Are you looking for better returns from the hard work you perform?
As freelancers become more common in the work place so do the solutions that enable contractors to maximise their earnings. From Limited Companies to offshore trust solutions. Which option is right for you and where can you get the best return for your hard work? There are plenty of options but why would you consider them with so much bad press and the threat that HMRC are just around the corner?
Typically freelancers and contractors are paid a higher wage for the work they perform because they don't have the security that an employee on a full time contract is given. The skills provided by the contactor are more suited and honed to the role they are performing, rather than being requested to multi task or provide support in a variety of different areas in different departments.
A recent independent survey by the Professional Contractors Group has found that freelancers choose to become so for positive reasons, rather than through necessity. The desire for flexible working and an increased trend in this working style has been welcomed by business through recession, producing a smaller core of permanent staff and larger numbers of freelancers and temporary workers. Indeed, with flexibility and usually higher rates of pay, it is understandable why contractors and freelance workers might think there is no incentive to consider anything other than freelance work.
This increased income provides the contractor with a dilemma - How to minimise the tax liability? Typically contractors have used Personal Service Companies or partnerships to increase their return and reduce the impact of tax on their income, but the introduction of ir35 eliminated the avoidance of tax and National Insurance through the use of these types of intermediaries.
So what is tax avoidance? It seems to be a mischievous word if you read the literature produced by HMRC, but is it illegal to avoid tax? The answer to that is simple. No! It is a criminal offence to evade tax but nowhere does it stipulate that tax avoidance is illegal. Lord Tomlin had this to say about it when he addressed the House of Lords :
“Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”
It seems that the payroll path has not been made an easy one for contractors and freelancers in recent years and navigating the rocky road of legislation and tax law is not for the faint hearted. One overriding factor for the continuance of these schemes is that, although HMRC like to issue phrases like “retrospective action” which is obviously a scary thought for contractors already involved with similar schemes, it would be impossible for the government to prosecute or change legislation retrospectively.
Imagine the scenario – Driving any type of petrol vehicle has been banned, and a new law has been passed to that effect as of today. You are later arrested for driving your petrol car a week before the law was passed. That would be changing legislation retrospectively and would break European human rights laws on many levels. Once the law has been approved you would have to buy an electric car or manage your affairs differently in the future, but then that's the point, we would all expect to do that, after the law has been changed. There is no way that you could make provision for a law that could change before it has been made.
The following legislation affects contractors today and has an impact on the working style contractors and freelance workers choose to adopt:
BN66 - Budget Note 66 was introduced to attack the abuse of the Double Taxation Treaty that exists between the United Kingdom and other jurisdictions.
IR35 - IR35 became law via Schedule 12 of the Finance Act 2000.
The aim of the legislation was to eliminate the avoidance of tax and National Insurance through the use of intermediaries, such as Personal Service Companies or partnerships.
S660A - Section 660 was introduced to combat the use of ‘income shifting' or ‘settling' of income on another person so as to gain advantage of a lower tax rate. This technique was commonly used between a husband and wife to reduce overall tax liability.
IR56 - IR56 was introduced to clarify and outline the circumstances in which a person could be deemed to fall within IR35. This guidance set out a test base of questions designed to illustrate the differences they consider when looking at employed or self-employed status.
HMRC Brief 61/09 - HMRC Brief 61/09 is not legislation, it is commentary setting out HMRC's viewpoint.
This article was written by Halcyon, if you would like to find out more about Halcyon's services then you can visit their website