Eastern europe is switching to flat rate taxes, with considerable success.

http://news.bbc.co.uk/2/hi/business/4155907.stm

They are easier to calculate, less risky to individuals (who can never be sure what HMRC will try to hit them for, so always have to keep excessive reserves), cheaper to collect, more liked, and avoided less as a result.

And of course they're lower since they apply to everyone. Poor people gain from social payments, rather than tax refunds.

Since UK is going to increasingly compete with these countries, perhaps a simpler tax system is the way to go. All this rule means, is that small business will have to keep extra cash in reserve against the risk that they'll be judged to come under this complicated rule. They'll increase the margin of savings they need to put aside to protect their businesses from HMRC attack. But that money could be spent better on their businesses.

It's not just freelance contractors that will be hit by this legislation.

All family businesses from sweetie shops through to widget maufacturers - anyone that seeks to minimise their tax burden by working within the existing tax laws - will be impacted by this ill considered and vindictive legislation.

The sooner more people wake up to this threat the better chance we have of reminding the Government that tax avoidance is not tax evasion and that they should stop treating hard working families like criminals.

thats only PFY's there ?

<-- Icon of blood-sucking Labour MP

The problem with fighting HMRC is that if they are proved wrong by their own rules, they just (quite literally) change the rules! This is no joke - it has happened time and time again.

It's an impossible situation, and other than driving more and more small businesses into the ground, and screwing them for a small amount of extra revenue until they finally throw in the towel, serves no purpose.

As an IT contractor myself, and someone who has run other small businesses, have no idea what the answer is other than give up and leave the country. This government has a single-minded mission to destroy any free enterprise that this country used to be quite famous for. Maybe they'll be happy when we're all working in the salt mines for a bowl of gruel a week.

Re: "You need to be in the club - poor people or those who work for a living are not eligible for membership."

Clearly you have NO IDEA what you are talking about! Maybe if you injected a bit of self-motivation and attempted to better yourself and actually try and make a difference by taking some risks and putting some (mostly unpaid and difficult) work in, you would understand how unfair this all is. Then again, you can just sit on the sofa, switch the telly on and complain that someone is better off than you, instead :-)

Re: "If this becomes law, will it apply to income "split" during this financial year?"

Well, that's the problem isn't it? All literally depends what HMRC decide to make up on the spot!

Why has IT kicked this all up?

For decades every small shop owner, every small accountancy firm, every one man band solicitor was doing this, it starts up in IT and suddenly requires government intervention.

I don't get it.

Really are bad losers

All the way to the House of Lards....and lose

Yah boo sucks to you we'll just change the rules then.

now I know where all the sulky kids in the primary school playground went to work.

kilted

Splitters!

My guess is that they see more money coming from IT than small shopkeepers.

Protection rackets have a long standing history of adding new clauses and increased charges for their victims -- I don't see why the government's version should be any different.

Well actually a fair amount of you are. I know I was when I did it.

Charging £70 quid an hour and being paid a little over the minimum wage ?

Making this up ? Phone an accountant or visit an umbrella company website - the first and biggest claim will be about 'minimising your tax exposure' or some such weasel words.

And you wonder why offshoring is so popular.

(too f'ing right I'm posting anonymously - I don't need to see a whiny row of developers tomorrow)

While it probably will eventually whimper away like other proposals, it's stuff like this that helps give the proposed "Fair Tax" in the U.S. some traction.

Effectively it's a 30% sales tax on just about everything from bread to bonds. The supporters figure it will drop retail prices about 22% (from tax savings on income & payroll taxes by the corporations), so a net increase in prices paid of about 8%. In exchange, no income taxes, no withholding from your paycheck, etc.

To satisfy concerns over regressive taxes there would be a monthly "prebate" check from the U.S. Treasury that's calculated to be what a household at the poverty level will pay in a month in sales tax -- so effectively they're in the 0% tax bracket.

From hundreds of millions you get down to just a few million companies and individuals who are responsible to collect and forward the taxes.

Ok, so that's just the realy 30,000' view and I'm sure some of my details are off, but you get the idea. Consumption is easier to tax and more difficult to scheme around then taxing income.

I think you are the one who has no idea. It's all very well accusing us hammered tax payers and telling us to try and 'better' ourselves, but as soon as we try to, HMRC and the government in general F**KS us up the AR*E until we go back to paye and watch people who can afford devious accountants get richer and richer while we get poorer and poorer.

I work a solid week, get paid a decent amount, and watch most of it get taken away in tax. Holidays are a no-no - I need to pay the mortage with my money, and spiralling petrol costs (caused by tax) just mean I can hardly afford to get to work. And Why Oh Why on earth should I have to put in a load of extra unpaid hours when I have a family? And why would I take risks when I have all that to protect?

Rich, Go back to the single and presumably childless rock under which you live, and keep on ignoring the real world.

Well, the problem is that people ARE using this to avoid taxes. When the wife is getting half your salary, what's it for? Sex? Food & lodgings?

Even if you're an SME, if your wife is the secretary, why are you paying her the same salary as the boss, if it's not a tax dodge? You'd not advertise that job at that salary for anyone else, would you (else I'll brush up on my typing, I used to get 90wpm, down at less than 60wpm now...)? So it must be so you pay less tax.

HMRC *are* complete and utter arseholse who, if you DO manage to get your way (which is only possible if you're wealthy) will change the law toot sweet. Then again, tax avoidance is damn selfish. If it were cheaper to get because people weren't dodging it, the rate would come down, though more expensive for the ones actually able to dodge.

As another poster said, flat tax, unavoidable and simple to calculate. No rebates and just have a reasonable minimum wage that is tax free.

And if you're not paying tax here, you get no protection here. So if your patent profits go to Ireland, you get no tax protection in the UK. If you're a foreign resident, staying abroad 7 months to avoid taxes, you look after your own property (no police protection, hire a guard).

Someone from HMRC has probably been reading the Reg and seen all the things people have been saying about their incompetence with the missing CDs so decided to get their own back

Ok, for the non-contractors and non-business people out there that seem to like bashing us scummy blood-sucking leaches (contractors), a couple of home truths...

* We all pay tax. I pay a lot of tax, and I don't know any contractors that don't pay a lot of tax. The only way you can NOT pay a lot of tax is to (a) fiddle the books or (b) not earn much. Stories of paying 20 quid a year in tax are simply fanciful. As for stories of paying "1/4 or 1/6", well, 1/4 or 1/6 of what? If it's a 1/4 or 1/6 of gross income then that's still a lot of tax!

* Most permies have no idea how much work their employers have to do just to employ them. They are unpaid tax collectors (they have no choice), they have to keep you safe and warm, they usually feel obliged to sort out a pension for you, they have to supply you with a canteen if they employ enough of you, they have to pay other people lots of money just to keep the business infrastructure running. And that's BEFORE they actually do any real work that might make some profit! A small business has a smaller list of liabilities, but not by much.

* This is NOT just about IT contractors. I used to run (until very recently) a small retail business (nothing to do with IT). I worked on that business for 2 hard years before it could even open! I worked several hours almost every day on getting it up and running, in-between holding down my (IT) day job! I didn't get paid for it. Nobody gave me a bonus or even a slap on the back. I'm not complaining because I didn't expect one. The point is that running a small business is not the piece of piss that many people seem to think it is. These are, of course, usually the same people that moan and complain but don't actually DO anything.

...and why do some permie people moan their arses off about contract staff earning more than them and doing half the work, and getting free go-go girls at lunchtime, etc etc etc? It's a tired old answer, but why don't YOU try it then? If it is SO easy. If it is SO unfair then why don't YOU do it? Answers usually range from "ah, well, errr...." to "that's not the point!". The more honest will say something like "well, I don't fancy the insecurity" or "I don;t fancy working away from home". Well, that's the point isn't it? It's not all roses :-)

"Take this scenario for example, you have a married couple working alone as joint directors of the company. Both genuinely put 40hrs a week work in with one being the main fee-earner and the other being the behind-the-scenes person doing everything from accounts to phone answering and everything else that keeps a small company running"

There are lots of businesses like this - plumbers, vets etc - where there is a signficant input from both parties, and it would be hard on them if their respective contributions were not recognised. And if there was no partner the person concerned would have to employ someone as a receptionist/admin/bookkeeper for a significant number of hours for the business to operate.

But there are plenty more where one (usually he) is working on a contract basis for weeks or months at a time and the input from the other party is minimal. Their income splitting may be legal, but it puts two fingers up to the revenue, people like the ones you cited and those on PAYE who (school headteachers for example) probably get just the same input from their spouses, but unpaid.I suspect that on this subject those who make the most noise will be those least deserving of sympathy.

With self assessment, more people working outside PAYE and large numbers of independent financial advisers, it's just that anyone with a modicum of sense has started to consider what they could legitimately do to reduce their tax bill and with a larger pool of people around, good tax knowledge is no longer the preserve of advisers to the super rich.

What will happen is that this will probably lead to people making more complex arrangements such as multiple companies and cross-charging to step around the rules making the tax even more complex to collect.

And it's going to get worse with the internet helping to make cross-border working and service delivery extremely easy, for anyone remotely alert to the possibilities monies and services can be routed through different countries. They're pushing people to look even more carefully at the alternative possibilities which won't make life easier for them.

I'm sure this will spur many to look at offshore tax havens and arrange their affairs away from this government, for those that don't I expect they will put up fees and cause inflation to rise, BoE rates to stay high to counter the inflation and it will help kill off the UK housing market, perhaps helping turn a recession into a depression, well done Mr Brown!

I think, perhaps, your jealousy is clouding the issue for you. I suggest you remove the chip from your shoulder and check the comments regarding sweet shops and couples in business together.

There's an old phrase that I think applies to (or, applied to) you -- "If you can't beat 'em -- join em.". Or, to be rather less confrontational, have you ever wondered why you choose _not_ to contract?

Some people on here clearly don't understand that contractors don't save a fortune in doing things like this and they are NOT breaking any law. HMRC have continually moved the goal posts over the years to screw every penny they can out of the 'self employed'.

IT contractors (and other 'contractors' for that matter) are in the uneviable position of being forced to run a limited company rather than be a sole trader, be a director etc but are not allowed any perks of having a company according to HMRC (paying dividends and the like). If and when they become unemployed they are not entitled to benefits as they were not employed but self-employed, clearly contradictory as their company has employed them and paid PAYE etc.

It seems HMRC wants their cake and to eat it.

In many other trades you can be just that self employed and many as we know take cash in hand for jobs and pay no tax (a perk?).

Its well known If you are very rich you can avoid tax all together.

As for not paying any real tax, you must be joking, the only actual saving from paying dividends instead of taking salary is the 10% National insurance all the other taxes still apply. And if you take the piss too much with a small salary you run the chance of being investigated and they can go back six years.

Splitting the income with a partner is what every small business has done for eons without any proof of who contributes what. Again IT contractors are for some reason singled out by HMRC.

Permanent staff also forget that contractors often have big expenses to cover, such as commuting hundreds of miles each weekend, lodgings not to mention secondary fuel bills, council tax, tv licences etc etc. Living away from home is no bundle of fun either so just think what sort of life it is before critising too much. The lucky ones (mainly round London) just do a regular comute and get paid the same as a contractor coming from the other end of the country. I know, I've done it and tried to get my expenses covered but never managed it, so you end up earning a lot less in reality.

As I always used to say to such people if you think its such a bed of roses then give up your permanent job and go contracting. After all, its easy, you get paid many times more, do bugger all for it, pay no tax and have a flash car. Funny how very few ever did when faced with the choice.

There are good contractors and bad ones, I've seen both, and the same applies to permanent staff too.

"I'm fed up seeing friends who are contracting wriggling out of paying their fair dues in tax."

Do something about it then!

"Many of my contracting mates have more security than the permanent staff they work with e.g. minimum contract notices of 2 months or more, compared to 1 month or less for the permies."

I've Never seen a contracting contract with more than a months notice clause on the part of the employer/agency, and a contractor normally has no get out clause/notice period. They also get no redundancy pay or any other such benefits.

"Contractors often work in the same offices, for less hours as the permies."

Usually because they are contractually only allowed to work set hours. Over time is not paid or had to be signed off and permanent staff are given priority. Not a lot of point working for free as there is no possible future gain for it (promotion etc).

"Many of the ones I know use receipting / expense ruses to claim back the cost of mileage, car leasing, plane ("business") trips with spouses etc. I'm fed up of my mates asking to keep the receipt when we eat out so they can claim it back as a 'cost' despite the meal having sod all to do with their day job."

Mileage and leasing are not illegal as long as the normal benefit in kind is paid just as if it where a permanent employee with a company car. If they are making false mileage claims on a personal car or flights that are not relevant that is just fraud. The same on the meals in most cases it is fraud and should be treated as such.

"Why should contractors who often earn 2-3 times as much as the permanent peers per hour pay 1/4 -1/6 in tax?"

If they are then they must clearly be breaking the rules. Have you any actual figures to back this up as in 10 years of being a contractor I never managed anything like this but then I was honest and reasonable.

"They never seem to get caught out by HMRC, and having seen my own tax rise year on year I don't see why I should pay more towards their healthcare, the education of their kids and the social care of their elderly parents than they do at the expense of being able to provide for my own family."

Bloody simple, stop moaning and grass them up if it really pisses you off. Just like benefit fraud, fraud is fraud and they are breaking the law. If you are so sure of your facts and so annoyed by it do something about it.

If you must know as a contractor I was pissed off when other contractors did this and I played it straight and paid all the taxes, what pissed me off even more was when they then complained when they got caught. Even after fines they were better off than me.

If you want to know who is really ripping the country off, check out mps, last time I looked they got double the mileage allowance of any other person in the UK for 'business' miles and are allowed £20k in living away expenses (£0 for contractors).

The Moron that attacked Artic is obviously talking out of his orifice. If HMRC had won they would have hit every husband and wife business for 6 years of back taxes.

The revenue lost because what they were trying to do was illegal and they wasted over half a million of taxpayers money trying to do it. Geoff & Diana saved family businesses billions, why did HMRobbinU choose an IT contractor not a more traditional business who do similar things, maybe they aren't as cuddly as Architects or Plumbers?

Obviously all the frustrated permies out there need to try the dark side, apparently all contractors drive porsches etc, they don't spend weeks / months out of contract or take 10 -> 20% pay cuts when times are tight. If its so rosy go for it.

I tried both sides, Permie taxes I pay for .75 nurses, my Employer pays for half a nurse. Contractor taxes my company paid for half a nurse and I paid .75 nurses, my client paid nothing in taxes or pension contributions, healthcare etc (My Company covered those out of the hourly rate).

Permie I get up to two months training a year. Contractor I paid for a few weeks training and didn't earn while on them.

Permie I get 5 weeks holiday and its highly likely my salary will still be there when I get back. Contractor holidays were rare and taken between contracts, normally I had no contract to go to when I got back.

Permie I'm pretty sure I will get paid every month. Contractor I lived in fear of the contract ending early (which happened when the clients contractor decided to can the whole project and the 24 contractors involved), so I paid myself a low wage and built up 12 months of mortgage payments in the company. My wife who did the accounts, dealt with the agents etc while I was out earning shared some of the pot at the year end, she also lived on baked beans while I was out of contract and took the risk of being a bankrupt.

Anyone claiming expenses fraudulently, permie or contractor is comitting fraud. Try ringing the fraud hotline!

This change will affect every "mom and pop" businesses in the country, including newsagents, market stall traders, gardeners, builders, plumbers etc.

Under the current legislation they both "own" the business equally. So they both take the same (low) basic salary, pay all their bills, then take whatever is left over as equal dividends. When times are hard, they take no dividends and exist on basic salary alone.

HMRC is trying to say that the person going out and earning the money must be paid more than the person who does the admin.

So if you're a mom+pop plumber company with the man doing the plumbing work and his wife fielding the calls from the customers and doing the admin, the new rules say the man should be paid a lot more basic salary than the wife, and by extension pay a hefty chunk more tax.

The problem here is that both mom and pop own the business equally and both sit on the board of directors. Therefore it's reasonable they'd agree to pay themselves the same basic salary and take what's left over as dividends. After all, a company is free to pay their employees whatever they like for whatever work they do (so long as it's above the minimum wage). That's what capitalism is all about.

I believe HMRC's intention is to catch those companies where one person does all the work and all the admin, but signs on his/her partner as an equal owner of the business to dodge some tax. The problem then becomes this: How do you tell the difference between this case and the previous one?

There is a growing tendency - assiduously encouraged by this government - to blur the distinction between tax avoidance and tax evasion. Tax evasion means breaking the law, whereas tax avoidance means carefully planning your business to minimize tax without breaking the law. As Lord Clyde, Lord Justice General at the time, famously put it in 1929:

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow - and quite rightly - to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue".

All the talk about unfairness and cynicism misses this simple point. If a government wishes to make certain behaviour illegal, it can do so by passing suitable laws. But it should not then complain when citizens scrupulously obey the laws, with results other than those envisaged by the government. That simply shows that the government is unimaginative, or bad at drafting laws, or both.

To say - as Gordon Brown and HMRC have done - that citizens should comply with the government's intentions, rather than the letter of the law, is to revert all the way back to the Tudors and Stuarts, when the King's will was law and Parliament merely rubber-stamped it. A lot of people died to overthrow that arbitrary kind of power, and to bring about the rule of law under which all must be treated equally. We should not allow New Labour, or anyone else, to set our constitution back 500 years.