Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Finance Bill 2014: Tax avoidance round-up

by
13th Dec 2013
Save content
Have you found this content useful? Use the button above to save it to your profile.

Accountancy firms and part-time workers employed through agencies face greater scrutiny from HMRC after the government revealed its draft Finance Bill 2014 legislation dominated by new measures to counter tax avoidance.

Promoters of tax avoidance schemes deemed abusive by HMRC will be named and their intermediaries will be subject to new information powers and penalties. Customers of “designated promoters” will have to tell HMRC they have used such a promoter.

Taxpayers in dispute with HMRC will have to pay tax up front if a tribunal decision goes in HMRC’s favour, the government plans. This could prove controversial but a decision to delay this draft legislation until January has been welcomed by the Chartered Institute of Taxation (CIOT).

The CIOT said it supported the delay by HMRC in publishing the draft legislation to implement proposals to designate high-risk promoters and to allow HMRC to follow up tribunal or court decisions in HMRC’s favour in avoidance cases. “The CIOT believes that these are too important measures to rush: they need to be right first time.”

Stephen Coleclough, president of the CIOT, said: “The government are right to target promoters of abusive tax avoidance schemes. ‘High-Risk Promoters’ (HRPs), as they are called by HMRC, can cause significant problems for not only HMRC but also mainstream tax advisers and their clients.

“While a pragmatic solution is required to this problem area, it is vital that HMRC get the definitions of HRPs and ‘follower cases’ right and do not tip the ‘playing field’ nor unfairly target uninformed/misinformed clients of HRPs, particularly the man on the street who is sold a tax scheme, who should be distinguished from a sophisticated investor."

Intermediaries

One of the biggest changes for employers in the Finance Bill clauses is the news that workers supplied through intermediaries are being targeted, which will raise a significant amount in additional tax and NICs, according to George Bull, senior tax partner at Baker Tilly.

Temporary workers make up around 5% of the workforce, with the businesses supplying them sometimes employing them directly, using agency contracts, and sometimes using sub-contractors. The tax, NIC and employment law position is different in each case, so end-users have been going for the cheapest options, which often involve reduced tax costs and less paperwork.

The government has said that it will take action against those temps who are sub-contractors. The PAYE and NIC rules for temps currently don’t apply if the worker is not obliged to provide personal service, accepting that a self-employed worker finding work through an agency is still self-employed and should be taxed as such. But that will change from 6 April 2014.

The government estimates that 200,000 construction workers and 50,000 other self-employed people will come into PAYE, raising the tax and NIC take by £520m next year, Bull said. “It will be interesting to see how the hard-pressed construction businesses react to the extra costs.

Charities

As announced in the Autumn Statement, legislation will be introduced to prevent a charity from being entitled to claim charity tax reliefs if one of the main purposes of establishing the charity is for tax avoidance.

Corporation tax

The main rate of corporation tax for financial year 2015 of 20% was announced in Budget 2013.

The Finance Bill 2014 will also:

  • Impose a corporation tax charge for the financial year 2015
  • Set the main rate of corporation tax on oil and gas ring fence profits of
  • companies for financial year 2015
  • Set the small profits rates and marginal relief fractions for financial year 2014, and repeal the small profits rate provisions for non ring fence profits from 2015 onwards
  • Amend the mechanism for fixing the ring fence rates and fraction, which will in future be in Part 8 Corporation Tax Act 2010 that contains the oil activities legislation
  • Simplify rules which ensure the right tax is paid at the right time by companies under common control; including new rules for oil and gas ring fence profits, patent box small company treatment, capital allowances on long-life assets and the profit threshold for Quarterly Installment Payments

Simpler system?

Accountants often complain that the tax system is getting more complex, but the latest Finance Bill is a small improvement, according to Alex Henderson, tax partner at PwC.

“This year's draft finance bill comes in substantially shorter than last year - a promising sign that even if the tax system is not being simplified the rate of complication is at least slowing. The government has shaved over a third off UK tax legislation (673 pages compared with 1,074 last year) which will make life easier for anyone trying to fathom the tax system.  

New tax rules for partnerships

The government hopes to raise £3.2bn by tackling tax avoidance by partnerships.

Draft legislation in the Finance Bill will remove the automatic presumption of self-employment for partners in limited liability partnerships (LLPs).

Under the new legislation, which is due to start on 6 April next year, partners will have to satisfy at least one of three tests to prove they are true partners in a business, and retain the tax advantages the self-employed have over employees.

  • Test one: At least a quarter of their pay must be dependent on the profit made by their partnership
  • Test two: The partner must have contributed at least 25% of their “fixed pay” to the firm’s capital
  • Test three: Prove that they have significant influence on the overall partnership 

Colin Aylott of Smith & Williamson said: "All partnerships with a corporate member will therefore need urgently to review their current arrangements especially where an allocation of profit is made to a corporate partner.”

The big question for the medium-term to long-term is whether the new tax rules will make partnerships a less attractive business structure for accountancy firms.

Further reading:

Replies (7)

Please login or register to join the discussion.

avatar
By adbanks
16th Dec 2013 06:43

Incorporated Agency Workers

Maybe I'm reading too much into this, but do the changes to s44/ITEPA, especially the move to "personally involved in the provision" not extend these provisions to incorporated agency workers? (ie supercede IR35)

As the Notes explain: "for example the worker does not have income tax deducted because they are an employee of another company"

If this is not the outright intention of the proposed change, I'm willing to bet HMRC will try it on...

Thanks (0)
By cfield
16th Dec 2013 14:10

IR35 is not meant to be affected

I read the consulation doc last week and it specifically states that the new rules are only meant to affect the agency legislation, not IR35. PSCs are supposed to be unaffected.

Thanks (1)
Replying to Ranse:
avatar
By adbanks
17th Dec 2013 18:55

Consultation?!

cfield wrote:

I read the consulation doc last week and it specifically states that the new rules are only meant to affect the agency legislation, not IR35. PSCs are supposed to be unaffected.

That may be... but we know what the consultation re: IR35 Mk I said - it was all about Friday/Monday.

 

Equally, the growth in the use of limited companies came after s134 ICTA (as was, now s44 ITEPA) was introduced in 1978 - and which covered the use of unincorporated bodies. The use of a limited company was a loop-hole that should have been closed straight away.

Focussing on the "direction and control" test is a red herring as that has been in place since 1978 - it is the extension of the personal service provision that is the concern, so that "personally involved in the provision" looks through the chain of contracts.

 

Thanks (0)
Dave Chaplin
By Dave Chaplin
17th Dec 2013 08:33

PSC's are currently affected

Whilst the guidance indicates that contractors using PSC's should not be affected the legislation says something very different, and contractors are well and truely caught in the net. We wrote about this recently on ContractorCalculator:

If the draft legislation becomes law then it shifts the burden of paying the tax onto the agency - currently IR35 legislation means the contractors' limited company has to pay the tax if found inside IR35. If the burden shifts to the agency then there are a few possible outcomes:

1. Agencies will refuse to engage with PSC's, because of the risk. Similar in nature to the impact of the MSC legislation. So, no more need for accountants if everyone moves to PAYE.

2. Agencies and firms will work directly with the contractor to prove that the worker is not controlled, i.e. outside IR35 - in which case the chances of HMRC winning an IR35 case are much smaller.

3. Firms will bypass agencies and only hire PSC based contractors directly.

These are two seperate peices of legislation. So in theory the agency could be caught by the "false-self employment" part, with extra tax due, whilst the contractor remains outside IR35 - and vice-versa! And still neither routes give employment rights to the worker if they are caught by IR35 or the new peice of legislation. They would still need to go to an ET for that.

HMRC are well and truely in sticking-plaster-upon-sticking-plaster mode with this one, and it needs a rethink.

Dave Chaplin

CEO, ContractorCalculator

 

Thanks (0)
avatar
By adbanks
19th Dec 2013 08:57

Consultation Clear

Now that I've found the consultation document, the verdict is clear cut.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/264649/Onshore_employment_intermediaries_-_false_self_employment.pdf

Diagram between Para 2.9 and Para 2.10 shows the typical Client<-->Agency<-->PSC<-->Worker scenerio

then

Para 4.7: "Intermediaries are any structure interposed between the engager and the worker including Employment Businesses and personal service companies (PSC)."

Let me emphasise: INCLUDING PSCs

 

 

 

Thanks (0)
Dave Chaplin
By Dave Chaplin
19th Dec 2013 11:09

You can be caught and not caught at the same time

adbanks is right that PSC's are indeed also caught. So one can't simply bypass the agency and go direct, thinking it will solve the problem - because under the draft legislation your own PSC is considered the agency/intermediary. It affects all B2B relationships.

An IR35 test typically examines three main elements: right of substitution, control and Mutuality of Obligation (MOO). The false self-employment test is proposing just the control part.

So, in theory you could take a contract where there is heavy control (what project to work on and how, when, etc), but also allow substitution - which let's say you actually do. In that instance the False Self-Employment legislation says your PSC has to stump up the extra taxes, but the IR35 legislation says that you don't.

One the one hand HMRC will be trying to grab extra taxes from you, and with the other agreeing that you don't need to give it to them!

My current view (see my blog today) is that the legislation probably won't get through in it's current form.

 

Thanks (0)
avatar
By adbanks
21st Dec 2013 08:45

Simplify

Ever since s134 (now s44-46) was first brought in in 1978, it has been "policy" that [rightly or wrongly] agency workers (operating under the SD&C of the client) are not self-employed.

For some reason s134 covered the use of partnerships, but not limited companies - leading to the "loophole" that has seen the growth of PSCs.

IR35 did not address the anomaly, but sought to paper over some of the resultant cracks.  The MSC regulations sought to fix some of the problems resulting from IR35 (etc, etc)

The obvious simplification (which I believe was intended to be added in 1979!!!) is to extend s46 to explicitly include PSCs... then IR35 and the MSC rules can be repealed.

This way, clients (and agencies) will have to decide whether they want temporary employees or proper subcontract suppliers.  At the moment, they get all the benefits and none of the consequences.

I'm sure that the PCG and the industry that has sprung up to support IR35 would object...

In their current form, these proposals only go part of the way to solving the problem - and arguably will see MORE agency workers pushed into PSCs - just as the MSC regs saw more agency workers pushed into MSCs.

 

Thanks (0)