The Fizz! Blog

BBC presenters attempt to avoid 50% tax

Many papers (such as the Telegraph) ran a story over the weekend about BBC presenters setting up companies so that they can come off the BBC payroll, freelance, and avoid the new higher income tax rates coming in from 6 April.

It's a more complicated story than that presented in the papers - just deciding to be a paid as a freelancer when really you should be an employee potentially has nasty tax consequences from either "freelancer" or "employee".  I've written about IR35 on this blog several times before.

But, it does illustrate the point that simply hiking the top rate of tax doesn't necessarily lead to a proportional increase in the tax take - people start to take action to restructure their affairs to reduce their tax liability, or they just don't bother to seek further income.  In fact the highest rate of tax won't be 50% next year, it will be 61% - which I'll discuss in another article.  And, however great your desire to effect redistribution of wealth via tax policy, there's no question that the prospect of only being allowed to keep 39% of some of their earnings is likely to change the behaviour of some taxpayers.

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MP sacked for normal, mainstream tax planning

I have as much contempt for MPs as anyone else, and firmly believe that they should be first against the wall come the revolution.

At the same time, the witch hunt over expenses is becoming, in some aspects, ridiculous.  Kitty Ussher MP has been sacked as a minister for changing the home she nominated as her "principal private residence" for tax purposes for a month in order to escape paying Capital Gains Tax on its sale.  That's just standard tax planning.  You learn about it when you're studying for your tax exams when you're training as a chartered accountant.  People do it all the time.  If you look at any online tax forum (OK, it's maybe just me who looks at those) then you'll find tons of queries on the mechanics of how to do it, and how long you need to change the nomination for.

On top of that, it's somehow being held as further evidence against her that she sought and received the advice of an accountant on doing it.  Surely seeking and paying for professional advice on the subject legitimises her actions?  If she'd taken no advice and just hadn't told the taxman about the sale and hoped to get away with it (as other MPs have probably done) then I could see that as dishonest.  But getting written professional advice in advance?

It's one thing to be angry when MPs exploit the rules in ways that we civilians can't or won't.  But sacking them for doing things that "normal" taxpayers do all the time, on the basis of written professional advice, is frankly bizarre.

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£2,000 to scrap your old car

That was one of the proposals in last week's budget, and it’s absurd.  If your car is over 10 years old, you can accept £2,000 (half of it donated by the government) to scrap it in the next year, as long as you buy a new one.  It doesn’t matter if you’re scrapping a small, fuel-efficient car in order to buy a Porsche or a Range Rover, that’s fine.  The taxpayer (i.e. you and me) will contribute.  It also doesn’t matter if the car is made overseas, and no British manufacturer or worker (apart from the car salesman) will see any of the £2,000, that’s OK as well, you’ll still get £2,000 towards your purchase.  So, against a background of concern over a) over climate change and sustainability and b) the prospects for British manufacturing and employment, we’re going to pay for the scrapping of perfectly good cars, purely because they’re more than 10 years old, and the manufacture of new cars that don’t even need to exist, where no British manufacturer or worker is going to benefit in any case.  It’s a completely incoherent initiative that doesn’t make sense from any angle.

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Missing the point

The papers have been full of the "scandal" of Sir Fred Goodwin's RBS pension for the last few days.  As part of his agreement to leave RBS, a deal was agreed between Goodwin and the bank on the terms of his departure.  Then he left.   That should be the end of the story.  Applying both basic logic and basic contract law, if that package now turns out to have been unduly generous, then that's tough.  A deal's a deal.  If any action is to be taken, it should be taken against those who were responsible for agreeing a ludicrously generous severance package with him.

But no, apparently the government feels it's entitled to just set aside a legally binding contract if it doesn't like it.  Harriet Harman explicitly voiced this view yesterday:

"The prime minister has said that it is not acceptable and therefore it will not be accepted," she told the BBC's Andrew Marr Show.

So is that the basis on which contracts are going to work from now on?  A contract is binding unless Gordon Brown thinks it's unacceptable in which case it can be torn up?  Are we just going to explicitly abandon the rule of law from now on?

I'm not defending the job that Goodwin did - he plainly did a terrible job, and to see him set up for life as a reward is painful.  But the reaction to that should not be to try and claw the money back.  The reaction should be to a) examine the way we remunerate directors, and to b) examine whether those within RBS and the government really had any idea what they were doing when they struck the deal.  If we don't do that, the same thing will happen again down the line.  And then the same people who negotiated this laughable agreement will once again abdicate responsibility for their role, just as they're doing now.

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The problem with being a contractor

BT announced today that they're laying off 10,000 people.  Only a minority of those are direct employees - most are agency workers, contractors and the like.

Contracting - essentially, providing your services to a client via your own company, rather than being an employee on their payroll - has two main advantages.  Firstly, it's likely that you'll be paid more - the fact that you're not on the payroll means that a) your "employer" saves National Insurance and b) they can give you the boot pretty much whenever they fancy - you've none of the rights that an employee has.  Secondly, by working via your own company you can often pay far less tax than an employee on a similar level of income would pay - particularly if you're not hit by IR35.

But in return for those benefits, there's a price to pay.  The price is the loss of those employment rights.  If your "job" doesn't need to be done anymore, your "employer" have no obligation to find you an alternative position, and no obligation to provide redundancy pay.  You don't get paid holiday.  You don't get paid sick leave. Because they're not your employer at all.

Radio 5 just broadcast a short exchange with a BT contractor who was given two weeks' notice last week.  He's unhappy because BT's HR department have been of no help to him.  Well, no, I don't expect they have been.  You're not an employee.  In return for the extra pay and lower tax burden of contracting, you gave up any employment rights.

On top of that, you can be 99% sure that the contractor, when assessing whether or not IR35 - and its associated higher tax bill - applied to him, will have argued until he was blue in the face that he wasn't an employee, but was instead running a bona fide commercial business that didn't rely on BT in any way.

If you go into contracting, you have to take with the rough with the smooth.  It's no good taking advantage of the benefits while they last, and then whingeing as soon as you're exposed to the disadvantages.

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Banks - an observation

If I'd asked you this morning to invest £800 in the UK banking industry, I imagine it's quite likely that you'd have declined the opportunity.  "You know what, Greg?  I'm just a bit of short of cash this month.  No can do.  Sorry about that."

If I'd then suggested that this wasn't a problem, and that you could just borrow the £800 from somewhere and then invest it, I suspect I would have been turned down once more.  "Greg, it's a tempting and imaginative plan, but, taking into account the volatile and insecure nature of the banking sector at present, along with the general fears about the wider economy both here in the UK and abroad - not to mention my existing borrowing - I think that taking out a loan in order to invest in the banking sector would suit neither me nor my investment plans at present.  Thanks - but no thanks."

But this morning, the government ordered every man, woman and child in the country to do exactly that.  You have no choice in the matter.  We, as a nation, are borrowing £50 billion to help the banking industry - that's about £800 pounds each.  We'll have to pay that amount back later on, to whoever we have borrowed it from, with interest.  If you didn't want to borrow £800 to invest in the banking sector - unlucky!  You just have.

The banks will then use the money by lending it straight back to us (in the form of mortgages, loans and credit cards) and charging us interest.  The plan is that the interest they charge us on the amount that we owe them will enable them to repay the amount that they owe us so that we can then repay whoever has lent us the £50 billion.

I'm not really saying that this is the wrong thing to do.  We are where we are, and, although it might not be an ideal situation, we have to do what's necessary to get ourselves out of it.  But when you break the plan down into its constituent parts, you have to acknowledge that it's a bizarre state of affairs.

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Doing business in difficult times...

...was the name of a seminar that I went to this morning.

It was a very worthwhile session, though one of the presenters did assert that, with a recession coming, accountants will be advising that you cut back on costs as far as possible.  For what it's worth, that's not generally my feeling.  If anything, it's even *more* important than usual in a recession to maintain your marketing efforts, recruit and develop talented staff and keep building solid systems and infrastructure.  If your competitors are struggling, it could be a brilliant opportunity to take advantage of their weakness and come out of the downturn way ahead of the game.

The presenter did then talk about a lunch he'd had with the managing partner of one of the Big 4 accounting firms, who is apparently argung over just this with his partners.  The other partners want to be cautious, cut back and lay off staff, the managing partner wants to keep pushing on in order to maintain their market position and keep the pressure on their rivals.  So that's at least one other accountant who isn't advocating cutting costs to the bone!

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Dragonfly - a storm in a teacup?

There's been a lot of fuss in the last couple of weeks about a court decision that could adversely affect many contractors working via limited companies.

The company concerned is called Dragonfly Consulting Limited, and it has lost a long running battle with the Revenue.  The company has been found to fall foul of IR35.  IR35 is a rule that says that if an individual is working for another entity doing what is, to all intents and purposes, a job, then, even if the individual forms a limited company which sits between him and that other entity, then tax and National Insurance must be paid as if the individual were are an employee of the entity.  In other words, the individual loses the tax benefits of having their own limited company, and suffers the higher tax burden of an employee.

The central point in the Dragonfly was a "substitution clause" in a contract - a commonly used device that states that the individual can send someone else to do the work if they want.  This is a good pointer that the relationship is not a job - if you're an employee, you can't just send someone else in to work to do your job for you, generally.  However, in the case of Dragonfly, the end customer essentially told the court "Well, yes, the contract says that, but in reality he has to come in and do the work himself, and he knows that".  So the clause was set aside as it didn't actually reflect the real relationship.

There's more detailed discussion of the case at AccountingWeb (free registration required), where it's argued that the case has strengthened the taxman's hand.  In particular it is suggested that contractors and advisers now need to take much more care to ensure that substitution clauses are realistic and workable.

However, I don't really agree with that part of their analysis. It's always been the case that, under IR35, you can only rely upon a contract if it accurately reflects the real relationship between you and your client.  If the contract is a sham, or there are parts in it that are for show, with both parties knowing that they don't reflect the real terms of engagement, then the contract (or that part of it that is unrealistic) can be set aside.  Since IR35 came in, competent tax advisers have been telling their clients that a substitution clause is great, but that if the customer wouldn't accept a substitute in real life then it's not worth the paper it's written on.  So, in my view, nothing has really changed.

If you're worried by the implications of Dragonfly, do give us a call.

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Not a brilliant advert for estate agents

Usually, no stamp duty is payable on houses bought for less than £125,000.  This morning, the Chancellor announced a temporary stamp duty "holiday" on properties costing up to £175,000. Just after the announcement, Radio Five spoke to an estate agent to get his view on the news.

The estate agent said that, while any help offered to homebuyers is welcome, the most that this change will save anyone is £500, which is just a drop in the ocean.

But his £500 figure was nonsense.  The usual stamp duty on a house costing £175,000 is 1% of the total price - so, £1,750.  Now it's nil.  So the most that can be saved is £1,750, not £500.  Still arguably a drop in the ocean, but a much bigger drop.

The industry "expert" was evidently under the impression that the first £125,000 of any property purchase is taxed at 0%, with only the excess liable to stamp duty.  Which is quite wrong.  Once the price is over £125,000, the whole lot gets taxed.

Of course, the stamp duty holiday isn't going to make any difference, for several reasons, but, honestly - isn't it possible for the BBC to track down an estate agent who has the slightest idea about the basics of his industry?

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Nice work if you can get it!

You may recall that the chairman of HM Revenue & Customs, Paul Gray, resigned last year after the Revenue lost two computer disks containing the details of 25 million taxpayers.  It's emerged today that he received a payoff of £137,591.  In addition, he is still receiving a salary, which will be paid until next month.  Perhaps I should reconsider my original view that his resignation was honourable and admirable - it now seems another depressing case of failure being rewarded.

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