Reported by the BBC, the chancellor has been under pressure from Labour to cut VAT to inject money into the economy – and from senior figures in his own party to scrap the 50p top rate of income tax. However, the chancellor said it would be wrong to borrow money to fund temporary tax cuts or increase public spending.

“I’m a believer in tax cuts – permanent tax cuts paid for by sound public finances. Right now, temporary tax cuts or more spending are two sides of exactly the same coin, a coin that has to be borrowed – more debt that has to be paid off.”

To help struggling businesses, he set out plans to cut the cost of borrowing and improve access to loans but full details would not be released until the Autumn Statement in November. They already say that they are helping businesses by keeping interest rates low.

Speaking about the case, Hannah Dobson, VAT director at accountants Smith & Williamson, said that HMRC were looking to restrict this ruling to Reed; which means they were able to claim back the difference of VAT charged on invoices. Whilst she thought it would be hard for HMRC to restrict it like this, she said;

“If HMRC cannot restrict the application of this ruling to Reed, this opens the door for other agencies to start charging on the margin, and for agency clients to start making claims against their agencies for repayment of overcharged VAT, with the agencies claiming the money back from HMRC.”

Tom Hadley, REC Director of Policy and Professional Services, said that they were monitoring the situation and looking to “play an intermediary role between agencies and Government officials.” He continued;

“There has been some debate over the implications of the tribunal ruling. It has been argued that it does not necessarily set a precedent as this was only a first-tier Tribunal and the judgement was based on a very specific supply model. However recruiters and their clients will clearly want to look into this further - especially if there is an opportunity to recover VAT payments.”

Meanwhile, HMRC released a short statement in which they said they were “considering the effect of the recent judgment of the First Tier Tribunal in Reed Employment Limited and whether it has any wider implications.”

ICS are one of the leading contractor accountants and administration companies and have helped thousands of contractors working in a range of industry sectors. You can contact us now for a tailored proposal based on your individual circumstances as a contractor.

Kevin Green, the Recruitment and Employment Confederation chief executive, said: “The outlook for the UK jobs market is mixed but there is scope for cautious optimism. The increasing employer confidence is a good sign and the feedback from professional recruiters confirms that fluidity is returning to many sectors of the labour market.”

He highlighted areas including financial services, as well as the technology and pharmaceutical sectors, as those which could benefit from expansion and demand for staff saying, “Businesses are also looking to build greater flexibility into their resourcing which will provide temporary and contact work opportunities.”

Dr John Philpot, chief economic adviser at the Chartered Institute of Personnel and Development was slightly more wary, saying that “2011 will be a fingers crossed year for the economy and jobs.”

“If all goes well and the unexpectedly strong progress made in 2010 is sustained, the jobs market will be able to cope with the impact of the coalition government’s spending cuts and tax increases without any significant rise in unemployment.”

His caution was in reference to the public sector cuts that have followed the spending review, and tax increases such as today’s (4th January) rise of VAT from 17.5% to 20%, and he ended by warning, “Things only have to turn out a bit worse than expected in the wider economy for the jobs situation to weaken, which remains the CIPD’s central forecast.”

ICS are one of the leading contractor accountants and administration companies and have helped thousands of contractors working in a range of industry sectors. You can contact us now for a tailored proposal based on your individual circumstances as a contractor.

The government is planning to spend £900 million in an attempt to address the £42 billion tax gap and it is thought that the self-employed will be among those facing increased scrutiny from HMRC, as they say mistakes on tax returns are relatively common from such workers.

VAT is also high on HMRC’s agenda affecting contractors working via their own limited company. Contractors should ensure their VAT returns and payments to HMRC are correct. HMRC recently estimated that around £15 billion of such contributions had been underpaid.

They suggested numerous reasons for this but highlighted that a lack of bank lending would greatly limit economic growth. “It will take many years before bank balance sheets and fiscal positions return to anything like normal,” said Mr King.

The Bank said the key issue behind its prediction that inflation would remain higher than previously forecast was the government’s decision to raise VAT to 20% from 17.5% at the start of next year.

Hugh Pym, BBC chief economics correspondent commented that the Bank’s warning that the UK faces a difficult economic recovery could increase fears of a double dip recession. However, the Bank’s own projections say this remains highly unlikely.

These key points are;

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The purpose of the change is to encourage compliance and highlights the benefits of paying their VAT electronically.  It also removes the cash flow advantage businesses can benefit from by paying by cheque.

If paying by cheque, all businesses, including contractors with their own limited company, must allow enough time for their payment to arrive and to clear into the bank account no later than the due date shown on their VAT return. A cheque takes three bank working days to clear so it is important to be aware of this change to ensure you do not pay your VAT return late which could result in a surcharge.

HMRC advise that you should allow at least three working days for a cheque payment to reach them and a further three working days for the payment to clear into their bank account. This means if you were to pay your VAT return by cheque, send it off no later than one week before the due date.

Alternatively, a VAT return can be filed online and paid electronically. HMRC recommends that contractors with their own limited company make their VAT payments electronically as this is safe and secure. In most cases it also gives up to seven extra calendar days to pay or, if paying by Direct Debit, at least ten extra calendar days.

From April 1 2010 businesses with an annual turnover of £100,000 or more (exclusive of VAT) and all newly registered businesses must file their VAT returns online and pay any VAT due electronically.

Independent Contractor Services offers a Limited Company Service which aims to help you with setting up your own limited company. We also offer a free IR35 review and can give you accountancy support and expenses guidance at your request.

Their most recent addition is the podcast. HMRC have recorded a series of podcasts and the latest one is aimed at businesses and citizens throughout the UK including contractors and sole traders.

The ‘Super’ podcast as it has been named, features guidance from HMRC experts including Stephen Banyard and also Don Macarthur. It covers important topics such as; the need for all employers to file their Employer Annual Returns online from this spring; new penalties for late payment of PAYE being introduced in May; and key changes to corporation tax filing and payment coming in next year.

Stephen Banyard, director of HMRC’s Business Customer Unit, said: “Our Super Podcast is a great way for businesses to remind themselves about some of the major changes on the horizon affecting VAT, PAYE and corporation tax. So whether you’re a VAT-registered trader, employer or limited company, we’d urge you to take 15 minutes to download and listen to it, to help ensure you’re prepared for the changes.”

The HMRC Super Podcast can be downloaded from HMRC’s podcast pages at http://www.hmrc.gov.uk/podcasts

ICS Accounting Ltd specialises in providing individual accountancy, tax advice and administrative services to professional contractors.

Below we have highlighted how specific measures will affect contractors. If you have any questions or would like more information about how our services for contractors can help you please contact us on 0800 195 3750. 

Corporation Tax

In his final Budget, in 2007, Gordon Brown had announced that the small firms’ rate of corporation tax would rise in three increments to 22%, the final increase being due in 2009. As many contractors who work through their own limited companies will be pleased to hear the planned increase in Corporation Tax has been deferred again until 2011, and the small firms’ rate will remain at 21% until then. 

 Income Tax and NICS

The new top rate of 50p on all earnings over £150,000 will come into force in April 2010, and 42.5% on dividends. The starting point for employers’, employees’ and self-employed NICS will be maintained at £110 per week. The upper earnings and profits for Class 1 and Class 4 NICS will be kept at their current levels of £844 per week, for the self-employed, the rate of Class 2 contributions will continue to be £2.40 a week. Class 3 contributions will also remain at their current rate of £12.05. 

 A further 0.5% increase on all National Insurance contributions by those earning over £20,000 was announced. Therefore many National Insurance Contributions will go up by 1% from April 2011, but by only 0.5% for incomes under £20,000. For freelancers within the scope of IR35 – if it is still in force at this time – this will be a double whammy, as IR35 obliges them to pay both employers’ and employees’ NIC.

  VAT

VAT will return to 17.5%, effective from 1st January 2010. This ends the 15% VAT “holiday”. 

Self-Employment in the Construction Industry

Following on from the blanket proposal to deem construction workers as employees unless some very restrictive tests were met, the Government announced that they would be publishing a summary of consultations in the New Year. No other commitments have been made.  

 Infrastructure

The Government announced a series of infrastructure projects and stressed its commitment to improving markets frameworks along with best practice in management and procurement. 

 The oil and gas sector is one of the focal points. In particular, changes to the criteria for the Ultra High Pressure, High Temperature field allowance have been announced. These changes, it is believed, could support the recovery of up to 300 million additional barrels of oil and gas from the North Sea. The Government is currently considering developing an infrastructure in the largely underdeveloped area of west of Shetland and the case for any fiscal support. This may represent very positive news for oil and gas freelance contractors.

 Overall, the industry seems to agree that this has been a neutral Pre-Budget Report for contractors, with only the very highest earners likely to be drastically affected. 

From the first week of January, all businesses who charge VAT at the standard rate will have to have new or amended resources in place to reflect their higher prices. Although HMRC has issued new guidance on the VAT reversal, these changes will cost firms about £125m, on top of the £175m they have already spent when VAT was reduced earlier in the year to 15%. The government reduced the VAT rate temporarily from 17.5% to 15% until the end of the year as part of its “fiscal stimulus”.

Business groups say New Year’s Day is not the right time to land firms with a large administration bill, arising from them needing to change pricing or invoicing systems. UK Economists also fear that getting rid of the lower rate of VAT, which has so far had little or no effect on the public’s spending, could hurt consumer confidence at a time when it appears to be returning.

For more information on working through your own limited company or perhaps our umbrella service, please visit the website or alternatively telephone them on 0800 195 3750.