Income Contraction for Contractors

Background

It is common practice in the UK for individual contractors to contract their services to clients through a Personal Service Company (PSC), rather than be on the client's payroll as an employee. This could be as a cover for maternity leave, an IT contract or simply as a means to build a consulting business from scratch.

This arrangement provides a variety of tax advantages, such as avoidance, not evasion, of PAYE and National Insurance.

The PSC in most cases would raise an invoice to the engaging company, with VAT where applicable, and records this as trade income as opposed to employment income which is totally legitimate and legal.

HMRC's Position

HMRC has recently opened consultation into this practice as it seeks to counter this advantage by requiring the engaging company to deduct PAYE & NI at source before paying the invoice of the intermediary company.

Current Legislation

The IR35 legislation enacted in April  2000 was designed specifically to ensure that persons who control these PSCs that obtained contracts from clients, pay the relevant PAYE & NI is there engagement would be one of employment were it not for the imposition of the PSC.

This consultation now aims to shift that responsibility onto the contractor's client which would create a raft of unwelcome results the least of which would be:

·         The client in deducting PAYE & NI at source would then need to make payments of employer's NI adding additional costs to the client

·         The employment status now being afforded to contractors may result in the need to provide all the benefits that normal employees enjoy

Our Position

The consultation document has raised quite a few questions for us here at Harvey Edwards, namely:

1.      How is VAT to be treated, now that the trade income of the PSC will become the employment income of the director?

2.      Are we now to assume that where the PSC accounts are concerned there will be no income to report?

3.      Wouldn’t it be more commercially viable to use the current IR35 legislation as a means to grant amnesty to those contractors who have failed to account PAYE & NI; similar to the amnesty provided to the medical profession, plumbers & electricians which have yielded great success for HMRC?

To read the consultation document in its entirety please click here.

For more information on this document please contact:

  www.he-llp.com

0113 815 1315

15 Queens Square, Leeds, LS2 8AJ

Indirect Tax Update: Automobile Sector 2/12

Headlines – Bad Debt Relief (BDR)

Following last week’s breaking news of the Upper Tribunal’s Judgment please find below text of an alert sent to all readers subscribed to HELLP’s Indirect Tax Update.

GMAC 3 – Upper Tribunal Judgment

The case is about the vires for the restrictions to the UK Bad Debt Relief (BDR) rules which applied between 1978 and 1997, as well as the way in which s.22 VATA 1983 (‘the Old Scheme’) was repealed. Judgment has now been released by the Upper Tribunal.

Background

Let us start with reminding our readers what the current bad debt relief (BDR) rule is: If you send an invoice to your customer on the 1^st of January for say £100 plus £20 VAT you will immediately need to account for the output tax and pay the £20 VAT over in the next VAT return that covers the January period. Now if six months has passed from the due date of the invoice and your customer has not paid you, then you can claim BDR by requesting that HMRC pays back the £20 to you, subject to certain conditions; hence the term Bad Debt Relief.  

Prior to 1989, no BDR claims were possible unless the debtor became insolvent (‘the Insolvency Condition’). For the whole of the 1978 to 1997 period no BDR claim was possible if the contract of sale included a ‘Reservation of Title’ (ROT) provision (under which title to the goods did not pass to the customer until and unless all payments due under the contract had been made) (‘the Property Condition’).

In Section 39(5) of the Finance Act 1997, the UK sought to withdraw the right to bring claims under the Old Scheme by providing minimal notice (‘the Time Limit Issue’).

GMAC’s Position

GMAC argued that the Property and Insolvency Conditions were ultra vires and could not be relied upon.

GMAC also argued that Section 22 VATA 1983 was repealed without giving taxpayers sufficient notice, and that the repeal should be ineffective.

HMRC’s Position

HMRC opposed these arguments, and also argued that GMAC was trying to rely on a directly effective right in conjunction with domestic legislation to produce a result not intended by the Directive. HMRC said that GMAC would benefit from a windfall if it relied on both a directly effective BDR claim and on the domestic law de-supply of the subsequent sale of any repossessed vehicles. HMRC said that there could be no directly effective right to a windfall (‘the Windfall Issue’).

The Decision

The Upper Tribunal has found in favour of GMAC on the Property Condition, the Insolvency Condition and on the Time Limit Issue; however the Upper Tribunal found the Windfall Issue extremely complex, and has invited the parties to make further submissions before finally deciding whether or not to make a reference to Europe. It is currently hoped that further submissions will be made at a hearing in October.

Why is this important?

This is a positive decision for taxpayers. The Windfall Issue is relevant only in connection with BDR on repossessed hire purchase goods which are resold. Other taxpayers with historic BDR claims are unlikely to be affected by the Windfall Issue and based on the Judgment as it presently stands, other taxpayers should now be able to make domestic law claims under s.22 VATA 1983 (although it remains likely that HMRC will continue to reject such claims until the GMAC 3 litigation is finally determined one way or the other).

How it affects you

The outcome of the above case should give tax payers the motivation to lodge BDR claims which were previously denied, with HMRC as a precedent has now been set by the GMAC ruling.

Serious thought to lodging their claim, as HMRC may now seek to‘re-repeal’ s.22 VATA 1983.

Taxpayers who have already lodged claims, had them rejected, and appealed will not need to take any further action, save for keeping their claims up-to-date on a four year basis.

Contacts

Feel free to contact one of our VAT advisers if you need to lodge a VAT claim or if you have any questions about this case and its implications for your business. 

www.he-llp.com

0113 815 1315

15 Queens Square, Leeds, LS2 8AJ

HELLP’s Indirect Tax Update: Education Sector 1/12

HMRC Update - Framework for Higher Education Institutions PESM

HMRC has now made publicly available the new version of the Framework for Higher Education Institutions (HEIs) partial exemption special methods (PESM).

This has been agreed with the British Universities Finance Directors' Group and the Higher Education Funding Council for England providing guidance on formulating PESM for HEIs. The framework includes guidance on:

• How to determine a fair ‘value’ for supplies of grant-supported education;

• When to add ‘sectors’ to a PE method; and,

• How to identify and deal with ‘distorting supplies’.

The document adds that this framework is not mandatory and does not replace the content of VAT Notice 706 (Partial Exemption), but adopting its principles will enable HMRC more readily to give approval for a PESM for which a Statutory Declaration has been made. It takes full account of the findings of the KPMG Review of Partial Exemption in the Higher Education Sector (KPMG Review) that was commissioned by BUFDG, HEFCE and HMRC and which was published in June 2007.

Click here to view the guidance in full.

www.he-llp.com

0113 815 1315

15 Queens Square, Leeds, LS2 8AJ