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Topical tax from TaxAid. By Nichola Ross Martin

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30th Apr 2007
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Complex tax legislation is more than just a headache for accountants, it can be totally catastrophic for those who are unrepresented and cannot for one reason or another afford to pay for professional help. TaxAid is a charity which was set up in 1997 to help this group of people get through their tax problems. It does this through a large network of volunteers who help by giving free advice to those with tax and tax debt problems. Using its experience the charity also seeks to inform and influence government policy.

TaxAid holds regular tax conferences and last week’s centred on the topic of “Employment: Dealing with a Shifting Tax Environment”. This is the first of two articles looking at some of the conference highlights.

Company taxation
Andrew Meeson, tax consultant with Spenser Bradely, Meeson looked at some of the highlights of the budget. He described the Chancellor’s tinkering with company tax rates as “defying reason” and leaving a “legacy in chaos”, pointing out that his changes bizarrely actually hit companies with profits of £400,000 the hardest. As we all know the real winners are the big companies, with a fall in the main rate of company tax.

Self-employed v. employed v. dividends
Reviewing the tax advantages of being self-employed, employed or incorporated (and paying yourself by dividends), he concluded that incorporation still produces the lowest tax liability. He puts it down to the “classic Treasury error of excessive meddling. Too many changes have been made at once, all working contrary to one another. While the increase in CT rates makes dividends less tax-effective, the raising of the NIC threshold has a similar effect on both salary and self employment. The reduction of the income tax basic rate is in large part cancelled out by the abolition of the starting rate”

Gift aid
Further complications arise in the context of changes gift aid which are created from reducing basic rate income tax. This hits charities and benefits higher rate taxpayers, who now get £25 in tax relief (previously £23.08) from a £100 donation, and so charities will all see their donations fall by 2.5%.

Tax credits
On tax credits, Andrew points out that the ideal is to be a couple with a sole income of £32,600 and three children. Once again, the Chancellor’s efforts to target a group (helping to abolish child poverty) have totally backfired, because the shrewd tax credit’s claimant can manage tax relief of up to 96% on pension contributions, and thanks to the £25,000 income disregard milk the system for two years.

Managed service companies
A bi-product of “obsessive tinkering” has created the monster known as the managed service company (MSC), speaker Andrew Gotch of the Taxfellowship ran through the draft scope of the legislation which defines an MSC, but one of the most interesting draft clauses concerns the “transfer of PAYE debt provisions”. Basically, if an MSC is caught not operating PAYE, and seeks to avoid payment by going into liquidation, then new legislation enables the debt to be collected from a third party. A third party includes the following:

  1. A director, other officer or associate of the MSC
  2. A MSC provider
  3. A person who directly or indirectly encouraged, facilitated or otherwise been actively involved in the provisions by the MSC of the individual’s services; or
  4. A director or other office holder or an associate of a person within the two preceding two categories

What is interesting here is 2. because this could be any MSC provider, but what baffles all comprehension is 3. which is drafted so widely that it could also include those who created the legislation that pushed workers into MSC’s in the first place. All the leading tax bodies have problems with these definitions, and so the Finance Act debates on these topics will make good reading. Andrew concluded that if such broadly drafted legislation remains there will be a lot of reliance on HMRC’s discretion and judgment. On past experience with PAYE matters few professionals have any confidence with this.

Employment status
Andrew Gotch continued his talk by looking at “the modern approach of the Courts” in employment status cases. One point to note is that if there is a written contract of employment in place, then HMRC cannot effectively rewrite it to suit them if there is not evidence to show that that the parties have acted in any different way i.e. created a different implied contract.
He looked at the case of Ready Mixed Concrete v. Minister of Pensions and National insurance {1968} 2 QB 497 where the court found that there are three components that must be present in a contractual relationship before it could be a contract of service. These are:

  • Mutuality of obligation
  • Control
  • Personal service

He pointed out that these are “plainly at variance” with HMRC’s approach. Taking the first, the mutuality of obligation means that one must provide work and the other must agree to do it. If either is free to dissent, then no obligation exists. For control, this means the right to control the job, it does not matter if this is only rarely exercised if the right is present and inherent in the contract. Personal service covers the right to appoint a substitute.

Employment status cases go before the employment appeals tribunal and the special commissioners, thanks to specialist firms like David Smith’s Accountax, more are appearing via the latter. Andrews’ attitude seems to be that HMRC’s status tests are outdated and that if you have a case, take it to the commissioners. In the current climate, you have a fair chance of winning it seems.

TaxAid is a registered charity, and welcomes donations and volunteers, more details of its activities and future conferences can be found on its website http://www.taxaid.org.uk

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