Reported on Contract Eye, tax advisers from the PCG have seen HMRC approaching members by sending them a letter, giving them a telephone call or even arranging an informal meeting, rather than issuing a formal notice of dispute when looking into a contractor’s tax affairs.

One contractor had even received a letter concerning his IR35 status after he met with HMRC to discuss VAT. Nothing regarding contracts or working arrangements was said to have been discussed at the meeting.

The PCG advise contractors who have been approached by HMRC to seek professional advice from the PCG or their accountant before responding. Contractors are not legally obliged to meet a tax officer in person – even for an informal meeting.

Contractor UK added that despite IR35 facing a review, “contractors should keep ‘vigilant’ because HMRC appears to be pushing for meetings with an ‘ulterior motive’”.

One of the first tasks for the OFT is to review the highly controversial IR35 legislation.  This will be detailed in a report that will identify areas of the tax system that cause the most day-to-day complexity and uncertainty for small businesses.

This has been welcomed by the Chartered Institute of Taxation (CIOT) and Andrew Hubbard, who has long been calling for a review in this area, commented:

“The Chartered Institute of Taxation has long argued that there is a real need to simplify the taxation of the smallest businesses. A more carefully planned and integrated approach would not only aid tax compliance in the small business sector but also allow small businesses to make commercial decisions that are not distorted by hasty and ephemeral changes in tax policy. We would like to see an increase in certainty, simplicity and stability of the tax system emerge from the review.”

The OTS is made up of independent experts and its task is to make recommendations to the Coalition Government on how best to simplify the tax system.

One the first tasks will be to review small business taxation, including the controversial IR35 legislation which could be positive news for contractors. According to the CIOT, the review is long overdue and will finally “even the playing field” for the UK’s small businesses.

The Office will provide an initial report to the Chancellor by in time for the 2011 Budget. It will point out areas of the tax system that cause the most day-to-day complexity and uncertainty for small businesses and recommend priority areas for simplification.

The Freelancer & Contractor Services Association (FCSA) has given the OTS launch a “cautious welcome”. Commenting on Contract Eye, they said;

“At the moment freelancers and contractors receive a number of tax reliefs (for instance on travel expenses and subsistence) to reflect the risks of the flexible workforce. Any moves by the Government to undermine the flexible workforce market, which UK plc is relying on more and more in these difficult times, will backfire on the UK economy.”

It is too early to tell how this new body will affect contractors but within the marketplace there is optimism that the Office of Tax Simplification will be good for them.

The coalition government wanted to make sure that they could undertake a comprehensive review of small business taxation in a way that makes the need for the current IR35 legislation redundant.

Prisk is reported as saying. “But we want to make sure whatever we change is a lasting settlement. One of the problems with IR35 is that it’s a constantly changing set of rules.”

The PCG, who represent contractors and freelancers across the UK are said to be very pleased with the comments from Prisk. PCG chairman Chris Bryce commented;

“We are delighted that Mark Prisk has said publicly what he has said to us privately and we are very pleased that important organisations now take the same view as us. There is still much work to be done, but we hope we can work with the government and these other organisations to find a fair and acceptable settlement for all freelancers and contractors.”

Comments from contractors responding to the emergency budget said that they wanted IR35 to be abolished so they are likely to also be happy about what the small business minister has said.

Update: The Department of Business has confirmed to Shout99 that the position is still to review IR35 and no announcement has been made that it is to be abolished. The interview with  Richard Tyler took place several weeks ago.

A BIS press office told Shout99: “Mark Prisk did the interview several weeks ago. He said that the coaltion Government was committed to reviewing and simplifying tax measures for small businesses – and one area that was mentioned was IR35. When asked about specifics, he said that any announcements about tax would be made in the Budget.”

Media within the contractor marketplace have also been discussing in depth about what contractors could expect and how it will affect them. They reference important issues such as IR35 legislation, Corporation Tax, Pension Tax relief and much more.

However, we want to ask you contractors, what you think will affect you in the forthcoming budget.

As well as being contractors, many of you will have families, some may have spouses working in the public sector and announcements regarding these may affect you as well as any specific measures targeted at the contractors working via an umbrella company and their own limited company.

So contractors, looking at every aspect of the budget, what do you predict and how do you think it will affect you?

The toolkit may also be useful for freelancers and contractors using an umbrella company. Umbrella company workers are thought to be captured by the regulations whereas those who are genuinely “in business on their own account” are not. This suggests contractors working outside IR35 will not be affected but many industry insiders however are yet to be fully convinced that this is indeed the case.

The REC are aware of the impact that the Agency Workers Directive will have hence why they are equipping recruiters with a toolkit which should help them overcome the administrative, legal and practical challenges once the legislation comes into force in October, 2011.

The REC will also be holding a webinar in July for contractors, recruiters and clients to view. They will also be holding a series of workshops specifically targeted to recruiters.

REC wants everyone in the contracting and freelancing marketplace to be prepared for the Agency Workers Directive (AWD).

In the Coalition’s full programme for Government, published yesterday (20th May) the Government declares it will:

“Review IR35 as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self employed, or restrict labour market flexibility.”

The PCG were established to fight the introduction of IR35 and in a statement on their website, John Brazier, Managing Director of PCG said;

“We are delighted that the new Coalition Government made this commitment to review IR35 as a priority only days after taking power. For the last 10 years PCG has campaigned for honesty and fairness when dealing with the UK’s 1.4 million contractors and freelance workers. With the end of the iniquitous IR35 we have the opportunity to achieve fairness.

Chris Bryce, Chairman of PCG said:

“Over the last few months the PCG team has had a series of meetings with the Conservative and the Liberal Democrat shadow front bench teams. We are delighted our message was heard and action taken.

The PCG work hard advising the Government where and when they are needed and provide a voice for their 20,000 members.

Contracting is a growing and valuable part of the UK economy and it is great that the Government appear now to appreciate this.

Dave Chaplin, CEO of Contractor Calculator did warn contractors not to celebrate too much yet until details of the review and what the new rules will be have been revealed. He is concerned that greater clarity over a contractors’ status might come at the expense of more contractors paying more tax.

Independent Contractor Services (ICS) recently added a page on the website dedicated to help explain IR35 to contractors and recruiters alike. Click here to view the page.

A large proportion of contractors work via their own limited company, or via an umbrella company and they wanted to help contractors when they are deciding which option to use.

Many contractors contract via limited companies and Contract Eye say this is often the most tax efficient way to work, especially if you are not caught by IR35.

They add, “Limited company contractors typically take a small salary (minimising PAYE and NIC liabilities), and withdraw the remainder of their income in the form of dividends.”

Working through an umbrella company, however, is often viewed as hassle free, especially if you are only contracting for a short period or if you are caught within the IR35 legislation. According to Contract Eye, service providers such as ICS, take care of invoicing, administration, chasing payments, and processing an individual’s payroll, leaving them to concentrate on their work duties.

They said, “If you are unsure if contracting is the life for you, working via an umbrella company offers a low-risk way of trying things out.”

There are advantages and disadvantages to working through your own limited company or via an umbrella company and it is important for a contractor to assess these and decide which the best option for them is.

Independent Contractor Services (ICS) offer both a Limited Company Service and an Umbrella Service, and can talk you through your options. Use our contractor calculator to find out what your return could be and which service may be best for you.

We want to help you understand IR35 without getting confused by the legislation which came into force with the Finance Act of 2000.

Within the contractor marketplace there has been a lot of talk about IR35. This is because a contractor recently secured an unlikely victory in an appeal against HM Revenue & Customs (HMRC) in an IR35 compliance case which lasted 5 years. The tax department began an investigation into Novak Brajkovic and his company, Novasoft, after he sent his contract to HMRC to be voluntarily reviewed.

Kate Cottrell, co-founder of Bauer & Cottrell, an employment status and IR35 specialist speaking on Contractor UK said; “When deciding IR35 status, full account of the actual working practices should be taken and proper attention given to the case law that is wholly relevant to IR35”.

Independent Contractor Services (ICS) also offer a free IR35 review to all freelancers and contractors.  It is a standard part of our service and is available to all contractors at no extra cost. It is also important for contractors to have a new IR35 review each time they begin a new contract.

Find out more about IR35 by visiting our page, http://www.ics.me.uk/about-IR35.

HM Revenue & Customs announced in March a number of amendments to its Employment Status Manual. This included case law updates in respect of the important High Court IR35 cases of Dragonfly Consultancy and Larkstar Data.

The Employment Status Manual gives contractors a clear view of the issues that HMRC will rely upon in the event of an IR35 investigation. HMRC have won 4 out of the 4 IR35 cases which went to the High Court.

HMRC builds on all 3 status tests (Substitution, Mutuality of obligation and Control) to decide whether a contractor falls within IR35 and is actually disguised as an employee or if they are working outside of the IR35 legislation.

HMRC added; “Sometimes it will be necessary to take up issues where there is a relatively small amount of tax in the case itself, because of the wider implications of the point at issue.”  

They want to highlight that although there may not be much tax at stake, as was in the Larkstar case, they want to protect the deterrent effect of the IR35 legislation. However from April, 2009 HMRC have had a stringent penalty regime so it is likely that the amounts at stake in future cases will increase substantially.

Kate Cottrell, co-founder of Bauer & Cottrell, an employment status and IR35 specialist speaking on Contractor UK said; “When deciding IR35 status, full account of the actual working practices should be taken and proper attention given to the case law that is wholly relevant to IR35”.