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What next after IR35

Recent changes to IR35 meant that Contractors no longer have the right to determine their IR35 status when engaged by medium and large businesses. I would imagine that HMRC view this as quite a successful project although I am not sure those affected would agree.

But who might be next? False self-employment is likely to be high on the government agenda.

The corresponding rules affecting sole traders already exist. If a sole trader is engaged as a self-employed worker but HMRC takes the view the arrangement reflects employment, it will be the engage that HMRC will look to for the missing National Insurance and in particular the employers NI, currently 13.8%.  

So, engage someone under self-employed status when, in reality, the relationship is employment and the tax consequences on you could be severe.

The sheer size of the sole trader workforce represents a big opportunity for HMRC, which is under tremendous pressure to raise revenue for the Treasury following the pandemic. There were a million contractors for HMRC to potentially impact with the IR35 changes. There are 3.5 million self employed. This is a big pond for HMRC to go fishing.

So what’s likely to be coming? Employment status checks! The taxman doesn’t need to wait for the introduction of reform to ramp up its activity in this area. They already have everything that they need. 

Uber recently lost its case that its drivers were self employed. They have now been given certain employment rights as workers. This is a twilight status somewhere between employment and self-employment.

There have been other similar cases. These decisions will not have gone unnoticed by HMRC. Many in the gig economy could find themselves the subject of an employment status check as a result. HMRC will be watching closely, poised to investigate firms that facilitate false self-employment to avoid Employers’ NI and other employer obligations, like employment rights. 

So who will be in the firing line. Who will be first in the HMRC spotlight? It is likely to be larger operators who engage a large number of “self-employed” workers. A victory here will send shock waves through the self-employed community.

If you think you may be affected by this, you know where to find us.

First Jaffa Cakes, now Nakd Bars

VAT was introduced on 1 April 1973, All fools Day. When you see cases like this one, it seems very appropriate. The VAT confectionary or cake VAT debate centred this time on Nakd bars.

The starting point is that food is zero-rated for VAT purposes but there the simple logic ends. Some food such as chocolate bars or packets of crisps are standard rated. Cake on the other hand is generally food and zero rated. It is the dividing line between these that produces the funny decisions. Is a Jaffa cake food or confectionery? Is it a zero-rated cake or standard rated chocolate biscuit?

A gingerbread man with chocolate eyes is zero-rated but if he has chocolate covered trousers, he will be standard rated. What if the trousers and only part chocolate? Where is the dividing line?

A recent case revolved around Nakd Bars. The primary ingredients are dates, but with sugar content by weight ranging from 33% to 52% for different bars.

Morisons argued that the bars were intended to have health benefits, as confirmed by the packaging, and that the sweetness was linked to the ingredients, particularly the dates.

However, the tribunal decision was decisive, that all the Nakd Bars are confectionery, and they are held out for sale as cereal bars to be eaten as snacks.

So if you are quite a fan of Nakd Bars because you thought they were a healthy fruit and nut based alternative to confectionery, you may need to think again. Whatever you decide, you will now be charged VAT.

MTD – status update

The HMRC Making Tax Digital (MTD) juggernaut continues its way. No stopping it now. It will soon be extended to all VAT-registered traders. Then we move on to Income Tax and Corporation Tax.

The quarterly reporting requirement for MTD for Income Tax Self-Assessment will impose a major administrative burden on taxpayers.

From April 2022, MTD VAT will be extended to all VAT-registered traders. Around a quarter of such businesses have signed up to MTD VAT voluntarily, so approximately 750,000 businesses will be affected by the extension.

Around 100,000 businesses that should be complying with MTD VAT have yet to sign up. HMRC recently sent a further letter to these businesses. It has not yet charged the penalty of up to £400 for filing a return other than by using MTD software, but they may soon run out of patience.

HMRC intends to expand the pilot of MTD ITSA in April 2021. The signs are that this will be a very small pilot with a limited number of software providers. It may not be sufficient to test the system in what is the last opportunity to run a full reporting cycle before it becomes mandatory in 2023.

Full implementation is expected from April 2023.

One uncertainty is how taxpayers will report income other than from trading and property. We will find out in due course.

MTD CT proposals were subject to a consultation. The pilot is expected to start in 2024 and MTD CT will not be mandated until 2026 at the earliest.

MTD timeline – What can you expect?

1 April 2022

  • Extension of MTD VAT to all VAT-registered traders.
  • New late-submission and late-payment penalties for VAT apply to periods starting on or after this date.

6 April 2023

  • MTD ITSA applies to unincorporated businesses and landlords with total business or property income above £10,000 per year. New penalties for late submission and payment apply to accounting periods starting on or after this date for taxpayers in MTD ITSA.

6 April 2024

  • New late-submission and late-payment penalties apply to accounting periods starting on or after this date for all other income taxpayers within self-assessment.

1 April 2026

  • Earliest date that MTD CT may apply.

Questions?

If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at alan.long@thelongpartnership.co.uk.

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