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Tax enquiry: "Why is ltd co director not an employee of end client?"

Strange tax enquiry question. The client is a typical contractor/consultant -not IT, but does get work via an agency usually on 6 month contracts. The first enquiry letter asked for a breakdown of sales invoices, which for the year in question were all for the same contract (6 months in middle of year with no work before and after that year). I answered and expected a reply asking why IR35 hasn't been applied etc - i.e. the usual stuff re IR35.

But, no, the inspector has asked "why he is not considered an employee of that company" meaning the end client. This has thrown me. He can't be an employee of the end client because the work is being done via two intermediaries, the agency and his own limited company. I don't know if the inspector is trying to be clever/devious or whether it's simply a new inspector who doesn't really know about limited companies. Should I respond with the full arguments about employment versus self employment (i.e. IR35 etc), or should I respond to say that he can't be an employee because of the two intermediaries?

Other questions asked by the inspector tend to suggest he is relatively new and experienced (i.e. referring to "proprietor" and "self employment" in a question about training costs which are only relevant to a sole trader, not a limited company director).

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02nd Mar 2012 10:34

He is asking about IR35

"why he is not considered an employee of that company" is the basic criterion for IR35 to apply.  The key word is considered - he is not asking if the contractor is actually an employee of the end client.

It is neither clever nor devious.  It is absolutely straight down the line.

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By BKD
02nd Mar 2012 11:38

Actually, Euan, I disagree

The strict test of IR35 is - if the individual had contracted directly with the end client (which he has not in this case) would he have been considered to be an employee or self-employed. Because that contractual arrangement does not exist, it is therefore not competent to ask the  direct question as put by the Inspector. After all, if the question - as it was asked - is answered in the affirmative, what is the outcome? If the answer to that question is that the individual is (as opposed to would have been) considered to be an employee of the end-client, then the end-client (and not any intermediary) becomes liable for PAYE/NI.

But perhaps we're splitting hairs, and the Inspector has simply been careless with his words.

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05th Mar 2012 11:44

I think it is about IR35

Sounds like he is inexperienced. I wldn't give a full reply, just respond to his question factually, maybe give some spiel about being taken on for a specific contract/piece of work as this was one of the criteria in a recent case.

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05th Mar 2012 11:46

Tax Enquiry

I have a few clients in a similar position to this, but are usually on much longer contracts.  My question has always been, if you are working for 1 company, 9-5 every day of the week, why are you not considered as am employee under basic principals ?

As an ex employee of the Inland Revenue (not HMRC) and a PAYE Auditor, I would always have asked that question.  HMRC have muddied the waters for themselves on this subject with IR35.

1 of my clients actually worked for a Govt Department as a contractor through her own Ltd company, but in reality, ran the whole department including meeting and being responsible to senior Govt people

Somehow, the recruitment industry and large employers have been allowed to ignore the basic principles, and then HMRC runs around trying to collect the tax from the little guy at the end of the chain.

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05th Mar 2012 12:04

Contractor Issue

I might recommend that you contact Abbey Tax (or similar senior company e.g Accountax) who can provide you with detailed technical advice for a reasonable fee.

This is what I would do if I were in your situation.

Roy Price

AIMS Accountants for business

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05th Mar 2012 13:23

Because he isn't

You could respond by saying that "The client might well consider hiring employees, when they need someone on an ongoing basis to fulfil a new role. But for this piece of project work the client only needed the services for 6 months. He is supplying services for a fixed term, just like a builder might do, rather than being employed."

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05th Mar 2012 19:30

Straight bat

I'd play this one with a straight bat - the simple answer is that he has no contract with the end client.  There are any number of cases which would back that up: I would quote

 

Construction Industry Training Board v Labour Force

James v Greenwich

Montgomery v Johnson Underwood

Bunce v Postworth

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Undoubtedly he is asking about IR35 ....

and although I accept BKD's argument, I would conclude that it was indeed just clumsy. I think your answer needs to be comprehensive, considering all of the recent IR35 cases and relevant badges of trade. Depending on your client's past exposure, it may well be worth calling in the experts at this early stage. Your task is to convince the inspector in one letter that this case is either (a) Not worth it or (b) The tax payer is suitably well prepared / represented that he isn't going to get a quick win.

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06th Mar 2012 09:50

Pick up the phone

Just a thought.  But if you are not sure what he is getting at, a conversation might clarify whether the inspector is asking a stupid question because he does not understand companies, or a badly phrased question because he does!

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