If the Lords don't push to get rid of IR35 then they should go and cuddle up with a good book and a cup of hot drinking chocolate (horlicks for OGA and ShirleyM)

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By johnjenkins
29th Nov 2013 16:20

Now for the killer.

It is not Tax Avoidance to start a Limited Company and abide by the tax rules and company law. Which means you can pay yourself a small salary and a big dividend. Who says you have to pay yourself a "commercial" salary only, HMRC (and jealous PAYE workers cos they haven't the guts to go it alone), and when they mess with tax rules and company law, this is the crap we end up with. Don't the Lords have better things to do? So come on GO get your finger out, earn some brownie points for the next election and abolish IR35.

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By johnjenkins
01st Dec 2013 17:05

I think the other

point totally missed by these discussions is that the self-employed and limited companies cover a wide range of industries not just a few IT (or the like) freelancers. When tax laws are made to catch a poultry few then it's chaos. Oh what a surprise that's wot we got.

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By Vaughan Blake1
02nd Dec 2013 09:15

Mr Nobody!

So who decides the commercial salary?  My answer to you John, is nobody has to!

My route wouldn't require anybody to judge or decide, nobody can, it is just too hard.  Dividends in excess of PAYE salary simply carry a 15% 'surcharge'.

Also, it would apply to all close companies as would have the proposed 'income splitting' rules.  No discrimination, it would apply whether it is an IT contractor or a sweetshop.

Locutus, I can't see many folks giving control of their company to their chatroom 'mates' to avoid a 15% surcharge on excess dividends.  If they do then good luck to them!  Check out the rules here, you don't just need  5 shareholders.

 

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By johnjenkins
02nd Dec 2013 09:41

@Vaughan Blake1

Why should anyone have to pay a 15% SURCHARGE, when they are working hard and obeying the Law?

Anyway it's all irrelevant. It's quite obvious that IR35 is going to be re-vamped to enable enough money to be clawed back to give us all £50 a year towards our energy bills.These politicians really do live in cloud cuckoo land.

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By Vaughan Blake1
02nd Dec 2013 10:03

But how hard is hard?

Not sure I see the logic here!

Are you saying tax should be linked to how hard someone works?  I can just see the boxes to tick to self assess that.

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By johnjenkins
02nd Dec 2013 11:12

No, what I am

saying is that there is no logic in a surcharge on decent hard working person(s) who choose a certain way of legally working (that has been in existence for years) in order to satisfy Government incompetancy. As previously stated  dividends have already been taxed.

My point is (however "clumsily" I have put it)  that there is no way that IR35 could be improved because the point of IR35 is to take away the legal entity of limited company status. Is it really right to say to a one man band limited company "sorry mate all your money has to be taxed under PAYE rules" because HMRC don't like the way you've taken advantage of rules that have been about for donkeys years.

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By Vaughan Blake1
02nd Dec 2013 13:18

John, I think we kinda agree here

I totally agree IR35 is wrong on many levels and should be scrapped.  I also agree that those starting and running their own business should be encouraged.

I also agree that the government's use of our hard earned is at times negligent to say the least.

I also agree that NIC is just tax with better PR.

The bit that I struggle with, is that the dividend route folk pay so much less tax than self-employed or employed. The tax rises deemed necessary by HMG seem to fall disproportionately on the PAYE crowd via higher NIC. 

 

 

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By johnjenkins
02nd Dec 2013 14:17

But, not only

has the dividend route been with us for years, it has already had tax at basic rate on it. Why all the fuss now? OK the self-eployed are Nic ed twice. There's no reason why all self-employed can't incorporate. What about the employers. Why should they pay nic for employing people. No, Vaughan, if you are going to move the goalposts, let's make sure it's both ends. As I said before if the self-employed had been left alone, IR35 wouldn't even have been a doodle on a daydreaming Inspectors' notepad.

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By The Black Knight
02nd Dec 2013 15:06

the only thing that's certain

The only thing that is certain, is that whatever replaces it will be an abortion too!

Reinforced by a lack of enforcement we will have IR35 Mach III deniers as well.

How can you keep on making the same mistake over and over again and not even notice.

Prime example of what happens when you fix something that isn't broke without understanding what else the rule change affects. The methodology of government has not changed.

Where did this start? one man limited companies ? CA1989? Audit exemption?

What stops everyone from being a limited company? the costs and complexity of compliance!! doh what shall we do now then? Idiots.

What forces people to become Ltd companies, Employers trying to escape excessive Er's NIC? Result scheming and 16 hour a week jobs for tax credit abuse.

Added to which I thought the IR 35 lot had largely slunk off to be umbrellas as they can claim for travel, breakfast, lunch and tea and pay virtually no tax at all.

or even gone for K2 type schemes.

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By johnjenkins
02nd Dec 2013 17:04

@The Black Knight

I disagree partly with employers trying to escape excessive nic. The main reason for the one man band ltd co increase is the destruction of the self-employed status. There is nowhere else for one man bands to go. Be taken on with zero contracts?  

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Replying to ireallyshouldknowthisbut:
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By The Black Knight
03rd Dec 2013 10:19

I wouldn't see it like that.

johnjenkins wrote:

I disagree partly with employers trying to escape excessive nic. The main reason for the one man band ltd co increase is the destruction of the self-employed status. There is nowhere else for one man bands to go. Be taken on with zero contracts?  

Take the construction industry, some time in the the late 1990's HMRC had an amnesty, there was a mad rush to put contractors houses in order and classify the employed labourers as employees.

The law hasn't really changed in this regard (been clarified by extra cases but not really changed)

And yet everyone is once again CIS and self employed.

The same thing happened with IR 35 these were the employed going back to work on monday same job but a limited company.

The genuinely self employed don't have a problem.

The root of the failure of IR35 (overly complex as it is) is a lack of enforcement. Common with all financial related legislation.

Our problem is that without any enforcement who are we to argue with the man in the Pub.

And those that represent us and or are listened too think its a giggle to earn extra fees every time the law changes.

The result is that no one can afford to take the advice to get it right. We do not even look at the issue. Instead we explain and issue a disclaimer.

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By johnjenkins
03rd Dec 2013 15:09

I don't agree

with the concept of where you are coming from BK.

Let's look at CIS shall we. This was set up as contractors and subbies (people on PAYE were no problem). Then, of course Mr Brown needed to pay for his crap management so what better way than to re-classify the self-employed, hence one man band limited company, hence IR35. If you want to alter a system of working that was set up in a specific way then you have to understand why it was set up that way. You can't just change it willynilly or you get wot we got now.

There is no such thing as an ungenuine self-employed person, even if their work methods mimic those on PAYE. Being self-employed is not tax avoidance. There is no legal definition of self-employed, just loads of decisions made on how well an argument is presented.

My view is that everybody should come off PAYE and go self-employed. How would HMRC like that? It won't happen because not all workers want to take the risk of being self-employed.

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By Gone Sailing
03rd Dec 2013 15:26

Move All SE to Ltd Co

Some people like the security of employment, others like to move around and 'be their own boss'.  For HMG, Class 4 replaces Er's NI when the employed becomes self-employed, and HMG is not loosing out, but misses the point of the risk and uncertainty associated with SE.

Ltd Cos. are much better for HMG rather than SA because the record keeping and business registration is captured better by law, and (probably) gets closer accountants scrutiny (audit legacy)? (just thought I'd throw that one in). So that's a question: does Ltd Co reduce the black market over SA? Off to wash my mouth out.

In which case move all SE to Ltd Co. and dump IR35, by reinstating the dividend incentives of 10 years ago.

 

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Replying to Jennifer Adams:
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By The Black Knight
03rd Dec 2013 15:48

trouble is it doesn't

Gone Sailing wrote:

Some people like the security of employment, others like to move around and 'be their own boss'.  For HMG, Class 4 replaces Er's NI when the employed becomes self-employed, and HMG is not loosing out, but misses the point of the risk and uncertainty associated with SE.

Ltd Cos. are much better for HMG rather than SA because the record keeping and business registration is captured better by law, and (probably) gets closer accountants scrutiny (audit legacy)? (just thought I'd throw that one in). So that's a question: does Ltd Co reduce the black market over SA? Off to wash my mouth out.

In which case move all SE to Ltd Co. and dump IR35, by reinstating the dividend incentives of 10 years ago.

 

Trouble is it doesn't.

The masters of not paying any tax form company after company never file accounts, remain uninvestigated and if they are do not pay the tax by busting the company, HMRC never ever persue or even ask any relevant questions to establish whether they could or not.

Despite the criminal contravention of s.993 (intention to defraud HMRC)

The Root of the problem is that HMRC meet their targets of compliance by turning a blind eye not by ensuring compliance

the area is completely lawless.

Nothing will change until the companies act is taken seriously and more directors are carted of for spell at her Majesties pleasure.

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By The Black Knight
03rd Dec 2013 15:35

employed/ self employed

It is still a question of fact based on looking at the picture as a whole as established in Hall v Lorimer

The same argument existed previous to GB as whether a master servant relationship existed or not.

That argument may have been expanded with financial risk and substitution but it is still essentially the same.

The only reason that it is a problem now is that we have been getting away with it for so long that there are instantly cries of that's not fair.

To be fair these IT contractor bods are not self employed. (despite the fact you can always present an argument that they are) and neither are building labourers.

The end result will be a completely disastrous piece of legislation that describes everyone a employees. Perhaps that is the political intention by design.

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By johnjenkins
03rd Dec 2013 17:14

Ok BK

I agree that the master/servant relationship has been about prior to GB, and it worked pretty well. A few problems caused by over zealous HMRC and mickey taking self-employed, but you are always going to get that. I also agree that the companies Act needs to be enforced.

The root of the problem is trying to re-classify the self-employed (it really doesn't matter if a few get away with a little bit, that's without going on to google, starbucks etc.) without due thought as to how you legislate properly. I have IT contractor bods as clients. Firstly they trade using a limited company (this is a legal entity in its own right). They work on particular projects. If that project is stopped then no work. Does that sound as though it should be an engagement of employment? I don't think so. What about the labourer who gets up at 5 in the morning, travels 2 hours and then is told, sorry no work, no pay. Does that sound like employment? No of course not. So you can't lump everyone under the same banner and that is what HMRC are trying to do.

Now we have a situation where HMRC is fighting the self-employed and the SE are fighting back. There is only one answer. Return to the status quo.

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By The Black Knight
04th Dec 2013 14:39

I think we have reached a consensus of opinion. :-)

What shall we solve next?

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By johnjenkins
04th Dec 2013 09:19

No doubt there

will be plenty in the Autumn statement to wet our appetites.

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By Vaughan Blake1
04th Dec 2013 13:18

After lunch, let's have a go at...

making the pension system work without having to tinker with it twice a year!

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By johnjenkins
04th Dec 2013 14:14

Lunch, lunch

some of us don't get that luxury. Cup of tea and sandwich. Why is it that the junior always comes back with cheese and pickle?

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Replying to chicken farmer:
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By The Black Knight
04th Dec 2013 14:46

because

johnjenkins wrote:

some of us don't get that luxury. Cup of tea and sandwich. Why is it that the junior always comes back with cheese and pickle?

Because you didn't ask for something specific, measurable and attainable? A ham sandwich

in the immortal words of the sex pistols " I didn't ask for sunshine and I got world war three"

"it doesn't grow on trees you know" "oh no? never heard of an ambush"

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By johnjenkins
04th Dec 2013 16:20

I prefer

amburgers. Yes I did twig that old chestnut. I send him out for salmon and rocket or roast beef and horseradish (we have a waitrose nearby). I bet on average he comes back with cheese and pickle 3 times a week. Yes I know I really should get off my backside and go myself but I would come back with fresh cream cakes etc.

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By njpandya
24th Dec 2013 19:58

Idiocy

There are contractors out there who have been working as good as an employee with the clients but on IR35 protected contract. It's other way round like innocent until proved guilty.

To change the system is not a big deal if government is really determined to do. My question is why do government want IR35 & PSC in first place when even an idiot knows that more than 90% of the income is sucked out by way of dividend and that also avoiding paying national insurance. And the beneficiary are husband and wife. In todays tax structure I have seen a situation where employee on £50k salary pays more towards PAYE/NIC compared to contractor getting £400 p/d.

Keeping high end IT & Banking contractors in mind Suggestion to OTS they must be brought with the PAYE/NIC brackets and all new contracts singned by them must be submitted to HMRC in RTI manner. This will help HMRC to keep track. Like in accountancy we have short and long term asset and liabilities, similarly any contract/consultancy which runs for more than 5 months automatically qualifies under perm employment no matter the client is the end client. subsidiary. The other problem is RECRUITMENT AGENCIES MUST WE WEED out which has caused a HAVOC in this process. It's like Genius are in the hands of IDIOTS! Typical sales people who in majority of the cases have no technical idea about high end contractors!

 

 

 

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By dstickl
06th Jan 2014 18:06

Copy of Select Committee letter supporting e-petition 55679 etc

FYI: Here below is a copy of the content of my submission to A Select Committee of the House of Lords, chaired by Baroness Noakes, into PSCs, which includes reference to my self explanatory e-petition 55679 [that has eleven signatures so far, with more than 9 months to go] of "Stop IR35 for pensioner workers not registered for VAT" ; 

OPEN Response to the “House of Lords INQUIRY INTO THE USE OF PERSONAL SERVICE COMPANIES AND THE CONSEQUENCES FOR TAX COLLECTION” IR35 scandal & “3 IMMEDIATE STEPS, etc, please”

0- LEGAL NOTICE:  For the avoidance of doubt, each statement in this OPEN Response in MS Word – to a House of Lords “CALL FOR EVIDENCE” dated November 2013 [here’s a link: http://www.parliament.uk/documents/lords-committees/Personal-Service-Companies/cfe20november13.pdf] to assist a review of the use of so-called “Personal Service Companies” [PSCs] (considering the implications for tax, National Insurance and wider issues both from the point of view of workers and their clients) that I believe should be mostly recognised as Business Services Companies – is either a statement of honest opinion honestly held by Mr Donald Stickland, or a statement of suggestion of honest opinion honestly held by Mr Donald Stickland, unless it can be proved to be a statement of fact in an English law court.

1- I welcome your inquiry into the IR35 “fiscal horror” (Chartered Institute of Taxation’s words allegedly) and the rectification of its scandals, and I summarise this Response as:

I-1 Because a worker in England apparently cannot just declare her- or him-self to be “self employed” (S-E) under English law – i.e. giving up access to any of those very extensive employment rights (and rewards) that an employee enjoys by law – self-employment seems to me to be a long outstanding and/or neglected area for both sensible tax law and sensible employment law, now due for rectification by parliament.

1-2 HMIR (Her Majesty’s Inland Revenue) apparently caused legislation in 1978 that agency workers were not entitled to be Tax Schedule “D” self-employed. Consequently some of those plus alleged PSCs and/or workers who believed they were S-E allegedly incorporated as a limited company. In 1999 HMIR issued “Press Notice IR35”, hence the name, that was asserted to cover the loophole of an alleged “Friday to Monday” (F2M) syndrome, where arrogant etc employers forced employees (with full employment rights) to leave work on a Friday evening, and then to return to work – on the Monday after the weekend – as self-employed, with diminished worker rights.  I believe that IR35 – as envisaged – was a correct response to F2M.  However, if an employee left work on a Friday, & then returned to work a YEAR (OR MORE) LATER as S-E, then I do NOT believe that IR35 should catch that worker.

1-3 In short, I believe that IR35 in its present form has exceeded the scope necessary to cover the alleged loophole.  In addition to my proposed “YEAR (OR MORE) LATER” IR35 waiver, I believe that 3 more immediate steps [see 1-6 below] should be taken to make “economic sense” of IR35.

1-4 The Office of Tax Simplification (OTS) looked at IR35 and issued a Press Release on 10 March’11 titled “Initial simplification ideas for small businesses tax unveiled”, stating in part:  “We want to stimulate more debate on our findings, so whether you agree with us or not, we are keen to hear your views to help us develop our final report to the Chancellor later in the year”.  I emailed J Whiting – e-trail appended to the cover email of my present Response – pointing out that the OTS team reported [e.g. in Foreword page 3, para 3] a debate on what “Tax simplification” should mean – but sadly nowhere used the words “economic sense” [(ES) as a requirement of “tax simplification’, contrary to TLRC, 2 below].

1-5 J Whiting replied: “You point out that that we do not say that simplification should make ‘economic sense’. That is a fair challenge: in our defence I would simply say that we took that as implicit. Simplification moves that do not make economic sense will not be effective simplification.” But no subsequent reference to the “ES shortcoming” showed up in OTS Minutes!

1-6 I believe that 3 steps are needed immediately for ES of IR35: (A) raising the 5% expense floor to better reflect SME fixed costs, (B) Stop IR35 for pensioner workers not registered for VAT [see e-petition on link http://epetitions.direct.gov.uk/petitions/55679], and (C) have a “reciprocal development” of legal/tax administration law/s, so that being IR35 caught in a Tax Tribunal is sufficient evidence of employment for an Employment Tribunal, to match the present convention that any finding at an Employment Tribunal that a worker is not an employee means that the worker cannot be IR35 caught, e.g. the Employment Appeal case of John Williams v's Hewlett Packard, in December 2002.

2- In general, it seems to me that (A) IR35 should NOT have been allowed scope creep from the original “Friday to Monday” (F2M) syndrome as was initially allegedly offered by Minister/s etc as a defence, and (B) the IR35 5% expenses allowance was insufficient to retain capital for growth in any SME caught by IR35, and thus failed to make economic sense.   In view of the F2M syndrome I believe that it would be both immoral and ill-judged to remove IR35 “en masse”, thus opening loopholes for abusive employers; rather IR35 should be salami sliced down to F2M size to make economic sense.    As the Tax Law Review Committee [TLRC] report "TAX AVOIDANCE" November 1997 states [in para 1.9 on page 2]  "Avoidance, and the risk of avoidance, are at their greatest where there is a failure to base the tax on sound economic principle, where the tax creates unsustainable boundaries or where there are arbitrary rule/s.  If governments wish to limit avoidance, they should avoid enacting legislation that positively invites it."  In particular, the specific problem of the IR35 2003 “tax consolidation” legislation is that "there is a failure to base the tax on sound economic principle, where the tax" fails to recognise the inevitable 'higher than 5%' inevitable running costs of small business, often recognised as the engine room of UK GDP economic growth.  It should be noted that the writer - despite many enquires - has been unable to establish the exact basis of the current "5%" figure with particular reference to the smaller businesses; consequently, it would appear that the "5%" figure is an arbitrary one, with the concomitant difficulties as noted by the Tax Law Review Committee in 1997.  Hence an economic "simplification" of IR35 may, paradoxically, require the insertion of a few words!

3-Turning now to the specific eleven questions asked by your Select Committee, I have set out below my answer/s – if any – to each, as “DS A”, following a re-statement of Qs: 

Q1.  To what extent are Personal Service Companies being used for the provision of personal services to UK businesses?

DS A1-1.  Who knows?  It seems to me to have been – and very probably still is – a murky area even within HMG, e.g. the scandal that broke around Student Loans Corporation (SLC) head Ed Lester in February 2012, and also in December 2011 shadow Cabinet Office minister Gareth Thomas asked health minister Simon Burns if any of his health department staff were NPW, i.e. paid via limited companies. In a written parliamentary answer, apparently later challenged by The Guardian, the minister said no payments were being made to civil servants in this way, adding: "It is not the department's policy to permit payments to civil servants by ways of limited companies."       

DS A1-2.  It should be zero percent (0%), if employment laws were to be amended in line with my suggestion of 1-6(C) above, so that any proved case of personal service in an IR35 Tax Tribunal – particularly if it were based on the evidence of the alleged “end client/s” – would be sufficient evidence for an Employment Tribunal of employment by the employer, the previously alleged “end client”.   This is an ideal opportunity for Parliament to amend poorly drawn up law/s, so that less legal work is required in the Courts and/or Tribunals, with the concomitant savings in legal aid cash – and other sources of expenses to be funded by UK taxpayers – which HM Government so clearly requires, especially with the “cuts” caused by financial crisis.  Basically this “leading Question 1” reveals the gulf of mis-understanding between HMRC, and the world of work - especially the vibrant area of self-employment - because so-called “PSCs” are often “Business Services Companies”, that risk being bullied by HMRC into accepting as “IR35 caught” – often so that they keep on working!

Q2. What is your view of the effectiveness and efficiency of the intermediaries legislation, first introduced in 2000, in facilitating tax collection?

DS A2. “Poor”, in short, particularly as the impact of the Whitehall contractor scandal (SLC etc) on IR35 reform might be significant.  Just look at the amount of IR35 tax collected, compared with the forecast/s made by Dawn Primarolo MP etc in 2000 etc.  Of course a huge industry of tax advisers and tax insurance providers has grown up over the past ten years or so, so there are plenty of people who (secretly) are probably quite happy that it exists.

Q3. Should the current intermediaries legislation be reformed and if so, what would be the alternatives?

DS A3-1. “Yes”, in short.   I watched Danny Alexander MP Chief Secretary to the Treasury (DAMP) on the BBC Parliament channel Video record showing that DAMP seemed to giggle at the point of saying: “There is an employee test under the IR35 rules, which I’m told is simple and straightforward, and that should be sufficient for determining on which side of the line someone sits”, which appears in Hansard record at [23 May 2012 : Column 1167].   

DS A3-2. The key reason for my para 1-6(B) proposal “Stop IR35 for pensioner workers not registered for VAT” [see e-petition on link http://epetitions.direct.gov.uk/petitions/55679], is that it was also very embarrassing for me on TV to see DAMP also say that OAPs were not liable to pay any National Insurance Contributions, when it is quite clear from current legislation that OAPs may be liable to pay employer National Insurance Contributions under IR35, should the alleged "intermediary" go bust, because David Smith LLB CTA wrote in 2009 in Tottel's "IR35 Defence Strategies", 4th edition, pages 165-6 QUOTE:  

13.13 Some personal service businesses may be tempted to ignore IR35, and, should a liability eventually materialise, ensure the  [alleged intermediary] company is without assets whereby HMRC goes begging; the contractor then starts another limited company the next day. This will not work and, indeed, it probably amounts to evasion. Accordingly, such a course of action should never be attempted or advised.

13.14 While the [IR35] liability is initially that of the [alleged intermediary] business, not the contractor personally, the director can be held personally responsible. This is because there are powers to serve a Notice of Personal Liability on a 'culpable officer' (in accordance with Social Security Administration Act 1992, s 121C) where he knowingly failed to make the necessary deductions.

13.15 There is a right of appeal and the onus is on HMRC to prove their case (SSAA 1992, s 121D(4)).    If HMRC do so there is a real risk of imprisonment, as well as a fine. 

13.16 While it is considered unlikely that many directors will be pursued, it is not impossible; and contractors who intend to abuse companies may be in for a big shock. Indeed criminal proceedings may be instigated in accordance with SSAA 1992, s 115. There are also criminal offences of fraudulently evading income tax (FA 2000, s 144) and NICs (see SSAA 1992, s 114). These provisions were not designed with IR35 in mind, but are drawn widely enough to apply to service companies. 

13.17 So far as PAYE income tax is concerned, HMRC have powers under the Income Tax (Pay As You Earn) Regulations 2003, SI 2003/2682, reg 72, whereby in certain limited circumstances, they can pursue the individual personally. ... 

13.18 In the author's experience, HMRC have never [i.e. up to 2009] successfully transferred an IR35 liability to a contractor, despite threats to do so. ENDQUOTE. 

DS A3-3. SUM-UP Q: If OAPs are not to be chased, then why not “Stop IR35 for pensioner workers not registered for VAT”, as too small to cause worry and/or dementia, please, especially in view of the extra Corporation Tax and/or Income Tax yield/s for HMRC?

Q4. To what extent does the current IR35 legislation impose additional compliance burdens and administrative costs?

DS A4.  IR35 imposes excessive additional compliance burdens, particularly on older workers – and especially OAPs – who have extensive intellectual capital that is currently under utilised.

Q5. Are the current avenues of consultation on IR35 working and what more should be done to ensure that the Government listens to interested stakeholders?

DS A5.  The current avenues of consultation are NOT working. I seem to have been fobbed off for years by HM Treasury.  HMG acts as if the “employment tests “ are simple, BUT parts of HMG uses PSCs, and fail to enforce the IR35 policy set out by other parts of HMG!

Q6. Are HMRC’s recent efforts in improving the administration of IR35 judgement cases working? Is more guidance and advice needed to aid individuals in judging the status of business transactions for themselves or should further resources be given to HMRC for compliance efforts?

DS A6.  No. HMRC’s training in this area seems poor to me. My answer to the question in the 2nd sentence is that simplification is NOW required, as I set out earlier in my para 1-6.

Q7. Do businesses insist on the use of Personal Service Companies? If so, should responsibility be placed on them rather than the worker to decide whether a business transaction falls within IR35?

DS A7. Some do, for some very sound commercial reasons, especially to manage the risk of a short term need to cover a work “peak”. My view is that if those alleged PSCs are IR35 caught at a Tax Tribunal, then a certificate to that effect must be prepared by that Tax Tribunal for an Employment Tribunal, and that the Employment Tribunal should be forced by English law to accept that certificate as sufficient proof that the worker was, in fact, an employee of the said “insistent business” – and be entitled to the full range of benefits to be enjoyed by an employee including, but not restructured to, holiday pay, sick pay, etcetera.  [You know it makes sense, don’t you, to have this reciprocal development.]

Q8. Are individuals forced into the use of a Personal Service Company as a prerequisite for being considered for work? If so, what can be done to ensure that the use of a Personal Service Company is appropriate for the individual?

DS A8. In 1996 I was told “Donald, we would like you for work with us on this electricity privatisation project, BUT you have to do it through a limited company”, so my answer has to be “YES”.  My view was that I was working through a Business Services Company – especially as I was taking risks in working over 100 miles away from home – and the certainty of being offered work to do, and even of being paid in a timely fashion, was medium and out of my control. That contract actually ended unexpectedly for me due to funding difficulties from on high, and with less than 40 days notice – placing other concomitant commercial arrangements that I had made at risk of a financial loss.  What can be done is that HMRC should recognise that many alleged PSCs are in reality Business Services Companies, and back off on IR35.

Q9. To what extent are Personal Service Companies still used in the Public Sector? Should those engaged in public bodies and similar organisations be prevented from working through a Personal Service Company? If so, would the Public Sector experience difficulties in obtaining the skills and expertise that are needed?

DS A9. Widely, probably, as The Times report headlined “Whitehall forced to call in experts” on 27 Dec’13 [link: http://www.thetimes.co.uk/tto/news/politics/article3958864.ece ] 1st para stated “About one hundred high-powered troubleshooters are to be drafted into Whitehall from the private sector to save the Government’s riskiest projects“. Whilst another para of that report stated “In a separate move, the Government is also hiring “world-class leaders” from the private sector to work with the 39 key contractors such as Serco, Capita and G4S. The Cabinet Office has recruited 15 and is about to appoint a further six or seven. A Whitehall source said that these specialists — known as Crown Representatives — would be hired for 12 months and paid £500 a day“, to which Times On Line reader “Nicholas Selmes” commented: “£500 a day? In consulting terms this is the equivalent of a junior office junior. The consultants that can make a difference (those with brains) are typically hired out at between £850-£2,500 a day depending upon role and seniority.”

Q10. What role do Umbrella companies play? To what extent are agencies encouraging individuals to enter into such structures?

DS A10-1. I really don’t know, but they may take some of the worry – due to the uncertainty of IR35 outcomes – away.  However agency legislation etc is apparently complicated to understand fully, especially by pensioner workers, just as IR35 is too complicated for some MPs to understand – e.g. Kate Green MP asked me recently “IR35? What’s that?” My basic view is that – if IR35 is too complicated for a lawyer Labour MP to understand – then it's certainly too hard for compliance by OAPs with an insufficient pension/s who have to take up work as a consultant, etc, that might be a target for IR35. Hence my suggestion made earlier that e-petition 55679, because I basically believe that if an employee has to leave employment due to retirement, there's no credible way that s/he could be an IR35 “disguised employee” if s/he returns to work because her/his intellectual capital etc is required, which s/he obviously controls.  

DS A10-2. Despite my implied request earlier to practicing accountants on AWEB for any evidence that my estimate for Exchequer Impact (£m) of "e-petition 55679" was, or was not, NIL, no evidence, in my opinion - either quantitative or anecdotal, has so far been forthcoming from a sample of practicing accountants - has arisen to disprove my estimate that the direct loss of IR35 revenue to HM Treasury is NIL (£m).

DS A10-3. So - in view of the "use it or lose it" apparent motto of Mother Nature - I've set out the following for the consideration of our Prime Minister: 

DS A10-4 URGENT for G8 Dementia Summit 11 Dec 2013:

DS A10-5. Dear Prime Minister, I read with interest your article on page 11 of the Sunday Express of 8 December 2013, and your call for action to help bring an end to the horror of dementia.

DS A10-6. Whilst I support your 3 fronts of (A) working to improve the way we deal with dementia in the NHS, particularly on diagnosis rates (B) getting the whole of society involved (C) medical research, I must tell you that’s not enough: 

DS A10-7. In my opinion, your government can take “action this day” [Churchill’s words] because some OAPs descend into dementia by stopping to use their mental faculties due to being scared off consultancy work by IR35.  So I set out a self-explanatory e-petition 55679 [link: http://epetitions.direct.gov.uk/petitions/55679 ] ; could you sign it please?

Q11. Aside from the issues of Tax and National Insurance, what are the wider benefits and drawbacks for the individual of using a Personal Service Company?

DS A11. The benefits of independent work for OAPs are continued better health - and concomitant NHS savings if dementia is staved off – plus the offsetting of the reduced pensions scandal, following the raid/s on pensions by the last Labour Government, and the low interest rates on savings presently. Other benefits include the independence of worry of personal bankruptcy having a limited liability company, BUT with the drawback of the concomitant need for compliance with English law – and the costs of such compliance including, but not restricted to, the frustrations of a crumbling HMRC who seem (from a close reading of the accountingweb website) to be unable to consistently answer the telephone in a timely manner, or to give consistent answers when people get through!  IR35 – as currently framed – just seems to be another straw that breaks the camel’s back!  Hence the need to waive IR35 for OAPs < VAT registration level, to generate some Income Tax and some Corporation Tax, from the efforts of OAPs – without the need to suck in more immigrants!

Yours truly

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Replying to atleastisoundknowledgable...:
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By IANTO
07th Jan 2014 08:03

@ dstickl - ET v's Commissioner's

Thanks for the reference to my case. I've long advocated that anyone "caught" by IR35 and determined so in the Tax courts should take their case to the ET. It is still my contention that the two courts would not disagree with each other if only from a political standpoint. As you point out, I did it the other way around. However, the whole process opened my eyes to the legal system and I am less than impressed!

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Locutus of Borg
By Locutus
06th Jan 2014 22:39

Too long, Don

Why not put all of your efforts into keeping your own company outside of IR35?  IR35 is largely a volutary tax.  It is much easier than trying to change the world!

I fear your campaign and e-petition will get you nowhere.

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Replying to andy.partridge:
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By dstickl
06th Jan 2014 18:39

We'll see ... my e-petition WILL COST YOU NOTHING !!

We'll see ... 

Q: Why not sign my e-petition, Locutus, after all:

IT WILL COST YOU NOTHING  !!

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By dstickl
07th Jan 2014 10:55

@IANTO: My pleasure & cud I ask you to e-sign e-pet 55679 please

Hi IANTO,

My pleasure [& thanks] for highlighting a very necessary "reciprocal development".  In turn, could I politely ask you to e-sign my self-explanatory & focused e-petition [here's a link: link: http://epetitions.direct.gov.uk/petitions/55679 ] "Stop IR35 for pensioner workers not registered for VAT", please.  IT WILL COST YOU NOTHING  !!

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By johnjenkins
11th Jan 2014 12:34

Simple

either increase basic rate tax or don't spend so much.

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Replying to Craig89:
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By dstickl
11th Jan 2014 14:53

@ johnjenkins: Why should UK indigenous workers pay MORE tax?

johnjenkins wrote:

either increase basic rate tax or don't spend so much.

Why should hard working UK indigenous workers pay MORE tax, so that those companies that avoid Corporation Tax - allegedly Starbucks, etcetera - pay even LESS tax, please?

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Replying to Cheshire:
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By The Black Knight
11th Jan 2014 16:35

Public opinion

dstickl wrote:

johnjenkins wrote:

either increase basic rate tax or don't spend so much.

Why should hard working UK indigenous workers pay MORE tax, so that those companies that avoid Corporation Tax - allegedly Starbucks, etcetera - pay even LESS tax, please?

The public openly support starbucks, amazon, and google by shopping there. Added to which these figures are negotiated with HMRC so what is reported in the press has to be make believe. How much tax was actually lost?

IR 35 has on the whole been largely ignored and not enforced either like other tax rules like paying corporation tax in the first place.

It is quite common to see companies on a two or three year no accounts/tax and dissolved cycle, whilst the directors have a salary and dividends on their personal tax returns to support their lifestyle/mortgages etc. This is a far more effective evasion method and avoids the need for enquiries into no accounts or returns. Its what we used to call false accounting and fraud but now probably comes under simplification because you don't need an accountant to do this either and you won't get reported for money laundering as a bonus. The result under this method is NO tax at all.

The success of this method relies on HMRC being never able to admit to their masters that this is happening so cover it up themselves. The scheme is thus fool proof.

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Replying to Lone_Wolf:
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By Gone Sailing
12th Jan 2014 11:48

Beautiful Taxes

The Black Knight]</p> <p>[quote=dstickl]</p> <p>[quote=johnjenkins wrote:

The result under this method is NO tax at all.

You have to spend = VAT

You have to live = Council Tax

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By The Black Knight
11th Jan 2014 13:11

nope

Simples yes but it's

Reduce taxation.

Spend less (privatise what you can) less inefficiency and waste and we don't need the nanny state.

Clamp down on tax evaders.

The economy could be saved from drowning if only they would take the foot off his head.

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By johnjenkins
13th Jan 2014 09:11

What happens

when the banks lose umpteen billions to third world countries or their own incompetance. Yes that's right they increase interest rates on good business to get the money back.

We always pay in the end so let's not make it complicated on the way there. Whether we should pay or not is a different matter. I'm quite happy to see banks and governments go bust because the financial structure of the world needs dramatic change.

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Replying to Ruddles:
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By IANTO
13th Jan 2014 14:44

Banks going bust

Gordon Brown and Tony Bliar let MG Rover go to the wall for the sake of a drop in the ocean compared to the money that was pumped into the bank collapse. Now the Chinese own the name and are trying to make cars bearing the MG logo, but somehow they seem to have underestimated the British buying public who seemed to have shunned their products. Apparently only a very very small number of the cars has sold in this country so far.

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By cookan
25th Mar 2014 13:26

Financial Risk

I'm lost with all this...there's nothing objective to say whether my contracts are in or out of IR35..I get the IR35 business entity tests but even the HMRC says in its own document that this only tells you the risk of being checked....it seems whether or not you're in or out is entirely at the discretion of HMRC....so....here's my point....surely I am taking on the financial risk that HMRC could decide that one or more of my contracts are within IR35...so by taking on that financial risk, I'm reducing the risk that my contracts are within IR35...4 Points please ;-) I mean how many employees can say they take on a risk that HMRC could phone them up one day and say "Hi, by the way, those holidays you get...we've decided they're worth more to you than the amount you actually get paid each day...It's just our feeling, you know...nice holidays in the maldives..that time with the kids was priceless wouldn't you say ?"

 

 

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