HMRC Risk and Intelligence service which is based in Cardiff has been issuing notices under S18a(2) TMA 1970 to online auction sites to request information about the members registers kept.

The auction sites are obliged, with no right of appeal, to provide the information as non compliance will result in an initial penalty of £300 plus up to £60 per day for continuing failure.

The information requested is going to be used purely to check on memebers to see that they are declaring and registered for tax correctly. Thus if you are an online trader who has not declared income from online trading activities, you will need to make a disclosure to HMRC by 14th June 2012. The full disclosure and payment of outstanding tax then has to be made to HMRC by 14th September 2012.

Chris Bryce, chairman of PCG said:

‘HMRC’s new guidance demonstrates their fundamental lack of courage and committment to improve the operation of IR35′

Click here for a joint press release from PCG and other outside bodies

Link attached http://www.hmrc.gov.uk/ir35/guidance.pdf

HMRC have claimed to have sent ourt 850,000 penalty notices to people who have missed the deadline for submitting the 2010/11 personal tax return deadline.

If you are one of the unlucky 850,000, you will be facing a penalty of £100. If you haven’t already done so yet, make sure you file your self assessment tax return as soon as possible otherwise if you are late by three months the penalty for each day after that is £10 per day for the next 90 days (£900 in fines) and if you still haven’t filed your self assessment by the 31st July you will ahve to pay the higher of £300 or 5% of any tax that you are owe for 2010/11

The benefits to you are that you have the right to reclaim VAT paid on purchases and also have an improved cashflow i.e. you can hang onto the VAT that you charge your customers, for up to three months, before you pay the VAT man.

Firstly, IR35 has, and remains, a big issue for contractors since its introduction in April 2000. It was hoped the new Government remove or reform IR35 this has not happened.

In the 2011 budget, the Government promised improvements which included a dedicated helpline and promotion of more effective engagement through an IR35 forum to monitor HMRC’s new approach. This forum has sought to narrow down the types of companies targeted for IR35 investigations.

The budget announced that it would “introduce a package of measures to tackle avoidance through the use of personal service companies and to make the IR35 legislation easier to understand for those genuinely in business. This will include: strenghtening up specialist compliance teams to tackle avoidance of employment income; simplifying the way IR35 is administered.”

We will let you know what this means as soon as further information is available. We think it may relate to implementing ideas that have come out of the IR35 forum.

Secondly, limited companies used by high ranking public sector individuals have been making the headlines recently and the Government has been quick to address this public criticism in the budget.

From 2013 any organisation that engages “office holders” and “controlling persons who are integral to the running of an organisation will be required to deduct PAYE and NIC’s from payments made for the services to the individuals.”

This should not affect regular freelancers or contractors, it should only affect office holders, i.e. if you get taken on in the clients organisation as a director or take a very similar role in that organisation. It is not expected that many people will be affected , but the Government is consulting on this new rule and how it will work. It is expected to be effective from the 6th April 2013.

By taking a small salary (the tax efficient salary is around your personal allowance mark) instead of taking all your income as dividend you can claim tax relief on the salary payment (an allowable deduction against corporation tax) also the salary you pay will (providing it is at the right level) preserve you entitlement to your state pension

A tax investigation can take years to sort out and if it goes through the courts then it can cost thousands of pounds in professional fees, not to mention the tax and penalties that might be at stake if you are found to be at fault.

Plus a HMRC investigation will cause you untold emotional costs, for both you and your family.

If you decide to fight an HMRC investigation then you should have professional help as fighting inspections and rulings by HMRC is not for the faint hearted, it is also technically demanding in terms of procedures and legislation.

Most contractors/freelancers will have some sort of insurance cover, which as a minimum will cover the professional fees incurred by an investigation.

As an addition many have policies which cover to a varying degree the tax liability at stake.

A good place to start you research is the Professional Contractors Group www.pcg.org.uk or to talk with other freelancers or contractors in your office, but the benefits and drawbacks as we see it are:-

Hours

If you are an employee, you normally have set hours of work, a specific place of work, and days of work and here is often an expectation of unpaid overtime. Normally as a freelancer there is a lot more flexibility on hours/days and place of work, plus there is often an expectation of unpaid overtime. Normally as a freelancer there is a lot more flexibility on hours/days and place of work plus no expectation of unpaid overtime.

Holidays

As a freelancer or contractor your entitlement to holidays is non existent, the 25 days holiday allowance that you were used to has gone, and any time off you will not get paid for.

To get around this you should put aside some of the money you earn to tide you over the periods when you are on holiday. You will also need to carefully plan you freelance/contracting around your work/projects and often it is tempting for you not to take a break as it will cost you money, but everyone needs a break.

We do know of contractors who will work solid for six months then have six months off work.

Benefits

As you are not an employee you will not receive any company benefits that you may be used to, such as your company car, medical insurance, pension, company gym etc , but you can of course purchase these if you want to, what it does do though is it removes you having to pay for benefits that you do not want, and you can just have the ones that you do.

Your extra pay should more than cover the loss of benefits. There are many specialist firms of IFA’s such as contractorfinancials.com who will be able to assist you with loss of benefits.

You may also want to consider income protection as if you are ill you may need some income.

Office Politics

People often say the main drawback of full time work is not the work but the people and politics. If you are an employee office politics is something that you can not help but become a part of. This is something that causes people undue stress and worry and is often brought home.

People often say that a major factor in them becoming a freelancer is to get away from office politics but you can not exclude yourself totally from office politics by you reduce the level to which you are involved, also you exclude yourself from appraisals and promotion worries.

Tax advantages of contracting

If you use your own limited company for contracting through you will definitely be in a better position taxwise than your permanent colleagues.

You will be able to save substantially on your national insurance, claim expenses against tax, and reclaim VAT on your expenses which will add up.

The answer is complicated and it will depend on the amount of years of contributions made by the person, but to maintain entitlement to the state retirement pension, directors should always pay themselves a salary of at least the amount of the ‘lower earning limit’ for national insurance purposes.

If there is only enough profits in the company to take the lower earnings limit then it makes sense to take a salary as opposed to a dividend to maintain entitlement to a state pension.