Taxman attacked over new avoidance rules

The taxman may claw back £500 from thousands of small companies that have filed their PAYE returns online.

The move would deal a further blow to the relationship between the Treasury and small business, according to accountants PKF.

The warning came in the same week that self-employed freelancers were invited to give their verdicts on HMRC.

According to the firm, HM Revenue & Customs has announced that, on “legal advice”, it has re-interpreted the anti-avoidance provisions on cash incentives given to employers that file their PAYE returns online.

Wording used by the department's notice suggests that small businesses that have filed online in good faith stand to lose up to £500 for returns they have already submitted and a further £325 for filing their PAYE returns online up to 2010.

The change could hit thousands of small companies that have struggled with HMRC’s online return systems believing that the incentive payments would offset some of their administration costs.

The anti-avoidance rules were introduced in March 2005 to prevent businesses splitting up into a number of small employers to make multiple claims for the £250 incentive payments.

In its original guidance on the rules, HMRC stated that it would not deny companies the payments where the business had been incorporated to take advantage of other tax breaks, for example, where the directors take dividend payments instead of salary to reduce NIC costs.

However, HMRC has now decided it will be interpreting the rules strictly and that it would deny the payments to any company where it considers that the company was formed to obtain “an advantage in relation to income tax, corporation tax or national insurance contributions”.

Peter Penneycard, national director of tax at PKF, said: “The way this announcement is worded, stating that HMRC "will withdraw or prevent payment" of the incentive, suggests that payments already made will be clawed back.

“In the pre-Budget report the Treasury announced that it would continue to look for ways to attack ’tax-motivated incorporation’ by small businesses but few expected such a retrospective and petty attack on small companies who are simply using the tax law to their advantage. If the Government does not like the tax laws that govern small companies then it should change them – not make petty attacks that move the goalposts after the match has started.

Few small business trust HMRC as it is: this sort of announcement is hardly likely to encourage them to cooperate with HMRC in the future.”

Alongside the PBR, the goverment unveiled draft laws to prevent what HMRC has deemed as the avoidance of tax and NIC by users of managed service companies.

The Recruitment and Employment Confederation has called for affected users and providers of MSCs to have more time to understand the new rules - if the government is serious about encouraging tax compliance.

Marcia Roberts, its chief executive, said: "We agree with the Treasury’s aims to tackle abuse within the MSC system. The REC is equally concerned about instances where workers have been transferred to MSCs with little choice and where MSCs do not calculate tax liability correctly.”

“However this is only half of the picture. MSCs take away the administrative burden from those who want to work as self-employed. The Treasury has not addressed in any detail what impact the changes to the taxation system will have on our flexible and successful labour market.”

“One of our prime concerns is the speed at which this new legislation is being brought in. Recruitment agencies cannot begin to plan for the new regime until the detail of these proposals is worked out. It is simply not acceptable to introduce changes to the taxation of a quarter of a million contractors overnight."


5th February 2007

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