Anti avoidance on PAYE online incentives

The Government has taken action to prevent 'opportunists' taking advantage of the incentive payments for small businesses to file tax returns online.

Larger employers are required to file their returns for 2004/5 or 2005/6 online. From 2010 (for 2009/10 returns) all employers will be required to file their end of year returns online.

Incentives

The Government offered financial incentives for small employers to help them make the transition to the new way of working and a number of payments to encourage them to make the switch to online filing early.

• for online filing of their 2004/05 return (due May 2005) £250
  
• for online filing of their 2005/06 return (due May 2006) £250
  
• for online filing of their 2006/07 return (due May 2007) £150
  
• for online filing of their 2007/08 return (due May 2008) £100
  
• for online filing of their 2008/09 return (due May 2009) £75.

The Tax Faculty, a respected and authoritative taxation body, (and part of the Institute of Chartered Accountants in England and Wales) had warned of the possible dangers of incentive payments in the context of multiple payrolls and said that 'it was clear that this was likely to attract opportunists as well as genuine small employers'.

Anti-avoidance - 'opaque regulations'

The Inland Revenue has now published regulations (SI 2005/826) to introduce anti avoidance legislation to prevent small employers being established for an 'impermissible purpose' and gaining a tax advantage as a result.

The Tax Faculty said: "The Regulations themselves are extraordinarily opaque and do not make an easy read. Unfortunately, the Explanatory memorandum is not much clearer."

A small employer includes sole traders, partnerships, LLPs and companies. An 'impermissible purpose' is defined as being for the purpose of

• obtaining an advantage in relation to income tax, corporation tax or national insurance contributions;
  
• obtaining an incentive under these Regulations; or
  
• avoiding an obligation to file a return by means of electronic communications under any enactment relating to income tax, corporation tax or national insurance.

So if a large employer splits its payroll to delay the time when electronic filing will be necessary, they are caught. If an employer splits into two or more smaller entities specifically in order to obtain more than one £250 incentive payment, they will be caught.

Other tax incentives

The Tax Faculty said: "The way the Regulations have been drafted seems to indicate that small employers set up to gain other tax incentives might also be caught. For example, what of the large company seeking to claim research and development credits at 25 per cent? If it split its enterprise into two medium sized companies would these Regulations prevent it claiming research and development credits at 50 per cent instead? We think not. These are secondary Regulations and are brought in under

'the powers conferred upon them by section 143(1) of, and Schedule 38 to, the Finance Act 2000(a)'

"Schedule 38 relates specifically to regulations for providing incentives for electronic communications. This means that although 2005 SI No826 can indeed catch taxes other than the current PAYE application, it is only in respect of incentives for electronic communications."

Disregard

The Tax Faculty also took issue with what it saw as 'the increasing disregard by the Revenue of the 21 day notice period.'

Peter Arrowsmith, Chairman of the Tax Faculty's Employers' Issues Sub-Committee and an NI expert said: "These Regulations - like some NIC Regulations the same day - were laid with less than the required 21 days notice. It is interesting that the shortened period includes just over a week's holiday for MPs and an extended weekend for the rest of us and then there will be only a day or two of parliament before it is being predicted that the election will be called.