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The main contention is a tucked away sentence in the lengthy Budget report which follows the Chancellor's speech.
In para 2.207, in relation to IR35 and personal service companies it says that, subject to consultation, the Government is going to require 'office holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source by the organisation by which they are engaged'.
This is likely to be a knee-jerk reaction to the recent controversy over senior Government workers, including Ed Lester, chairman of the Students Loans Company, being paid through their own companies to mitigate their tax bills.
However, the wording is ambiguous to say the least. It is not clear whether it is 'an office holder/controlling person' of their own limited company or the end client; or how 'intergral to the running of an organsation' is to be defined. And by whom are they 'engaged'?
These are the points which have had the sector stratching their heads and wondering what is coming up next.
Here we give a round up of reactions to this and other Budget news from the main players in the freelancing sector:
Deep concerns - PCG
Freelance trade groupo, the PCG, felt that the Budget revealed little of value for the UK's smallest businesses and did not go far enough in boosting business to have a positive impact on freelancers.
John Brazier, PCG Managing Director, said: “This Budget contains little to significantly help freelance business. Specifically, IR35 is not clarified further and a new consultation raises deep concerns over the future of interims and some freelancers. In general terms we welcome the rise in the personal allowance but are disappointed that important areas such as a further freeze or reduction in fuel duty did not happen."
On the issue of IR35 taxation, the Government hightlighted three areas for action. As well as the proposal for PAYE and Nics to be deducted at source; it confirmed it would be strengthening specialist compliance teams and simplufying the way IR35 is administered.
Mr Brazier said: “PCG would have liked to have seen the Government publically expand on the plans for 'making IR35 easier to understand' as the detail is crucial for freelance businesses. We have worked hard on the IR35 Forum in the last year and had been hoping there would be more of an update in the Budget than this rather generic statement.
“However, we are seeking urgent clarification for freelancers on the significant announcement of plans to require those engaged as 'office holders/controlling persons' who are 'integral to the running of an organisation' to become PAYE.
“These plans appear ambiguous and may affect senior interims and it is crucial that these legitimate businesses do not suffer as a consequence. PCG will be working hard to ensure that interims, consultants and contractors are represented in this process and defend the need for a flexible workforce in the UK.
“Overall, we believe this budget fails to directly address the needs of freelancers, in fact it leaves us questioning the Government’s commitment to flexible working. With consultations and amends to IR35 imminent this Budget has confirmed our expectation that the next few weeks and months will be crucial for the future of all freelance businesses. We will be focusing our efforts to ensure they are represented at all levels during this crunch period.”
Lack of understanding - FCSA
Industry group, the Freelancer and Contractor Services Association (FCSA) also expressed concerns about the direction of the proposal to deduct PAYE and NICs at source.
Stuart Davis, Chairman of the Freelancer and Contractor Services Association (FCSA) said: “Although overall we think the Budget will help to stimulate the economy, once again the Government has missed another opportunity to stimulate the critical flexible workforce made up of freelancers and contractors.
"We give a cautious welcome to Treasury’s plans to introduce a new cash basis for calculating tax for small unincorporated businesses. We await the consultation but if implemented correctly this could be extremely helpful to reduce the administrative benefits for freelancers and contractors.
“We are however, very concerned at the Government’s plans to require office holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source by the organisation by which they are engaged. We believe this is the Government’s attempt to try to prevent senior civil servants from legitimately working as freelancers and contractors as recently highlighted in the media. The Government plan to consult on their plans which is welcome but already we believe this demonstrates once again how the Government have a complete lack of understanding of the flexible workforce.
“As the FCSA we have been involved in the IR35 Forum so welcome the announced enforcement activity and we would urge all freelancers and contractors to seek appropriate advice and support to ensure that they do not fall foul of IR35.”
IR35 sticking plaster - Brookson
Specialist freelance accountancy Brookson spoke of the missing millions of freelancers who were overlooked in the Budget, but warned of the hidden danger of the potential IR35 'sticking plaster' in the Budget documentation.
They also viewed the announcement of the 'deduction at source' as a knee-jerk reaction to the recent politically embarrassing coverage of personal service companies and the civil service.
Martin Hesketh, managing director of Brookson Accountancy, said: "During the main speech the 1.4 million self-employed professionals working in the UK were ignored when the Chancellor praised the very industries which have caused the self-employed sector to grow but failed to acknowledge this workforce during his speech.
It was the Budget which damned the flexible workforce with faint praise. It’s a real missed opportunity as the Chancellor rightly looked to stimulate UK industries that rely on flexible workers, such as aerospace, creative, engineering and oil and gas. Sadly there are no measures in the Budget to encourage this workforce.”
According to Brookson the detail in the Budget shows the Government is viewing entrepreneurship through the eyes of medium and big businesses at a time when smaller and more flexible businesses are looking to expand, thanks in large to modern mobile working practices.
Martin added: “Buried in the Budget document is the notion that Government policy is ‘creating a more educated workforce which is most flexible in Europe’ – Mr Chancellor, this country already has four million of the most highly specialised flexible workers in Europe and you’ve chosen to ignore them.”
On the controversial issue of the IR35 comments, Martin said: “The announcements regarding increasing tax avoidance teams and continued progress with tax simplification were expected but what was surprising, however, is the additional element around office holders and controlling persons which is clearly a political knee-jerk reaction and flies in the face of the principles brought in with IR35.
"Such confusion will be worrying for our customers who are genuinely self-employed professionals and who shouldn’t feel as they could be labelled as ‘tax avoiders’ at a time when they are getting on with helping to grow the UK economy.
“My message is a simple one – if you are a self-employed professional then make sure you can demonstrate your status.”
Plenty of positives - Parasol
Derek Kelly, managing director of the Parasol group, which includes umbrella Parasol and accountants ClearSky Accouting said: “The Chancellor was in a bullish mood and the Budget announcement was fairly radical in comparison to recent years but I believe it was also well balanced. There are plenty of positives to take for contractors, freelancers and temps, as well as the staffing businesses that place them.
“As with last year’s announcement, the pledged increases to transport infrastructure investment will create not only jobs and assignments for flexible workers, but will also increase efficiency for the UK as a whole and therefore profitability. In the simplest terms, less time in traffic jams means more billable time working on assignment for contractors, temps and freelancers across the UK.
“A lot of flexible workers work in the leading industrial sectors listed by the Chancellor, i.e. aerospace, pharma, oil and gas and the creative and media sectors. These individuals will get a boost from planned investment, as will the staffing businesses that place them.
“Of more significance for flexible workers working via their own limited company is the cut in tax rates to 20 per cent for small businesses. This was essential for keeping one of the UK’s major sources of innovation competitive and a viable and valuable resource for UK plc.
“For me, the reduction in the top rate tax to 45p makes sense, as does the reduction in corporation tax. This will encourage the nation’s entrepreneurs and wealth creators and will lead to improved job creation in the UK. The staffing industry is one sector that I believe has an entrenched entrepreneurial spirit so this will also be a plus for business in this sector.
“I do have one concern, and that is the Chancellor mentioned that he will consult on a general anti-tax avoidance rule. He used fairly emotive language in describing tax avoidance as ‘morally repugnant’ but it is important to note that tax avoidance is not illegal. My particular concern is that this rule is a knee jerk reaction to the recent media coverage criticising the use of PSCs, and this would be wrong. Those willing to take the risk and start their own business should be rewarded and encouraged. I am hoping however that by delaying this with a consultation period it’s the Chancellor’s way of taking the sting out of this non-story.
“Finally, although not mentioned in the speech, IR35 remains an issue and the Budget Report does highlight that IR35 is to be simplified and a new regime to police it introduced. This is good news. I have always been of the view that with IR35 it is better the devil you know and any replacement would cause more upheaval and cost and is in no way guaranteed to remove any tax burden.”
Radical and sensible - CIOT
The Chartered Institute of Taxation (CIOT) welcomed the proposal to allow small businesses to use cash basis for calculating profits. The Government intends to consult on allowing businesses with a turnover of up to Ł77,000 per annum to move to the cash basis for calculating taxable profits. The CIOT said this was a radical and sensible move.
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“The proposals make good sense and reflect what many businesses already do ‘in-year’. They remove the need for translation into GAAP-compliant accounts which many owners of small businesses find confusing and see as unnecessary.
“Moving to a simpler receipts and payments basis will be much easier for most small businesses and will make it simpler for them to comply with their tax obligations, reducing the need for so many checks by HMRC.
“Aligning the proposals with the VAT threshold is a logical extension of the original OTS proposal and is likely to reduce the number of businesses which will move between the cash system and the more complex ‘accruals’ basis. Exposure to complications on moving across borderlines is always a concern when businesses face different regimes, but this means that the businesses faced with that problem will be more mature and in a better position to cope with – and afford – that transition.”
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Susie Hughes © Shout99 2012
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