Taxing Times

GBCT News / Tim Potter

Taxing Times

GBCT News / Tim Potter

Budgets rarely bring good news. Drinkers often need a fag to calm their nerves and smokers a drink to drown their sorrows. Recent times are little different. The regulars are on trajectories that have been set for some years to come. However, this year saw some unprecedented attacks on the self-employed and small businesses.

The subsequent public outcry has produced U-turns on some of the headline announcements, but the underlying attack is still there, and most of it has come in changes to the taxation system that have been gradually introduced outside of the usual budget routine. The demise of Class 2 National Insurance, reductions in dividend tax relief, and tighter rules on travel and subsistence expenses, are all set to make the freelance life tougher. Worse than these could be the changes to the way in which IR35 is implemented, particularly for those who work for public sector engagers like the BBC and educational establishments.

The passing of Class 2 NI will mean that those not making enough profits to earn NIC credits for pensions, etc., will be forced to top up their contributions via Class 3 NI. This is five times more expensive. You can fall below the Small Profits Threshold for many reasons, causing a break in contributions. Business could have been bad, you may have taken maternity/paternity leave, or even had a long mega project outside of the tax grasp of the UK. The reduction in dividend tax relief speaks for itself for those who use a Personal Service Company (PSC). You will pay more on the part of your income that you receive through dividends. Fewer aspects of travel and subsistence are to be allowable and will have to be accounted for on an ‘actuality’ basis (i.e. those pesky little receipts will become vital). Even though the increases in NI payments will no longer be part of the chancellor’s attack on the nation’s entrepreneurs, the more stealthily introduced changes to conditions for PSCs will begin to make such tax arrangements closer to worthless.

The government has been looking for ways to make the life of those in PSCs impossible, as it sees them as solely vehicles for tax avoidance. IR35 was first concocted to get at those in the IT industry who had long contracts with one single principle. Without the umbrella of a PSC such people would have fallen foul of the “master/servant” relationship expressed in Fall v. Hitchin (1981). That precedent that has caused so much trouble for our industry.

Now IR35 lets the Revenue use similar criteria to examine the nature of your company and if you don’t meet the criteria, you are PAYE. The company is regarded as transparent. Until now the burden of proof for each PSC was on the company to prove that it was a genuine trading entity with multiple clients. However, from April of this year, this burden of proof in the public sector is transferred to the engager (client). This means that anyone working through a PSC for a public sector body like the BBC, any further or higher education establishment or other body that is funded from the public purse, will have their status initially decided by the engager. The client is supposed to use a Revenue authorised calculator to determine whether a PSC is in business or falls under IR35. If the former then the relationship does not change but if the latter then the engager has to deduct tax at source as if you are an employee.

All might seem well for those who can prove that they are genuinely in business, but in practice what most institutions will do is deduct first and ask questions later, if at all. Some bodies have already started to tell their contractors that they will deduct PAYE, and the contractor will just have to just lump it and claim the tax back after the end of the tax year.

This applies the new rules incorrectly in several ways. Firstly, the rules only apply to PSCs not sole traders. Secondly, the engager has a duty to use the Revenue’s calculator to determine your PSC’s status. A decision against which you can appeal. At worst this will cause excessive tax to be paid that cannot be reclaimed for many months, if not years. I have had a time where it took three years to get back tax paid twice in such circumstances. The Revenue will not start to act on a reclaim until they have proof that you have already paid the correct tax (in addition to the overpayment) and that the engager has paid over what they have deducted.

Any client you find to be acting in the ways described should be challenged and reported to BECTU. National Officials will be able to intercede on your behalf and are readying themselves for a deluge of complaints on this issue. The union has tried to dissuade the Revenue from this retrograde step, but its lobbying (orchestrated by Tony Lennon, who I am indebted to for the information for this article) has fallen on deaf ears.

It is important to know where you stand on issues like this and BECTU is the resource for the best information and back-up. However, it will be worth those of you with PSCs to examine if they really are doing anything for you anymore.

Tim Potter
Chair
GBCT