Osborne 'to draw a line on freelance company tax-saving'

Leading advisors to freelancers both want and expect George Osborne to use his Budget to ‘draw a line in the sand’ on the thorny issue of being paid as a personal service company (PSC), rather than as an individual, particularly in the public sector.

Talking of the need for his statement next week to address PSC working, the advisors said the chancellor’s likely response would be to clarify the legitimacy of such tax-efficient business structures, notably where they are engaged by the state.

Attacked in the press for the preferential tax treatment their owners receive, the sub-text from the freelance trade sector is that Osborne will use the media’s splashes about high-profile PSC users as a platform to address PSCs, though not necessarily in his statement.

“From an IR35 perspective it is usual to ‘announce’ nothing much”, said employment status expert Kate Cottrell. “But this year there may be something in the [Budget’s supporting] documents about addressing the recent personal service company issue in the public sector.”

So rather than a general move in favour of or against all limited companies, she expects the mention in the government’s Big Red Book to be more “along the lines of putting its own house in order.”

Yet the outcry about personal service company working, which began with the revelations about Student Loans boss Ed Lester, has been so loud that any “clarification” from Mr Osborne should apply, even help, the private sector too, a freelance staff recruiter hopes.

In fact, alongside simplifying the tax regime for small businesses as the OTS has recommended, making clear that “personal service companies are legitimate business vehicles” tops the Budget wish-list of Outsource UK, according to its managing director Paul Jameson.

An accounting specialist for freelancers, Brookson, agreed that any acknowledgement of PSC working on March 21st would ideally be across the board, not sector-specific, partly due to the sheer scale of the 'witch-hunt' against them.

“We still see strong evidence that the key role of these workers remains unrecognised and unsupported by government. Much of the recent media coverage and political reaction to the ‘limited company working’ stories demonstrates this lack of understanding really starkly,” the firm said.

As a result, believes managing director Martin Hesketh, the chancellor should take corrective action and “recognise the genuine competitive advantage that self-employed workers bring to the UK economy.”

At its most, such an acknowledgement would include “specific measures,” to help the state in “providing an appropriate environment for them [freelancers and the self-employed] to flourish in”, he said.

At its least, one PSC user with 35 years’ freelance experience anticipated: “The best we can hope for [on March 21st] is a recognition that HMRC’s efforts at tackling tax evasion are directed at those who are only using limited companies to avoid taxation and leave us genuine businesses alone.

“[So] I am not expecting anything too momentous to come out of this Budget. It has to focus on growth; I just hope it recognises that us small, flexible one-man-bands are actually the engine for that growth.”

Outlining the basis for his low expectations, the contractor said the furore since the Ed Lester case has made the “total repeal of IR35 even less likely” than it was before.

Osborne, he reasoned, now has “too much ammunition” to evidence the Treasury’s claim that IR35 needs to be kept in place for its deterrent effect.

“IR35 still remains a controversial topic”, the Freelancer and Contractor Services Association confirmed in a statement to Freelance UK.

“[On Budget day] we hope to see some positive progress reported from the current IR35 Forum activity on how enforcement by HMRC will be more realistically targeted and efficiently carried out.”

The improvements that a new system for IR35 will bring to HMRC, which is due to assess contractors as a low, medium or high risk under the rule, could combine with the frenzy on limited company working to prove problematical for contractors.

“Something that I don’t want to see included in the budget,” said Rob Crossland, founder of Parasol, an umbrella company, “is a knee-jerk reaction to some of the recent media scaremongering relating to tax and tax avoidance.”

Also expressing concern, the FCSA warned: “We do expect an increase in HMRC activity around employment status in the new tax year and we would recommend to all self-employed professionals that they should engage with their professional advisors to ensure they can clearly demonstrate their self-employed status if challenged.”

Both the freelancer-centric issues at play – remuneration via PSCs and IR35, for which a new system goes live as a pilot on April 6th, could of course be addressed by the chancellor in one fell swoop.

Bauer & Cottrell, an IR35 advisory, reflected: “If there is something about the new IR35 administration [in Budget 2012] this would likely be tied to the PSC issue of late.Freelance contractors providing services in the public sector in particular should keep an eye out for any announcements.”

 

 

14th March 2012

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