The labour supply businesses seek to obtain a tax and National Insurance advantage by the creation of a purported overarching employment contract which is intended to enable temporary workers who would not otherwise be entitled to tax relief on travel and subsistence expenses to gain such tax relief.

In the last two years HM Revenue and Customs (HMRC) have seen a growth in arrangements which are variously described as ‘Travel and Subsistence Schemes’ or ‘Mobile Worker Schemes’. These schemes are operated by many businesses involved in the supply of temporary workers to end users: Employment Businesses and umbrella companies. The labour supply businesses seek to obtain a tax and National Insurance advantage by the creation of a purported overarching employment contract which is intended to enable temporary workers who would not otherwise be entitled to tax relief on travel and subsistence expenses to gain such tax relief.

These schemes often involve the use of salary sacrifice arrangements and rely for their effectiveness on the fact that HMRC have issued a dispensation in accordance with section 65 Income Tax (Earnings and Pensions) Act 2003.

In many cases such schemes are marketed to workers as representing a tax and National Insurance saving for the worker. However, the major saving is not to the worker, rather to the party who would bear the higher employer’s National Insurance contributions costs if it were not for the arrangement.

Following responses to the July 2008 consultation ‘Tax relief for travel expenses: temporary workers and overarching employment contracts‘, HMRC commenced compliance activity to identify and take action against those Employment Businesses and umbrella companies which are operating in contravention of tax, National Insurance or national minimum wage legislation.

Current compliance activity has identified a number of concerns that are the subject of more detailed, ongoing investigation. These include:

• Potentially ineffective overarching employment contracts
• Dispensations which are invalid, or which have been wrongly applied
• Not complying with the terms of the dispensation
• “Expense payments” made tax-free without that level of expense, or in many cases any expense, having been incurred
• Potential illegal deductions from workers’ pay
• Ineffective and sometimes unlawful management processes; and
• Breaches of national minimum wage

HMRC are working with other Government Departments, including the Department for Business Innovation & Skills, and Authorities, particularly the Gangmasters Licensing Authority, to identify businesses acting in contravention of legislation and will penalise breaches of the law as they are identified. In addition, HMRC are also working with end users of temporary labour to raise their awareness of the consequences of sourcing their temporary workers from businesses which act in contravention of the law.

HMRC are concerned that many lower paid workers being paid through such schemes do not understand the arrangements and in many cases are given little choice as to whether or not they are paid through such schemes. There are also concerns about low paid workers in such schemes opting out of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 without fully understanding the implications of what the opt-out means.

End user businesses which use temporary workers paid though Employment Businesses and/or umbrella companies which do not fully comply with their statutory obligations, clearly run a risk of damage to their reputation and their business if HMRC takes action.

HMRC will continue to investigate and challenge non-compliant Employment Businesses and umbrella companies and will report to ministers in due course on the outcome of that action and the extent of issues being discovered. Ministers will then be able to consider the extent to which compliance action is able to address the undesirable effects of these schemes and whether further measures are required.

HMRC

Speaking to the House of Commons, Austin Mitchell MP declared a need to stop consultancy and IT suppliers targeting the public purse as a source of easy profits.

He explained that, since 1997, such consultancies have “grown fat” off the taxpayer, partly thanks to “impulsive gestures” and “idealistic” thinking by the government.

But the member of the Public Accounts Committee said the other cause was state officials being taken in too easily by the IT sector’s sales and marketing teams.

“All too often, departments seem incapable of dealing with the wily stratagems and sales patter of consultancy salesmen,” the Labour MP for Grimsby said last week.

These salesmen, particularly those at the big IT consultancies, “over-praise” their product or service and “forecast that it can do more than it actually can,” he said.

It is not the first attack on IT’s drive for business by a Labour MP. Targeting EDS for its C-Nomis project, Jack Straw said officials were victim to “snake oil salesmen.”

But Mitchell believes the “failure” is actually on both sides of the contract – on the part of the IT supplier’s sales team and the government body engaging that supplier.

He said: “Departments…try to set too many objectives to be accomplished, which always leads to failure in IT contracts. When we try to do more with an IT system than it can bear, it inevitably breaks down and performs inadequately.”

To evidence his claim, he pointed out that the MoD’s defence information infrastructure programme was running 18 months late, and that the NHS care records system was also behind schedule, by four years.

He believes government departments need better advice to “put them on a more secure and effective platform for controlling the suppliers of IT systems they deal with.”

He added: “No taxpayer pound should be the source of easy profit. That is an absolute maxim. However, in consultancy and IT services, the taxpayer pound has been a source of far-too-easy profits.

“We need to control that, exact penalties where necessary and blacklist firms that are over-selling in that fashion to see that they do not make the same profits and mistakes in future.”

Part of Mitchell’s vision includes giving the Office of Government Commerce a stronger and more effective role than that of an advice service, allowing it to push its choices for IT contracts.

“It should have an audit and control role over those contracts, and it should ensure that performance is adequate,” he said. “If it is not, it should demand sanctions and penalties.”

Contractor UK

Borrowers face a mortgage affordability test from lenders amid plans by the Financial Services Authority (FSA) to step up the regulation of home loans.

Self-certification mortgages will be banned under the proposals with lenders required to verify borrowers’ incomes.

FSA chief executive Hector Sants said that some people who were able to get home loans in the boom would no longer be able to under the proposed rules.

The industry will have until 30 January 2010 to comment on the plans.

The FSA, in its mortgage market review, has outlined a series of proposals for increasing regulation in the mortgage market.

All borrowers will have to show they have sufficient spare income to finance the repayment of their new home loans.

However, the FSA drew back from any ban on 100% mortgages, or any limit on loan-to-value levels. There was also no ban on loans over a certain multiple of borrowers’ incomes.

However, it did not rule out such caps in the future, if the initial proposals failed to have a “sufficient effect”.

The plans, which the FSA described as more “intrusive and interventionist”, include:

• Making lenders ultimately responsible for assessing consumers’ ability to pay by studying borrowers’ monthly disposable income
• Banning the sale of “toxic combination” loans, such as a high loan-to-value loan for somebody with a poor credit history
• Stopping charges for borrowers who have got behind on payments, but are keeping to an arrangement to repay these arrears
• Extending policing of the industry by the FSA to all mortgage advisers and arrangers.

“We need a new approach to regulation,” Mr Sants told the BBC.

He said that the irresponsibility of the past that put firms and consumers at risk should not be repeated.

“In the past, the prevailing regulatory philosophy was definitely based on the notion that banks would behave properly and not put themselves at risk and not put consumers at risk,” he said.

“I think we just have to recognise that both firms and indeed consumers just don’t always make the best decisions. They don’t always act in their their best interest or indeed in the best collective interest of society. So we need a new approach to regulation.”

Ban plan

The most striking proposal is the ban on self-certification mortgages – the type where customers do not have to prove their income – as these have been associated with a disproportionately high number of arrears and repossessions.

When the FSA first took over the regulation of mortgage selling in October 2004, it proposed that borrowers who were not self-employed should not be allowed to self-certify their incomes. The mortgage industry lobbied against that idea and the FSA relented.

These loans made up nearly half of all the mortgages being offered at the peak of the housing boom, but have been at the centre of a number of mortgage fraud inquiries, when incomes were allegedly inflated by rogue brokers looking for higher commissions.

This led them to be dubbed “liar loans” by some commentators.

If the ban now comes in, lenders will be able to look at the tax returns of self-employed people – who have often used self-certification loans – for evidence of their income, the FSA said.

The regulator’s review came after the mortgage market mushroomed during the housing boom, with some 10,000 different mortgage products available at one point in 2007. Of these, 3,000 were specifically aimed at sub-prime borrowers – those who have inferior credit records.

“That is a level of complexity we could well do without,” Mr Sants said.

He added that lenders needed to give proper consideration to how much a borrower could afford, in what was often their most important financial decision.

Residential mortgage debt in the UK amounts to around £1.23 trillion, accounting for approximately 70% of all credit extended by lenders in the UK, the regulator said.

The FSA also wants the power to regulate buy-to-let mortgages, which are generally treated as business loans, and so currently fall outside the FSA’s scope.

The UK mortgage market has recently started to pick up slightly after dropping sharply during late 2008 and early 2009.

‘Rabble-rousing’

The Council of Mortgage Lenders (CML) described the FSA review as “well thought out and logical”, but described some of the political comment surrounding lending as more “rabble-rousing” than considered debate.

“It is ironic that at the same time as politicians are seeking to encourage lenders to increase their flow of mortgage lending to consumers, they are also keen to take steps to address the perception of ‘irresponsible lending’,” the CML said.

John Luke Busby, director of French mortgage group Athena Mortgages, said: “The FSA, it would seem, has been looking across the channel to France for direction when drafting its proposals.

“The French banks have carried out affordability tests for all types of borrowing, whether buy-to-let or owner-occupier, for years and if you look at historical house price trends in France there is a far more gentle variation in prices as opposed to the booms and busts seen in the UK.”

BBC Online

As a Contractor, you may not have replaced your lost ‘death in service’ benefits that you used to benefit from as a ‘permi’. But when you become a parent the safety net that this cover provides becomes vital to protect your children if the worst should happen.

With this in mind, we can now offer life cover worth £10,000 absolutely free to new parents.

The joy of becoming a parent is often accompanied by an overwhelming feeling of responsibility for your new born. You begin to consider how you will create a safe home environment for your baby and how you will protect it if anything should happen to you. It’s easy to forget the importance of life cover when you get caught up in the excitement of a new baby, but with free cover for new parents it need not be a financial burden. Redego Financials can help you to arrange the cover without any hassle so you have more time to enjoy the important things.

How does the cover work?

Life cover offers an essential safety net to Contractors because if you die then it will pay out a lump sum or an agreed income to cover your families expenses and pay off any debts. At an already traumatic time, life cover offers the peace of mind for your dependents that they are protected financially and prevents them from being liable for any debts you leave behind.

You can insure yourself for a certain period in your life, for example until your children leave home, or you can choose a whole of life policy that will pay out no matter how old you are when you die. The insurance can be inflation proofed to ensure that the amount paid out upon death will be worth the same amount in spending terms as when you decided to take out the policy. This is particularly important for a whole of life policy as £100,000 now would hold a very different value in 30 years time.

The offer of £10,000 free life cover applies to new parents and as such you need to register for the cover before your baby is six months old. The offer applies to both parents and is per child so when you and your partner have a baby you can claim £20,000. If you are lucky enough to have twins then you can claim £40,000 free life cover and so on.

It is possible to take out excess cover on top of your free cover which you will need to pay monthly premiums on. We would advise Contractors to have enough cover in place to pay off any outstanding debts and also provide a safety net for your family to fall back on if the worst should happen. The free cover will end on the child’s first birthday by which time you should be back on your feet financially and able to take on the repayments which will be relatively low on this level of cover. Our advisers will be on hand to help you arrange an affordable cover to suit your individual needs.

HM Revenue & Customs (HMRC) have been exasperated for many years by the way the construction industry behave as if the rules on paying workers gross don’t apply to them.

They published a new consultation (July 2009) that has the look and feel of the finished article, so its more than likely to become legislation before the end of 2010.

Reading between the lines, HMRC see this as the final attempt to align the construction industry with other sectors and get 300,000 ‘false’ self-employed subbies on to PAYE. Genuine self-employed workers will be able to continue trading by passing a simple 3 criteria test.  To qualify, sub-contractors would have to either:

• provide their own plant & equipment (normal tools of the trade do not count!)
• provide all the materials for a contract OR
• provide other workers

So, how will the construction industry respond?  To be fair to the industry, they have always had to balance between being ‘compliant’ with competing with other contractors who pay workers on a ’self-employed’ basis.  To make matters worse, the test for employment status has always been complex, based on case law and constantly changing, so they could genuinely say they didn’t know whether a worker was self-employed or not.

Now there is a workable status test, and the Treasury’s intention has been clearly stated, most contractors will probably decide that the risk of non-compliance is too great and make arrangements to pay their workers through PAYE.  They can do this through their own payroll or outsource to a compliant PAYE umbrella company, which will give workers the opportunity to claim legitimate expenses

The new legislation that penalises managed service companies–companies that are run for contractors by providers–has sent a powerful message throughout the industry. There is real concern on the part of agencies and recruiters about the status of the contractors they work with. Are you running your own limited company, or is someone else running it for you? In the latter case, you may have trouble getting more work.

Demand for Repayment Without Notice

Says David Vincent of the London-based Lawspeed, a legal consultancy specialising in contractor affairs: Recruiters and agencies are most likely to be concerned about 3rd Party Liability – tax debt arising from an association with a managed service company which incurs a tax debt that HM Revenue and Customs cannot recover. Recruiters could be liable for managed service company tax debts after 6 January 2008 and the sums involved could be very significant especially where a recruiter or agency has a large number of contractors on their books.”

”If a transfer of debt is activated there is an immediate joint and several liability for the agency or recruiter whether or not a debt notice is served,” Vincent explains. This means that the employment provider could find itself liable for contractor tax debt without even knowing about it! The Revenue will simply appear at the door, as it were, one day and demand repayment.

” Recruiters and agencies are likely to view this as very unfair because it could have a very detrimental effect on the balance sheet and overall value of their businesses.”

Checking on Status

“Recruiters are likely to be more prescriptive in determining whether a worker company is a managed service company, This may add to administration and slow down the sign up process,” Vincent warns.

In other words, your agency or your recruiter will want to be very certain that you are not working in anything that could be even loosely defined as a managed service company. Some agencies have already circulated questionnaires to their contractors asking for definitions of status. But this is probably only the beginning, as further checks will be made, probably extensive ones at the times a contractor is under consideration for a given contract.

Compliance Checks

What Lawspeed expects is that recruiters and agencies will undertake regular compliance checks of their contractors as well. And they will want to ensure that providers register all their limited companies with the Revenue. “They will also undertake spot checks on PAYE slips provided to the worker to ensure payment is full PAYE,” Vincent adds.

What this means in practice is that contractors should know for certain what the status is of the limited companies they are running, and that they should be in a position to prove that status if required to do so. If contractors are unable to prove the independent status of the companies they run, they risk losing contracts.

Contractors need to be very aware of this issue which is unquestionably the hottest topic in the industry today. Ignore it at your peril.

Contractor Calculator

It is clearly an attempt to extract more money out of the industry. They have estimated that of the 860,000 self employed subcontractors in the UK 300,000 have been wrongly described as self employed and if these workers were re-classified as employees the Treasury would benefit to the sum of £350 million per year.

The proposals are that to be classified as self employed the workers should meet one or more of three criteria:

1. The worker must provide plant and equipment, not just the tools of his trade.
2. The worker must provide all materials.
3. The worker must employ other workers. He will be responsible for ensuring the correct criteria are met for his workers.

The problems that these criteria create are wide ranging and as usual provide more questions than answers.

Most small contractors would like to have their own plant and machinery but do not have the finance to fund their purchase. What would HMRC’s view be if for a few days per year the subcontractor hired a machine to assist him in his work?

Materials are often purchased by the main contractor where possible because of the financial benefits of bulk purchases. So if each subcontractor purchased his own materials the costs would escalate. Again we wonder how HMRC will react to the contractor charging the subcontractor for the material used and for the subcontractor to add this on to his own invoice.

The third criteria seems to penalise small businesses but we wonder how HMRC will react to partnerships?
On a positive note the subcontractor would only have to satisfy ONE of these new criteria. The subcontractor therefore may have to make some small adjustments’ to his working practices to achieve compliance with just one of these criteria.

There are also other proposals to include in the new system all workers who provide their services through Managed Service Companies and Employment Agencies. Even workers operating through their own Limited Companies are not exempt as they will be required to operate PAYE on themselves if they do not meet one of the three criteria.

The Treasury have not given a date for the implementation of the new system but enigmatically say that the timing of the introduction of the new rules is critical which probably means as soon as possible. There is a consultation period up to 12 October 2009 and so it could be as soon as next April when these new rules come into effect.

The proposals will also have a VAT impact. Labour only sub-contractors at present are unlikely to be VAT registered but the requirement for one of the three criteria to be met, will undoubtedly increase the turnover so that it could easily reach the VAT Registration threshold thus creating a liability for them to register.

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Qdos

Focusing on Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia, the report shows that most significant opportunities lie in countries where the sector is best established and that have a sound regulatory framework in place – particularly Poland, Hungary, Slovenia and the Czech Republic.

In order to maximize potential benefits when the economy recovers from the current economic crisis, the report says, it is necessary to establish an appropriate regulatory framework for the industry to operate in, eg Bulgaria and Romania.

Poland has the largest number of private employment agencies (2,340) and the highest number of internal staff (4,073), while Bulgaria has the smallest market with total annual sales of €23m (£19.8m) compared with €92m in Romania, the second smallest, and €569m for Poland, which again had the highest number.
Last year, the average penetration rate in the region was roughly 0.6%, the highest was in the Czech Republic at 1.9%, while the lowest was in Bulgaria (0.2%), compared to the EU average of 2%. The highest number of agency workers in full-time equivalent was in Poland (84,931), followed by Hungary (33,860) and Romania (30,305).

Annemarie Muntz, president of Eurociett, says: “As part of its everyday activity, the sector keeps people in touch with the job market and helps laid off workers and ‘outsiders’ to re-enter the workforce. It supports workers by providing them with training to ensure that their skills are in line with market demand.
“The industry acts as a buffer for the labour market as a whole and provides companies with the kind of flexibility they will need to adapt to and recover from the current crisis. In Central and Eastern Europe, the agency work sector still has room for development, which will in turn lead to job creation and better functioning labour markets.”

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Recruiter

Using a pension as a route to reduce tax was particularly lucrative for higher earners. The result was that many exploited the freedoms to the full and the 1.5% of top earners received 25% of all pension tax relief last year. However the benefits were not only felt by the UKs millionaire community. Using pensions as a tax planning tool meant that many Contractor clients were pocketing more of their hard earned income than ever before, with some choosing to take a minimal wage or dividend in order to save tax on a all of the rest of their annualised contract income.

The budget rains on the pensions parade

The Budget speech announced that income tax was rising to 50% and this looked set to make pension investment even more of a tax break. The mood was soon dampened by the announcement that the Chancellor would be clamping down on the extent to which pensions could be used for tax relief.

From April 2011, tax relief for Contractors that earn over £180,000 will be capped at the basic rate of 20% and those earning between £150,000 and £180,000 will be judged on a sliding scale of between 40 and 20%.

Whilst the initial reaction from investors and industry professionals alike was to adapt a ‘buy now while stocks last’ mentality, it soon became apparent that the Chancellor was one step ahead of the game. Anti-forestalling rules have been put in place to prevent high earners from maximising contributions over the next two years in order to make use of the tax breaks before they disappear.

‘A-day’ to may day – pensions simplification it is not!

The new restrictions that have been put in place mean that Contractors who have already earned £150,000 or more this year or over the past 2 years, will be restricted to 20% tax relief on pension contributions above a ’special annual allowance’ of only £20,000. Unfortunately, this extends to both employer and employee contributions.

This impacts on your ability to contribute through salary sacrifice arrangements if you operate under an Umbrella company and stops you using unlimited company contributions if you contract via a limited company.

Whilst it is still unclear how the new pensions restrictions will work in practice, any Contractor earning up to £149,999 per year is entitled to invest almost all of it in a pension without incurring income tax, corporation tax, National Insurance deductions or being liable as for benefit in kind. However, if you earn just £1 more than that you are only able to invest up to the special annual allowance of £20,000. It is worth bearing in mind that the £150,000 earnings they are referring to, does not only include salary but also income such as rentals from buy-to-let properties, dividend income and bank interest.

If you invest over this £20,000 limit then you will be subject to a repayment of the balance between the basic and higher rate tax relief that you will gain on this excess investment. This tax relief repayment will probably be via your self-assessment return.

A silver lining for savvy investors

One saving grace is that pre-existing investors who have exceeded the £20,000 limit will still benefit from their current tax relief arrangements as long as they were contributing regularly on a monthly or quarterly basis before April 22nd 2009. These pre-existing regular contributions will be known as ‘protected input amounts’ and so someone that already contributed £3000 per month will be able to continue to contribute that amount and benefit from 40% tax relief.

For those savvy pension investors, keeping up regular contributions will be crucial in order to continue receiving the tax relief benefits that you currently enjoy. Any investment that exceeds the special annual allowance of £20,000 and your individual ‘protected input amount’ will be charged at a rate of 20% this year and 30% in 2010.

Unfortunately for those contractors that employ a more ad hoc approach to pension investment, this pre-existing contribution bonus does not apply. Investors that prefer to invest via a lump sum at the end of the tax year will therefore fall foul of the new rules.

Missed the boat? There may be another route

If you are in the fortunate position of narrowly missing the £150,000 earnings cap, then now is the perfect time to maximise contributions in case of any further increase in earnings or new rules coming into play. The most effective way of contributing is likely to be through regular investments on a monthly or quarterly basis as we have already seen various concessions being made for regular contributors and this could lead to further savings in the future.

If your earnings exceed the £150,000 limit then it is arguably more important than ever to invest up to the £20,000 special allowance in order to exploit one of the few remaining tax breaks for Contractors. If you invest the full £20,000 then the tax man is effectively paying £8,000 which is a worthwhile return on your investment and with savings rates at an all time low, it might represent the best place to invest in the current climate.

Also if you earned over £150k last tax year but wont do so this year there is a way to reduce your income back down under the threshold using a Gift Aid donation for 2008/9.

With concerns growing over the future of state pensions due to the shrinking workforce and increasing longevity, the emphasis is on personal investment to provide for your retirement. It is therefore highly unlikely that the Government will abolish higher rate tax relief altogether and if anything, the higher taxes announced in the budget provides an even greater incentive for Contractors to make regular contributions towards their future.

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Contractor Financials