Like many sole practitioners, I started out as a wage slave and only became self-employed about midway through my career. It was something of a happy accident really. It certainly wasn't planned that way!
I spent most of my early career in financial services and worked for various banks, finance houses and insurance companies throughout the 80s and 90s, studying part-time for the ACCA exams and finally qualifying in 1988. I had a CV as long as your arm, but all that background actually did me a lot of good, as it gave me a breadth of experience few people in the industry had.
It didn't teach me very much about being an accountant though, not a real one anyway. That only really happened when I started contracting in the late 90s and running my own company. Maybe it was the buzz of being (more or less) my own boss or maybe it was just the tax savings, but I never wanted a "permanent" job after that. In just a couple of years, I learnt more about tax returns, and more importantly tax planning, than in the whole of my career up to that point. In fact, the other contractors started asking me to do their accounts too, so I got my practising certificate in 2000 and re-branded the business as Acumen Accounting.
Back then it was just a spare time practice, as I had a full-time job running the finance function for a group of captive insurance companies. This came in handy when IR35 first reared its ugly head in 2000, as I had a separate contract with each company and, crucially, was able to draft the basic terms and conditions. This kept me on the right side of the taxman, but IR35 also encouraged me to take on more private clients and market my burgeoning practice as a real business, mainly through the website. This worked quite well, as few accountants had their own website in those early internet days, and I was able to steal a march, so much so that when I came to a cross-roads in my career a couple of years later, the way forward was obvious.
The group had decided to outsource their insurance operations, and only a small team of us remained to manage the handover. I had a choice between finding a new position or staying on 2 days a week for a while and using that interim period to dip my toe in the water and see if I wanted to go into public practice full-time. It was a no-brainer. I went for it, and I've never regretted it for a single moment ever since.
For one thing, I actually feel as though I'm doing something useful these days. My clients are really appreciative of the work I do for them and rely on my advice. So different from the old days, when I felt more like a cog in a machine, and I certainly never really felt appreciated. Back then, I seemed to spend more time sorting out staff issues or sitting in weekly meetings than doing any useful work, and I was getting bored with the repetitive cycle of head office reporting and regulatory returns.
I came to another career cross-roads in 2008 when the "old job" finally came to an end and simultaneously my largest client created his own accounts department, precipitating a big drop in turnover. I decided to focus more on the tax side of things, so set up a new brand called Acumen Tax Solutions and marketed it with a series of fact sheets, which ranked highly on the internet and drove business towards the main website.
I've always enjoyed tax more than accounts and by that time I'd added considerably to my knowledge and experience. Anyway, there's not much money in number-crunching any more. Those days are over. You have to be more of an all-rounder now and advise on all sorts of things, from IT to HR to tax, and I find the tax work a lot more fulfilling. I've even found the time to write a couple of Tax Cafe books which have helped to put me "on the map" so to speak.
It was also around that time I started posting on Accountingweb. I've always found this site to be both a brilliant resource and a great way of communicating with fellow professionals. I also get a lot of satisfaction from helping others, which is one of the things that makes me stay in public practice. It's been a lot of fun too, even when I'm crossing swords with some of the more contrary posters (of whom I am undoubtedly one). Accountingweb certainly boasts more than its fair share of us. Well, that's my story, for anyone who's interested. It would be fascinating to read other members life stories and see where they come from.
The trouble with MTD and indeed most other Government initiatives is that the decision-makers are not close enough to the coal face to see how things work in practice. They just cannot see the wood for the trees.
Of necessity, they rely on rough estimates and statistics collected in all sorts of ways, some quite dubious, and then treat them as robust data. Policy then takes over and all objections/reservations based on practicalities get steamrollered in the drive to implement the policy in the shortest possible time-frame.
Only years later when the project is seen irrefutably to have failed will any sort of enquiry take place into what happened. People will then ask why all the obvious bad signs were ignored.
The only way to overcome this is for all major changes in the way things are done in the public sector to undergo a proper degree of independent scrutiny first before policy decisions are made. I know we have Impact Assessments but these tend to be conducted by the very people who wish to push through the proposed changes and I suspect that in most cases they make sure the revealed impacts are not severe enough to derail the initiative.
Maybe we should have some sort of independent public enquiry first rather than afterwards once things have gone belly-up.
Presumably it is impossible to detect who was actually using the CEST as it is meant to be an anonymous tool. My guess is that most of the people who've been using it are contractors or their advisors, curious to know if they should have been given a pass, not the client managers or the agencies. The latter are all busy people and simply don't have the time to assess people on it, nor indeed the inclination, as there is nothing to stop them imposing these blanket policies.
I don't get the comparison to a dodgy MOT though. For one thing, paper MOT certificates are a thing of the past (it's all done online now) but that aside, HMRC promised to stand by the CEST results if the answers given were correct. The results are not invalidated just because the CEST isn't fit for purpose. It is certainly not illegal like the dodgy MOTs used to be.
Moreover, that is not the reason the public sector bodies are ignoring it. They are ignoring it because it's too much time and trouble to assess people individually. In fact, if the CEST was fit for purpose, they would be even less inclined to use it, as it would inevitably require them to answer loads more questions.
The CEST is much maligned but are we not are looking a gift horse in the mouth here? After all, it does rule in your favour if you can honestly answer the control and substitution questions the right way. If anything it errs in favour of the contractor.
I know it doesn't mention MOO, but I don't think all that many contracts are free of MOO anyway, so it's a bit of a MOOt point really (couldn't resist that one).
It's not a deemed salary. It's actual salary. It's just that it's been taxed in someone else's payroll.
The fact that it didn't go through your own payroll doesn't affect its status as a deductible trading expense for corporation tax purposes. Nor does it make the net pay element a Deemed Payment under IR35. That only applies to turnover which is caught by IR35 but wasn't matched by salary taxed under PAYE.
The other expenses like eligible travel, mobile phone bills and accountancy fees are also treated as deductible trading expenses in the normal way.
If all or most of the PSC's turnover for the year is taxed at source under the public sector IR35 rules, that will create a loss both for accounting and tax purposes, as there will be little, if any, remaining turnover to offset the other overheads against. If the PSC paid corporation tax the previous year, then it can carry the loss back and claim a tax rebate.
Agree 100% re the flowchart. To me this seems the best way to help sole practitioners. Just break the subject down into small chunks and restrict it to the type of things that actually affect us. Then advise accordingly.
Example questions might be:
- Do you use client data for marketing purposes?
- Do you send client data to any third parties other than HMRC and Companies House?
- Do you send email attachments to clients containing personal data?
- Do you store personal data off-site or on the Cloud?
- Do you regularly upgrade your anti-virus software?
- Do you have any staff with access to client data?
I'm guessing that all most of us need to do is encrypt emails with sensitive data, update engagement letters and just be generally aware of privacy and data issues.
If your clients start getting spoof emails purporting to come from you, that shows hackers have obtained their email address at the very least, either from intercepting them in cyberspace or hacking into your address book (or from data leaks by your internet service provider).
I assume this counts as a data breach which must be reported within 72 hours. Given how often this occurs, there could be literally millions to report in the UK every week. Does every single instance need to be reported? Is every single report going to be looked at and followed up? This is the sort of thing we need clarification on.
It's good that the GDPR is non-prescriptive in terms of how you comply and requires you only to take whatever reasonable steps to secure data are commensurate to your business, but we need good guidance as what would be reasonable.
For example, must all emails be encrypted now? Is that a minimum requirement for a small firm of any size, or is it just some emails we need to do this for?
IR35 in the Public Sector has done more to harm the NHS than anything else, even more than Jeremy Hunt. The locum hours worked/paid in 2017/18 have dropped by a staggering percentage as doctors and senior clinicians quite rightly say "no" to umbrella companies or direct agency work and would rather stay at home than see over half their earnings spliced off to HMRC.
Have you got any official sources/statistics for this?
It would be political dynamite if true.
You can work solely for the NHS and still be outside IR35, this could mean giving up all revenue. Even using your plan successfully could mean souring relationships with your sole or main client.
The best solution was for locums and others unfairly affected by the blanket policies to band together and confront the NHS managers as a group demanding to be individually assessed, as was their right, or they would walk away to the private sector. Unfortunately, without a union to represent them, it is very difficult to mobilise people like this, even when they are all up in arms about it.
The HMRC CEST tool is neither legally binding nor fit for purpose and if it's not possible to create a better tool than that then the fault is in the poorly defined legislation.
The CEST has 2 saving graces. Firstly, for all its faults, it is actually quite generous if you can honestly give it the right answers. Secondly, they pledge to stand by it if you answer correctly and it rules in your favour.
So if you can get the client to agree with your answers (and that's a big IF for most contractors) you are in the clear.
The main reason most public sector bodies fail to use it is not because it's unfit for purpose. It's because a) they don't know about it, and/or b) they don't care about it, and c) there is nothing in the legislation to make them use it (or an alternative method of appraisal).
To be honest, an agency nurse shouldn't have to work through either an umbrella company or her own PSC as she is clearly an NHS employee in all but name. I believe they all have the option of working through the "bank" but the pay rates are lower so many choose the agency option instead.
No doubt this is due to the employer NI burden being dumped on the employee, but the hourly rate should still be higher than it works out for a salaried employee. It would be a whole lot simpler and cheaper for the NHS if they paid their nurses decent overtime instead of requiring them to work through agencies or the bank, simply to avoid budget constraints.
I certainly don't think all contractors are highly paid professionals. I've seen many that aren't, and I suspect these people are the real target of the IR35 reforms. A lot of them probably are disguised employees if push comes to shove, although in the NHS many locums would pass the control test given the chance.
The problem is in how the reforms were communicated and implemented. In theory all contractors should be individually assessed, either with the much criticised CEST tool or some other way, but not enough was done to stop the public sector bodies imposing blanket policies branding everyone as caught by IR35.
That was inevitable without anything in the legislation to stop it, as managers simply don't have the time, the knowledge or the inclination to sort the sheep from the goats. Also, they more or less ambushed them with these new rules, which were rushed in with undue haste.
Consequently, they have caused untold damage to the public sector by driving skilled workers away, and now they want to do the same to the private sector, all in the name of so-called fairness. I think they will find the private sector a much tougher nut to crack though.
Your clients should have either suspended all further work under their contracts until the NHS Trust agreed to treat them as outside the scope of IR35, or found jobs in the private sector.
If the Trust was the fee payer, your clients could have sued them for breach of contract due to making illegal deductions not required by the legislation (which by the way obligates them to assess each person individually, not impose blanket policies).
In practice, however, most locums and other NHS contractors were herded en-masse into umbrella companies, where you sign up to being an employee, so that option wasn't open.
Well, that's what happens when bureaucrats think they know our jobs better than us.
I don't know why people are getting so confused about the accounting treatment of so-called IR35 pay. It seems pretty straightforward to me.
Firstly, you recognise the gross figure before deductions as turnover. You credit Turnover and debit Trade Debtors.
Secondly, unless the director wishes to challenge his deemed tax status, you treat that gross figure as salary. That avoids it suffering both income tax and corporation tax. So debit Salaries and credit Director's Loan a/c.
It is important not to actually put it through the payroll though, as the director will already be getting a P60 from the fee payer. You don't want one from the PSC as well.
You should still report it in Field 58A on your payroll software (which HMRC have finally got round to adding to Basic Tools) but this should be just a flag field. It shouldn't affect the payroll numbers or appear on the director's earnings record.
Then the cash comes in, net of deductions, so you debit Bank with the net figure, credit Trade Debtors with the gross and put the balancing debit for the deductions on the Director's Loan a/c, so he ends up with the net pay figure, just as he would if it had gone through his own payroll.
Simples. Why HMRC and ICAEW are getting so confused about this I just don't know.
Of course, the HMRC Guidance note last year proposed a totally different treatment. It said you should treat the net figure as turnover and basically ignore the IR35 deductions. This is hogwash and should be completely ignored. It flies in the face of all accounting principles and has no legal status as it is not in legislation or been endorsed by the professional bodies.