It doesn’t have to be Halloween for tax ghouls walk to earth, but as it is, I’ve listed my top tax horrors. Do you agree, or are there more frightening tax monsters waiting in the shadows?
1.Contractors’ loan charge
This is easily top of my list as it contains all the nasty elements: retrospection of the tax charge, taxpayers who were misled, unreasonable estimated amounts of tax, and the prospect of insolvency for those caught up in the net. This is not just my view, but that of ICAEW who gave written evidence on this proposed tax charge to Parliament.
The draft law is contained in Schedules 11 and 12 of Finance Bill 2017-19, which passed through the committee stage in the House of Commons without a vote on 19 October. Although the provisions have to be discussed in the House of Lords, before the act comes into force, the Lords do not have the power to impose amendments on this bill.
2. IR35 for public sector
The original IR35 provisions came into effect on 6 April 2000 with no meaningful consultation process, and the result was badly designed law which has largely failed to collect the tax and NIC it was expected to. HMRC investigates a relatively small number of IR35 cases per year (estimated to be around 200), and there have been some notable wins by taxpayers who have used personal service companies.
The emphasis of IR35 changed when the rules were tweaked for public sector contracts from 6 April 2017. Confusion and misunderstandings still exist within the chains of agencies serving public sector bodies, as Bhavina Carsane of Chartergates explained in July. A major fault in the IR35 public sector rules is that there is no route for the PSC to appeal a decision made by the public sector body about the nature of its contract.
3. Agency rules and quarterly reporting
The IR35 rules have had an impact on the contracting market, as more individuals now work through employment agencies or umbrella companies to relieve the burden of tax administration and to reduce tax risk. However, the government views the operation of these intermediaries as another potential route to tax avoidance.
To counter this perceived tax gap the agency rules were amended in 2016 to require quarterly reports from all employment agencies of amounts paid to freelancers where PAYE has not been applied, as Gabelle explained in August. If these quarterly reports are not submitted on time, or are incorrect, the agency can be fined up to £1,000 for each offence. The range of businesses which can be drawn into this quarterly reporting regime is quite frightening.
4. VAT international services
VAT is supposed to be a simple tax, but as soon as the transaction crosses an international border confusion abounds. The rules are different for goods as opposed to services – why? I have no idea. Neil Warren gave us some practical tips on how to report international transactions on the VAT return, but I fear he only scratched the surface of this horror.
When an individual taxpayer leaves the UK and claims to be not resident for UK tax purposes, the rules to determine whether they are really non-resident were as clear as mud. That’s because for departures before 6 April 2013, there was no definitive law. The rules were based on a mish-mash of case decisions going back hundreds of years, and the HMRC guidance known as IR20. From 6 April 2013, the statutory residence test (SRT) applies. This at least sets out a clear framework, although for the years of departure and arrival, the split year rules can apply, which are complex enough to give anyone nightmares.
Trick or treat?
Some may say such tax confusion is a treat for tax advisers who are needed to unravel the mummified legislation to make sense of it all. I would prefer transparent consultations, resulting in clear rules which are easy to apply, but I feel there is a ghost of a chance of that happening.
That’s my short list, I could go on, but there is a strange knocking at my door…
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.