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Tax Year in Review 2016

A look back at some of the tax stories that affected contractors in 2016

A happy New Year to all of the Contractor Weekly readership and one can only hope that 2017 is kinder to freelancers, in tax terms, than the outgoing year was. With the introduction of the off-payroll rules from April 2017, for those working in the public sector, however, this may seem overly optimistic but stranger things have happened. Like Leicester City winning the Premier League! So let’s take a look back at some of the events in 2016 that shaped the tax world of the contractor.

January

HMRC forced to withdraw up to 2,000 Accelerated Payment Notices (APNs) that it had issued in error to participants in the Montpelier IR35 Manx Partnership arrangements.

Following publication of their Making Tax Digital roadmap, HMRC announce a series of consultation events to discuss the issue of tax payments.

February

Eventual publication of the IR35 Forum minutes for December 2015 confirms that HMRC plan to develop an online employment status tool for use by contractors.

Some contractors receive reduced PAYE code numbers for 2016/17 as HMRC sneakily attempt to collect tax on dividends a year in advance.

An independent review of self-employment reveals that owner managed businesses cite tax as a barrier to growth.

March

Newspaper rumours about the Government tightening up the rules for freelancers working in the public sector are proved true as George Osborne, the then Chancellor, announces IR35 reforms in the Budget. Clear objective tests will be introduced to help engagers decide whether or not they need to consider the new rules. For cases that are less clear cut, a digital tool is to be developed to assist end users in deciding if IR35 is relevant.

Budget 2016 also confirms that the Company Distributions legislation will be introduced in the following month. This will re-classify a final distribution on the winding-up of a company as a dividend where an individual carries on a similar trade within two years of liquidating their company and the main purpose of the winding-up is to obtain a tax advantage.

Directors loans outstanding nine months after the end of the accounting period in which the loan is made will attract an increased tax charge of 32.5% as from 6th April 2016.

The Office of Tax Simplification (OTS) make further recommendations regarding the alignment of tax and NIC and recommendations on simplifying tax for small companies.

A report on what motivates someone to sign up to a tax avoidance scheme is published by HMRC.

April

Dividend taxation and new rules for claiming travel and subsistence (T & S) by contractors become effective from 6th April 2016. To support the T & S legislation, HMRC publish their narrow guidance on supervision, director or control (SDC).

Association of Taxation Technicians (ATT) accuse HMRC of overcharging small business consultants using the VAT flat rate scheme, by misdirecting businesses to use unsuitable business sector categories.

Administrative Burdens and Advisory Board criticise HMRC over Making Tax Digital and the department’s woeful telephone service.

Nine years after the Managed Service Company (MSC) legislation was introduced, the first landmark tax tribunal case is won by HMRC in Christianuyi Ltd & Others v HMRC.

May

HMRC release consultation document, ‘Off-payroll working in the public sector:  reform of the intermediaries legislation.’  The consultation will run for 12 weeks.

Treasury Committee raises a number of concerns about Making Tax Digital and the ATT calls for its postponement to allow adequate time for consultation and testing phase.

Five years since they were launched, HMRC announces that their taskforces have raised more than £500 million in additional taxes.

National Audit Office report, ‘The quality of service for personal taxpayers’, slams HMRC for its mismanagement and collapse in service to individuals.

June

The Companies House annual return is replaced by a confirmation statement as from 30th June.

July

Results of research commissioned by HMRC into IR35 reform are published in a report, ‘Intermediaries Legislative Qualitative Research’. Not surprisingly, the report confirms that end clients do not want responsibility for IR35 as it would be costly, burdensome and constraining, as well as undermining their business and relationship with self-employed workers.

Low Incomes Tax Reform Group questions the relevance of Umbrella companies following the new restrictive T & S rules and urges workers to consider their relationship with Umbrellas.

OTS publish a discussion paper on ‘Lookthrough’ taxation; a way of taxing small companies and their owners by allocating the profits of the company to the proprietors.

August

Government signal that proposed IR35 reform within the public sector will go ahead in April 2017, as planned, despite a REC survey of 95 public sector employers that found the majority felt change was unnecessary.

Building on its success in the tribunal case of Christianuyi Ltd & Others, HMRC include MSCs in their Spotlights in an attempt to ward off contractors.

Agencies and employment intermediaries filing late quarterly returns after 5th August will incur automatic penalties.

HMRC launch six consultations involving various aspects of Making Tax Digital.

September

OTS respond to proposed IR35 reform in the public sector by saying that rather than simplifying matters the proposals will add complexity.

Following concerns about the timetable for implementing Making Tax Digital, HMRC agree to delay its introduction to 2019 to allow businesses more time to prepare and adjust. Despite this, the Treasury Committee warn that this may not be enough.

Since the introduction of APNs in 2014, HMRC proclaim that they have issued 60,000 such notices leading to a £3 billion revenue haul.

October

Following a First Tier Tax Tribunal hearing involving BBC news presenters, Tim Willcox and Joanna Gosling, it is revealed that approximately 100 current and former Beeb presenters are under IR35 enquiry.

November

In the very last Autumn Statement, new Chancellor, Philip Hammond, announces that contractors working in the public sector and who are deemed to be caught by IR35 will not be permitted to take advantage of the 5% ‘tax-free’ allowance that is used in deemed payment calculations. In a further blow to contractors, a new 16.5% VAT flat rate will be introduced from 1st April 2017 which will apply to businesses with limited costs, such as labour-only businesses.

A Guardian newspaper investigation uncovers a number of temporary recruitment agencies using aggressive tax avoidance schemes, costing the Exchequer millions in lost revenue.

The OTS publish its report, ‘Closer Alignment of income tax and national insurance:  a further review’. Whilst it reaffirms its view that NIC and Income Tax should be united to create a simpler and fairer system, the dream is still a long way off.

After further consideration, the OTS decide not to recommend Lookthrough taxation as a method of simplifying tax for small companies but do believe that the Sole Enterprise with Protected Assets (SEPA) model is worth a punt.

December

Draft provisions for Finance Bill 2017 for PSCs working in the public sector are published. The original proposed gateway tests to ascertain whether or not the IR35 rules have to be considered are now scrapped and instead the engager will use HMRC’s online employment status tool to make a determination at the start of a contract.

OTS announce it is to explore the simplification of VAT and also stimulate debate on the ‘Gig’ and ‘Sharing’ economy.

Responses to HMRC’s consultation document, Strengthening Tax Avoidance Sanctions and Deterrents’, published in October, support the department’s proposals to make promoters and ‘enablers’ of tax avoidance schemes to bear some of the risk by imposing a fixed 100% fee based penalty where a scheme is defeated.

Taxation of benefits-in-kind to be simplified in Finance Bill 2017 by setting clear dates for ‘making good’, e.g a cash payment by an employee to their employer in return for the benefit.

More criticism of HMRC in the Public Accounts Committee review of the department’s performance in 2015/16.

As 2017 begins then, in the words of one of the greatest of all Britons, Winston Churchill, “let us go forward together”.

By Andy Vessey

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