Budget 2010 - I am not going to say “me too”

One usually annual problem for tax practitioners is that we are expected to have instant knowledge of every bit of information announced in the Budget almost straight away. There was in fact very little of substance in the March Budget of 2010, which is not surprising given that we are having a General Election probably on 6th May, and what Chancellor would announce anything unpleasant and painful in such a situation?

There is no point in publishing here a commentary on the Budget announcements. The newspapers have covered what there was in depth, and for a more insightful examination of the Budget scraps I recommend AccountingWeb.

The real Budget will be from the post-election administration in May. It is going to hurt, whoever delivers it, but we will have more certainty that measures already announced will actually come in, and will know about those new ones as yet unannounced. That is all!

Weighing up whether your workers are employed or self-employed

There was an interesting tax case before the First Tier Tax Tribunal in respect of which the decision was announced in February. It was much reported in the tax press and tax circles, but also in the national broadsheets. The case involved a very well known company, Weight Watchers Limited, which is a subsidiary of Weight Watchers International.

The case was not remarkable in the sense that many people treated as self-employed have subsequently been found to be employed, and it was unremarkable also in that the usual tests were applied, which are in respect of the amount of control the provider of work has over its workers. The remarkable element is that Weight Watchers have gone so long in the UK without HMRC having mounted a challenge. I suppose they would have been taking advice from their accountants over a number of years.

In this case the tribunal determined that there were a number of indicators that WW leaders, those who run the classes around the country, were employees and that the wordings and requirements of their contracts made them so. These included:

1.WW could replace a leader if they did not feel the leader was representing WW correctly in a contract which existed between the company and the member, not between the leader and the member.

2.The Company decided on the timings and places of meetings indicating a degree of control.

3.Most of the guidance to help the leader hold successful meetings given by WW was 'mandatory rather than aspirational'.

4.WW required certain targets of the leaders including maintaining their weight within their 'gold goal weights'.

5.The takings collected in meetings were insured by Company and had to be paid over within 24 hours of being collected for them.

There are other rules concerning the taking of holidays, regular supervisory observers being sent to classes by the company and so on, which appear to indicate that the company is very much “hands-on” when it comes to controlling their workers in the field.

To be self-employed and to borrow from HMRC's booklet ES/FS2, one needs to ask:

• Can the worker hire someone to do the work, or take on helpers at their own expense?

• Can the worker decide where to provide the services of the job, when to work, how to work and what to do?

• Can the worker make a loss as well as a profit?

• Does the worker agree to do a job for a fixed price regardless of how long the job may take?

I have no argument with these and if a worker does not satisfy these basic principles then he or she is probably an employee.

Of course no two cases are exactly the same. The Company is going to appeal against the tribunal decision and they may make a good case for all I know, but it does indicate for every business that before deciding a worker is self-employed they need to look at the facts on their merits.

As a result of the defeat of the company by HM Revenue & Customs, £23M has been provided in the company accounts as a liability which may have to be met, and this would be in respect of the PAYE tax and Employer's and Employee's National Insurance Contributions over a number of years for which they may now find themselves responsible. The possible tax hit has been shown as $37M in the international group's accounts.

I am not sure whether this sum is related to the full PAYE liability or if the Company is assuming that they can take into account tax already self-assessed and paid by their workers on their hitherto presumed self-employed basis. Guidance from HMRC following a fairly recent case, Demibourne Ltd v HMRC SpC 486, says HMRC will effectively allow credit for such tax assessed on a self-employed basis in these cases. Where the worker has not paid tax self-assessed, the Company will not have a remedy.

We await the appeal with interest, but remember that if you tell a worker when to turn up and how to do the job and that person has to ask for time off and holidays, he or she is probably an employee, whether an engineer, a bar person or an office cleaner.

© Jon Stow 2010

Late, late tax planning

The 2009 Pre-Budget Report in December signalled a significant number of tax increases in the UK designed to make up the significant Budget deficit following the banking crisis. For many or our clients there will be a significant impact on their finances.
-Income tax rates to rise and personal allowances to reduce for wealthier clients.
-Future changes to rates applicable for dividends, trusts and NICs.
-New 50% income tax band.

There are further complicated rules for pension relief restriction and the end of well-established tax breaks for furnished holiday lettings (currently enjoying business tax advantages). There is speculation about an increase in capital gains tax and I have heard different forecasts from various commentators.

We have about three weeks to do some quick planning which may mitigate in some part the higher tax payable on income receivable after 5th April 2010. It might be slightly less if restrictions are brought in with the 2010 Budget, for which we still await a date.

From 6 April 2010 there are higher rates of tax and fewer reliefs. Those earning in excess of £150,000 will be subject to a ‘super-tax’ of 50% on income over that threshold.

Furthermore, personal allowances will be restricted for those earning more than £100,000, at the rate of £1 for every £2 of income above that figure. As the current personal allowance is being frozen at £6,475 this means the full allowance will be extinguished at an income level of £112,950.

The gradual tapering of the allowance – within the narrow banding of £100,000 to £112,950 – means that where income falls within these limits, the effective rate of income tax is 60%.

In the current fiscal year ending in April it may be possible to convert income chargeable at 50% to gains chargeable at 18% or even an effective 10%. It would really depend on the circumstances of course, so no idle promises.

From 6 April 2010 there will be three rates of tax on dividend income. Where income falls within the basic rate band, the 10% tax credit will extinguish any liability, as before. The equivalent rate for 40% taxpayers remains at 32.5%, but a new rate of 42.5% will be introduced where income will be taxed at the new rate of 50%.

National Insurance contributions (NICs) are due to rise from April 2011 (a further year on), but if these go ahead as planned they will add another 1% to the rate, which is a significant uplift and may be a very sobering thought as people look ahead. Businesses could consider paying themselves in advance through salary or dividends, or paying their employees early bonuses but these are tough times from the point of view of cash flow. Still, any available option should be considered.

Our clients' finances and tax positions need to be looked at in the round; taxation of small businesses is inextricably linked to the reward and taxation of their owners and their families. Whilst high earners will bear the brunt of the initial increases, every taxpayer will feel the effect. These are tough times and tough decisions need to be made, although not to the long-term detriment of the businesses themselves. In addition, with a General Election in the offing we can only plan in the short term based on what we know now.

If you know anyone who may be affected make sure that their accountants and tax advisers are reviewing their tax positions in these next few weeks. Of course you may wish to talk to me about how I can help. Not everyone will have the flexibility to adjust their financial strategy, but it is worth checking.