The report by REC/KPMG is based on data provided by recruitment companies and is a strong indication of the UK labor market. The number of vacancies that arose and was reported by recruitment companies indicates the recovery of the labor market is now improving and growing steadily.

The Chief Executive of the Recruitment and Employment Confederation, Kevin Green said:

“The labor market is out of intensive care but it is still in a fragile state. While employers are hiring more now than at any other time in the last year, the recovery is tentative and must not be put at risk by taxes or regulatory changes.”

Changes in taxation or other legislation such as IR35 legislation could affect the growth of the jobs market significantly. Even though the placement of jobs, both permanent and temporary, has increased again this January, it was at a slower pace than in December 2009 – a stark reminder that the rate of recovery is not guaranteed.

As the private sector starts out on the long road to recovery the public sector are now facing job cuts. Alan Downey at accountancy firm KPMG said:

“These figures clearly show that the starting gun for a public sector recession has been fired. It is now only a matter of time before we are faced with the deepest and most prolonged cuts in public expenditure that anyone can remember.”

As the private sector is recovering it is advisable that contractors enlist the services of an umbrella company to make sure that they are earning the maximum they can within IR35 rules.

“It is only right that people pay their fair share of tax, which supports vital public services. We know that law abiding taxpayers will want to see the results of HMRC’s investigations into tax cheats. This new approach should make people think again about trying to get away with tax fraud.”

Mr Timms has made the assurance that only people who are deliberately avoiding the payment of tax will be targeted and anyone who has concerns regarding their tax affairs should contact HM Revenue & Customs immediately.

Anyone caught evading taxes will have to pay the tax that is due as well as paying interest on that tax. In addition to this there are penalties of up to 100 per cent of the tax lost which will have to be paid.

This legislation follows in the footsteps of other measures such as IR35 legislation, which was introduced to ensure everyone pays the correct amount of tax. This move by HMRC is another step to show that they are going to do everything they can to stop tax avoidance.

Any contractors working through an umbrella company are assured that they are having the correct amount of tax and national insurance deducted from their earnings as all umbrella company services are HMRC compliant.

Mark Prisk, the Shadow business minister, has said:

“The current government has treated the self-employed disgracefully. More often than not they have treated them as if they are on the fiddle, which is wholly unacceptable. We want to reform the system.”

Mr Prisk also stated that contractors had been treated unfairly by the current government over the last decade, with a misconception that contractors are trying to cheat the tax system which is untrue and unfair.

IR35 legislation is often unpopular as it requires contractors to prove their employment status to stay within the IR35 rules. The IR35 legislation was introduced in April 2000 in order to stop contractors avoiding tax and national insurance contributions through the use of intermediaries such as Personal Service Companies. Prior to the IR35 rules, an individual could set up a limited company and receive payment as dividends rather than a salary meaning he would not be subjected to the rules of Pay As You Earn. The introduction of IR35 legislation puts greater emphasis on an individual proving their employment status.

The head of public affairs, Simon McVicker from the Professional Contractors Group, commented that the PCG have been in talks with the Conservative Party concerning the reform of IR35. He also stated that contractors were not looking to evade taxes, just a system that is less complex and fairer.

Contractor Andrew Tilson undertook work for Alstom Transport through his limited company, working through an agency and charging the company on an hourly basis. Despite these facts, Tilson was declared to be an employee of Alstom Transport by the Employment Tribunal.

Mr Tilson was first employed by Alstom Transport in August 2004 and worked as a full time manager until November 2006 when his contract was finished with just one week’s notice. As the Employment Tribunal made the decision that Tilson was in fact an employee of the company, unfair dismissal could be claimed leaving it possible for other long term contractors to claim employment rights.

Following this decision, an appeal made by Alstom Transport was upheld by Judge McMullen of the Employment Appeal Tribunal after claiming that Judge Smail should not have been dismissive of the contracts. It also discovered that Alstom Transport was not given the opportunity to present further evidence proving the contracts were legitimate.

For any contractors within IR35 legislation it means that where they have similar roles and responsibilities to permanent employees of a company, they should ensure that their contracts are drawn up correctly making it very clear as to their employment status.

This case only emphasises the importance of a contract to ascertain whether a contractor is within IR35 rules or not. Such behaviour as working regular times and certain days which are set out by the client as well as having to apply for time off are indications that a contractor is in fact an employee.

Under IR35 legislation contractors who do not meet the definition of self employment will be liable to increased levels of tax and national insurance.

HM Revenue & Customs has no legal definition of employment but will base its decision on MOO, a mutuality of obligation. If an obligation exists between a company and a contractor to provide and accept employment, then this would be viewed as holding employee status by HMRC and would therefore come under IR35 legislation.

Any clause in your contract that includes details such as specific start and finish times each day on specified days in the week should be avoided as well as pre determined lunch breaks as this could be seen as an indication of employee status. Things such as this and the general working practices or contract will decide whether or not IR35 legislation applies.

Stuart Davis, chairman of the Service Providers Association, claimed earlier this month that the definition of a contractor needs to be made official. He also said that this would assist when defining contractors for the purpose of the IR35 rules, which is essential for a reform of current legislation.

As the election approaches, it has been claimed by Simon McVicker, Head of Public Affairs at the Professional Contractors Group that the Liberal Democrats and Conservative Party support a reform of the IR35 legislation.

Contractors are advised to seek legal advice before signing contracts if they are in any doubt of their employment status. Any contract should contain a clause regarding the Mutuality of Obligation in order to clarify such items.

A self-employed IT consultant, Robert Huitson, used an offshore scheme so he could divert income earned in the United Kingdom through a foreign account, thus taking advantage of the Double Taxation Treaty. This was practiced from 2001 by many and was legal until just two years ago.

Mr Huitson claimed that HMRC could not claim taxes due on the income that was earned up to the 2008 Finance Act becoming law, as at the time he had acted within the law. Mr Justice Kenneth Parker ruled in favour of HM Revenue & Customs, which means that other participants of schemes like this may also be taxed retrospectively.

Chris Bryce, the chairman of Professional Contractors Group has expressed concern that the ruling in favour of HMRC may affect others by

“opening the door to retrospection”

Whilst Mr Bryce and the other members of PCG do not encourage off shore tax arrangements they have strong opposition to

“taxpayers being retrospectively penalised for arranging their tax affairs in a way which was entirely legal and proper at the time they undertook to do so.”

The Intermediaries legislation was first introduced in April 2000, first proposed by the chancellor at the time Gordon Brown in the 1999 Budget to eliminate avoidance of tax and national insurance contributions, later to become known as IR35 legislation. This was introduced to stop tax and national insurance avoidance through intermediaries.

Contractors employing the services of umbrella companies will be able to relax knowing that they are paying the correct amount of tax and national insurance, staying within guidance from HMRC.

Contractors can be subjected to an IR35 investigation at any time to ensure they are compliant with HMRC regulations regarding IR35 legislation. This came into effect from April 2000 to enforce the payment of tax and national insurance for all contractors who were working as employees. If a limited company contractor becomes the subject of an investigation with HMRC, records for up to six years of earnings and expenses will be required to prove he has complied with IR35 rules.

HM Revenue & Customs say that all records of your business, earnings and expenses should be kept for a minimum of six years; this is not only to prove compliance with IR35 legislation but to also ensure you pay the correct tax amount.

HMRC stated:

“If you do not keep adequate records or you do not keep your records for the required period of time, you may have to pay a penalty.”

To avoid unnecessary sanctions being imposed on a limited company contractor because of inaccurate tax returns being filed, their financial affairs should be kept in order, with all the necessary documentation being kept as proof of compliance.

Contractors who work through umbrella companies will have the correct tax and national insurance deducted from their pay, ensuring they are compliant with the rules of HMRC. Any HMRC approved expenses that are incurred whilst fulfilling their employment duties will be allocated against their pay resulting in less tax being payable.

As the law does not precisely determine the definition of ‘employment’ or ’self employment’ HMRC advises that it is vital for contractors to seek legal advice for any contract before they sign it to ensure they do not fall within IR35 legislation.

The Daily Telegraph has reported that if the Tories win the 2010 election they may repeal the 1999 legislation. Mark Prisk, the shadow business minister was quoted as saying "The current government has treated the self-employed disgracefully. More often than not they have treated them as if they are on the fiddle, which is wholly unacceptable. We want to reform the system,"


The full article can be found here

The Telegraph has also reported that the Tories also intend to ‘unleash the forces of enterprise’ with a raft of new proposals for small business, including:

Reduce corporation tax from 28p to 25p to boost British business and "attract international headquarters to Britain". Cut the rate for small businesses to just 20p. He said taxes for small businesses would be "simplified" to "make it far easier to get a business started". "Abolish the tax on new jobs created in new businesses" by allowing a one-year break from paying National Insurance for the first 10 workers they employ. Free small businesses from the "burdens of red tape and complex taxation". Reform the tax regime for intellectual property to make Britain the "most attractive" of any major economy.

The full article can be found here

Tories also reportedly plan big changes to PAYE, where the HMRC would directly deduct tax from worker payments as they enter their bank accounts.

The full article can be found here

The workers employed by umbrella companies are not under-employed. They are full-time professionals who play an important role in keeping the country’s economy afloat. Neither are they temporary workers. They will often complete regular contracts for the same company; it was for this very reason that the much-maligned IR35 legislation was introduced.

What the TUC seems to fail to realise is that umbrella companies are effectively the employers of those working under them, and as such have to follow the same rules and regulations for employees as any conventional firm. The Agency Workers Directive, which aims to give agency workers the same rights as employees, has yet to come into force, and in any case does not cover IR35 legislation. Umbrella company employment is therefore popular with contractors, offering both job security and protection from IR35 rules.

This was brought home recently when Contractor UK, a resource for IT professionals, said that female umbrella contractors may be entitled to maternity pay, in the same way as those working for conventional employers. As an employee of the umbrella company, a woman would be entitled to SMP (statutory maternity pay) providing she ticked all the right boxes for entitlement.

This will come as a relief to those in more active jobs, such as fitness instructors. Freelance exercise teachers are one of the groups who fall foul of IR35 legislation, owing to the fact they usually have long-term contracts with the same health clubs, and often use centre equipment. Umbrella company employment is therefore ideal for them, offering protection from IR35 legislation as well as financial security should pregnancy cause them to temporarily stop work.

The shadow business minister, Mark Prisk, highlighted the faults in the current tax system, saying it was unfair on umbrella company contractors and other people working outside normal employment rules. He was particularly scathing about the IR35 rules, which were first introduced in 1999, and said he would reform the system if the Tories got into power.

In the Daily Telegraph recently, Mr Prisk was reported to have said the current taxation system was unable to cope with workers who fell outside traditional employment. In the event of winning the election, he said the Tories would change the tax rulings affecting small businesses and contractors working under umbrella companies – who he said had been treated particularly unfairly.

Mr Prisk commented that the government had singled out self-employed contractors for “special treatment,” more often than not treating them as if they were “on the fiddle,” a fact he found totally unacceptable. He wants a more transparent, fairer system for freelancers. His ideas have the full support of the Liberal Democrats.

In 1999, the HMRC was expecting to make an extra £220 million in National Insurance payments alone as a result of the IR35 rules. Yet a freedom of information request issued by the PCG (Professional Contractors Group) last year revealed that between 2002 and 2008, the IR35 made just £9.2 million for the treasury.

The PCG has always maintained that the IR35 rules are difficult to enforce and restrict flexibility in the labour market. They have now said they would support any plans the Tories have to reform IR35 legislation, and have looked at a number of options. One possibility is to allow umbrella company contractors to opt out of National Insurance contributions, which the PCG says would be a “big step” in the right direction.