Health department apologises for IR35 deals

The Department of Health has apologised for misleading the opposition about paying senior figures via limited companies to help them avoid income tax. According to one insider, the 25 cases identified by The Guardian could be “the tip of the iceberg”.

The comment mirrors that of AccountingWEB member The Black Knight, who commented on the scandal that broke around Student Loans Corporation (SLC) head Ed Lester earlier this month that government departments were “some of the biggest drivers and users of personal service companies”.

The leaked internal documents reveal that senior staff employed by the department were paid salaries direct to limited companies, with the likely effect of reducing their tax bills.

The majority of companies provided to the department are registered as business and management consultancies, however in most cases the companies' names emerge to be little more than an adaption of the individual's surname, according to payroll information leaked to The Guardian. 

One Whitehall source said: "We cannot defend these arrangements, but it may be it is very common in Whitehall and this is just the tip of an iceberg."

In December shadow Cabinet Office minister Gareth Thomas asked health minister Simon Burns if any of his health department staff were paid via limited companies. In a written parliamentary answer, the minister said no payments were being made to civil servants in this way, adding: "It is not the department's policy to permit payments to civil servants by ways of limited companies."

In response to The Guardian's findings the department issued a statement on Wednesday 15 February clarifying its definition of “staff": “We can confirm that no civil servant who is an employee of the Department of Health is paid in this way. We are currently carrying out a full audit of such arrangements in line with the recently announced Treasury review of tax arrangements of public sector appointments.

“To this extent it was certainly not our intention to mislead anyone involved. We would be happy to clarify the situation in greater detail with anyone who asks and apologise for any misunderstanding involved."

The issue of whether or not the staff in question should be caught by IR35 will likely come into play, as AccountingWEB members have previously highlighted, centring on whether they declared they were caught by IR35 as “disguised employees".

Commenting on the SLC tax scandal at the start of the month Nicola Ross Martin revealed the arrangement was covered by extra statutory concession A37, and that HMRC appeared to have given Ed Lester the benefit of A37 twice.

Continued...

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frustratedwithhmrc's picture

Despicable - Yes, Surprising - No    2 thanks

frustratedwithhmrc | | Permalink

It is interesting the comment about "We cannot defend these arrangements ", however elsewhere we hear Jonathan Baume, general secretary of the First Division Association (effectively the union for senior civil servants) doing exactly that.

Mr Baume said "Because the market rate was so much greater than the salary that would have been offered in the civil service, various deals were being done, and some of these are now being exposed.

We need to be very transparent, and very clear that this cannot continue, but at the same time grasp a very difficult political nettle, which is to address the problem of pay at the senior levels of the Civil Service."

So this is an admission that they were unable to bring external people into the civil service as the salaries were deemed too low and therefore decided to ignore the rules covering these matters (PAYE regulations, IR35, etc.) and agreed to pay these high ranking civil servants as if they were external contractors (although they can in no way be so described) to minimize taxes.

Forgive me if I've misunderstood the circumstances, but if not, someone should be fired for abuse of power and these high ranking civil servants disguised as external contractors should be investigated by HMRC to ensure that they pay "the right amount of tax" - just like 'all the little people' have to do.

 

johnjenkins's picture

It just

johnjenkins | | Permalink

gets better and better. Still DH can't be blamed for this one can he?

IR35 case success rate

mikewhit | | Permalink

I know that HMRC's success rate in bringing IR35 cases has been very low, but I hardly expected the government to try to raise it by creating its own "disguised employees" !!

When does the first case begin ? I am sure that people with lives made miserable by IR35 investigations will be eagerly awaiting HMRC's prompt action in such well-defined situations.

johnjenkins's picture

A deal will be struck

johnjenkins | | Permalink

and that will be an end to it.

Will a deal really be struck, johnjenkins? Here's a copy of ...

dstickl | | Permalink

Will a deal really be struck, johnjenkins? Here's a copy of a letter that I wrote earlier:

15 February 2012

To: The Prime Minister The Rt Hon David Cameron MP

10 Downing Street, London, SW1A 2AA 

[via Recorded Delivery: AU 0043 5286 4GB]     and

 

To: The Chancellor of the Exchequer The Rt Hon George Osborne MP

11 Downing Street, London, SW1A 2AB    

[via Recorded Delivery: AU 0043 5287 8GB]

 

Gentlemen,

URGENT – Budget 2012 – IR35 modification proposal – REVISED VERSION

I refer to my letter to you of 08 February 2012 that has not yet been replied to:  I realise that you are both very busy men BUT today’s reports of 2.67 million unemployed with 7.87 million part time workers worries me, and I believe that IR35 needs to be URGENTLY modified to help some potential workers by increasing private sector jobs to offset public sector redundancies.

The thesis of this letter is again that one of the many “forces of British stagnation” of the FSB speech is IR35 as currently – I believe – set out in the Income Tax (Earnings and Pensions) Act 2003, Part 2, Chapter 8, ‘The deemed employment payment’ Section 54 etc [aka ITEPA 2003]; this letter suggests a moderate proposal for modifying IR35 in its implementing legislation [previously S.I 2000/727 section 7 (1) Step One etc] BUT which was consolidated in 2003 in ITEPA, by adding a few words to (a) make better economic for businesses’ costs (b) to restrict the focus of IR35 to blatant cases that could hence be then consistently enforced by HMRC, thus avoiding scandals  apparently due to ignorance of IR35 “at and from the top” like SLC.

NEW ABSTRACT: IR35 is such a "fiscal horror" that it seems to have been forgotten or ignored by some legislators, civil servants, etc, leading to a "Catch 22" situation that lower-paid workers are expected to sort out!   Isn't the best "legal aid" that Parliament can provide is to take lower-paid workers out of scope of IR35?

For example: In the recent SLC scandal of Mr E P Lester being paid gross (e.g. HMRC Tax Ref 2926942328 dated 14Oct'10 & "the remit of an Employer Support Team"), too many MPs and officials failed to ask: “did Lester declare he was caught by IR35 as a ‘disguised employee’?”  OR: "IF IR35 dues have been paid, THEN is there a story?"

PROPOSAL: A revised S.I should be introduced as part of the Budget March'12 that IR35 “should be modified so that IR35's implementing ITEPA Section 54 (1) Step 1 would in future “be revised to have a ‘cost allowance’ of the VAT registration threshold in cases where the worker has had a break of at least 366 calendar days since leaving a contract for service.”   These simple words could form part of the Chancellor's Budget speech!   [Please see detailed. wording change in "RECOMMENDATION" section below]

BACKGROUND:  (1) IR35 was "Originally trailed as a means of cracking down on Friday to Monday cases, where employers were sacking whole departments [on Friday], and then getting those staff to come back [on the following Monday] as independent consultants".  This potential tax and NIC avoidance abuse was and is a real threat to HMRC's work, and this writer believes that this IR35 rationale remains partially valid - subject to sensible restrictions being brought to the implementing Legislation in 2012.

(2) For the very high paid, for example Directors General of the BBC who would seem to have to be ITEPA 2003, Section 54 etc - provision of services through an intermediary - looks through intermediaries and tries to distinguish Employed and Self-employed. Its current "IR35 5% costs allowance" also seems to be of a sensible order of magnitude that could address potential tax and NIC avoidance abuse at a very high level of pay.  Ditto at Student Loans Company, etc.

(3) However, for the "Squeezed Middle" of aspiring small businesses, the IR35 regime seems tome to be highly problematical.  As the Tax Law Review Committee report "TAX AVOIDANCE" November 1997 states [in para 1.9 on page 2]  "Avoidance, and the risk of avoidance, are at their greatest where there is a failure to base the tax on sound economic principle, where the tax creates unsustainable boundaries or where there are arbitrary rule.  If governments wish to limit avoidance, they should avoid enacting legislation that positively invites it!".  In particular, the specific problem of the 2003 “consolidation” legislation is that "there is a failure to base the tax on sound economic principle, where the tax" fails to recognise the inevitable 'higher than 5%' inevitable running costs of small business, often recognise as the engine room of UK GDP economic growth.  It should be noted that the writer - despite many verbal enquires - has been unable to establish the exact basis of the current "5%" figure with particular reference to the smaller businesses; consequently, it would appear that the "5%" figure is an arbitrary one, with the concomitant difficulties as noted by the Tax Law Review Committee in 1997.  Hence an economic "simplification" of IR35 may, paradoxically, require the insertion of a few words!

(4) This ‘fiscal horror’ defect for the "Squeezed Middle" of aspiring small businesses also has societal consequences:  IR35 secondary legislation as currently drafted inevitably tends to criminalize some workers - especially low paid workers and lower paid workers - because of the "Catch 22" situation that they are unable to afford the legal etc costs of skilled advocates, to fight the not straightforward IR35 statute and case law.  The Student Loans Company man, Mr Ed Lester, of course may be able to afford the legal costs!

SECONDARY LEGISLATION:  (1) The IFS / Tax Law Review Committee report "Countering Tax Avoidance in the UK: Which Way Forward?" February 2009 states in part:

* On page 45, section 13.16:   Secondary legislation [? presumably Statutory Instruments (S.I.) etc?] is generally drafted by HMRC rather than Parliamentary Counsel, although Parliamentary Counsel do scrutinise it if it amends primary legislation.  Secondary legislation is viewed as suffering from the lack of parliamentary scrutiny afforded primary legislation.  This has been seen to be a real problem in practice.  The question arises: Was the “5%” allowance – and the rationale for its size – adequately reviewed by Parliament at the start?

* On page 19, section 7.6:  HMRC does not have the power to legislate: taxation can only be imposed by the legislature [Article 4 Bill of Rights 1689] and while HMRC may decide upon its own interpretation of the legislation, that interpretation is not binding on taxpayers to the extent confirmed by the courts.  The question now arises: Was the “5%” allowance – and the rationale for its size – adequately reviewed by Parliament at its consolidation into ITEPA 2003, three years later?

* On page 45, section 13.17:  If Parliament leaves the detail to be formulated by HMRC, this is widely regarded with suspicion as being subject to no parliamentary scrutiny on adoption (and potentially violating the principle that only Parliament shall impose tax) and as being open to possibly no effective challenge on appeal to the courts.  The question today arises: Isn’t the peril the economy is now in such as to prompt a NEW review of the “5%” allowance – and the rationale for its size –by Parliament?

(2) In view of (1) above, it would seem highly likely that S.I. 2000/727 section 7(1) Step One etc was drafted by HMRC in 2000, without scrutiny by Parliamentary Counsel.  This is highly problematical for Parliament, because Items (3) and (4) of the "BACKGROUND" discussion above suggests that HMRC may have drafted secondary legislation where  "there is a failure to base the tax on sound economic principle, where the tax" fails to recognise the inevitable 'higher than 5%' inevitable running costs of small business, especially in the current climate of austerity where any chance of economic growth should be encouraged - rather than suppressed by legislation.

CONCLUSIONS:

(1) It is now apparent that the economic implications of the words of S.I. 2000/727 section 7(1) Step One etc were not fully understood in 2000, when they were probably drafted by HMRC and were not reviewed in detail by Parliament in 2003, thus possibly transgressing Article 4 Bill of Rights 1689.

(2) In particular, the extraordinarily wide interpretation possible of the current IR35 words of ITEPA 2003, Part 2, Chapter 8, section 54 (1) Step 1 etc has meant that there seems to be a lack of focus by HMRC; this lack of focus seems to have resulted in a legislative lottery, as the SLC case in Central Government has shown. It should be noted that reports in Private Eye [e.g. in the "Rotten Boroughs" features ad nauseam] suggest that this legislative lottery is not necessarily restricted to Central Government, but may well occur in Local Government as well.  These alleged tax/NIC evasions seem to the writer to be due to an inevitable lack of focus by HMRC due to the widely drawn secondary legislation of HMRC, and HMRC's insufficient resources to properly police such a wide-ranging system.  Clearly HMRC needs legislative change to help HMRC focus & prioritise.

(3) The words of the “consolidating by bringing in S.I. 2000/727 not apparently discussed in HoC” ITEPA section 54 (1) Step 1, etc, need to be amended without any further delay, especially to minimise aggravation to small businesses to enable them to start up with some legislative certainty.

(4) In particular, to restrict cost allowances in a relevant easy to implement way in order to allow HMRC to focus their investigative resources, a costs allowances ceiling of the VAT registration threshold has been chosen for your kind consideration.

(5) Furthermore, to unambiguously avoid any possibility of any potential "Friday to Monday" type scenario, a minimum "cooling off" break period from an employment 'contract for service' of 366 calendar days - i.e. a year - has been chosen, also for your kind consideration.

 

RECOMMENDATION: Amend ITEPA 2003 Part 2, Chapter 8, Section 54 (1) Step 1 that reads: QUOTE 54 Calculation of deemed employment payment (1) The amount of the deemed employment payment for a tax year (“the year”) is the amount resulting from the following steps:   Step 1
 Find (applying section 55) the total amount of all payments and benefits received by the intermediary in the year in respect of the relevant engagements, and reduce that amount by 5%. 
ENDQUOTE by replacing the words "by 5%" with the following words: "by a monetary amount that is the greater of either (a) the VAT registration threshold for a worker who did not work for a period of at least three hundred and sixty six (366) calendar days after the date his or her previous contract for service if any ended or (b) five per cent (5%) for all other workers".

[NB: If necessary during the course of debate in HoC etc:  ADDITIONAL RECOMMENDATION: Also amend ITEPA 2003 to allow a downward change to (a) “VAT registration threshold” derived amount, via provision of devices such as “Alterations of amounts by Treasury order” [e.g. ITEPA’03 S 716] and/or “Orders and regulations made by Treasury or Board” [e.g. ITEPA’03 S 717].

 

I look forward to hearing from you!

Kind regards,

dstickl

 

PS: After my writing the above, a further possible IR35 scandal emerged when The Guardian wrote a story on “NPWs” [non-payroll workers] at the Department of Health:

(a) I have commented to the BBC R4 Today programme as follows:

QUESTION: What are you going to do to correct the - in my opinion - apparently misleading INCORRECT BELIEF said to EVAN DAVIS by Mr J. EVANS?, of FDA (First Division Association) of "Top" civil servants, broadcast on R4 at or after 8:15am on 16Feb'12, when I heard Mr EVANS? say "I'm sure it's legal" in connection with reports about pay (and hence taxes) in "The Guardian" about 25 Dept. of Health consultants/staff contracted through very small companies, similar to the notorious SLC (Student Loans Company) scandal, where it seems to me - in my opinion - that IR35 monies due under Income Tax (Employment and Pensions) Act 2003, Part 2, Chapter 8, Section 54 (1) Step 1 etc, were not reported or paid to HMRC!

Please note that HMRC have made statements minuted in the "IR35 Forum" that - unlike true Self Assessment - indicate when IR35 is a "high risk", it is necessary for HMRC to also contact so-called "End Clients" or "End Users" [of which I believe the general public including me may form a part], as well as "HMRC's customer", and accordingly, it seems to me that HMRC cannot ethically claim "Tax payer confidentiality rules"!

Surely, at the very least, HMRC should clarify without delay whether or not (1) each arrangement was caught by the IR35 net, and (2) all IR35 monies due have yet in fact paid to HMRC?  

Regarding "Tax confidentiality rules" please note that regarding the notorious Goldman scandal:

"Hartnett said the reprieve was worth “less than £10m” to Goldman Sachs, but declined to elaborate further citing tax confidentiality rules"

Translation - in my opinion - I'm going to hide my incompetence by claiming "confidentiality".

We all know how HMRC would react if we - HMRC's customers - declined to answer them on the basis of "confidentiality".   They would instantly imply that a refusal to answer indicated guilt - so why shouldn't we judge HMRC and/or Mr Hartnett by the same standards.  

ALSO:

Interestingly when Mr Hartnett was asked if any action was going to be taken against any Individuals who were culpable for the mistake, he pointed out that this was "not the HMRC way".

So how does he square that with the "fine them on any excuse" policy applied to taxpayers?

Maybe next time a penalty is issued for a client's return being late we should just write and say that the client has "learnt" so the penalty should be cancelled.

 

(b) Here is an extract from The Guardian “IR35 monies due to HMRC ‘cover up at and from the top’ story”, i.e. including the – in my opinion – “misconduct in public office”, corrupt and conspiratorial phrase of “because HMRC may use this to take forward IR35 cases with those NPWs”, for your easy reference:

Department of Health apologises over tax deals 'misunderstanding'

Exclusive: Andrew Lansley faces questions after leaked emails reveal at least 25 senior staff have salaries paid to companies

                                                Patrick Wintour, political editor

            guardian.co.uk, Wednesday 15 February 2012 21.52 GMT

<http://www.guardian.co.uk/politics/2012/feb/15/department-of-health-tax-...

Health secretary Andrew Lansley will be asked for a full explanation of the tax arrangements for senior Department of Health staff.

...

It continued: "The department [of Health?] would probably want to avoid anything that implies its NPWs [non-payroll workers] are disguised employees reputationally, to avoid unnecessary employers' national insurance and because HMRC may use this to take forward IR35 cases with those NPWs."

The emails also discuss whether it would be possible to reply that an answer cannot be provided due to disproportionate cost.

...    ENDS.

(c)  CONCLUSION on the above:

The “curse of IR35” is that it seems to currently criminalize society at and from the top. Surely its focus should be narrowed in the way I’ve suggested above, shouldn’t it?  So that everybody who works – and my goodness this IR35 saga does show how many ignorant passengers we have holding back UK GDP growth – is clear of their IR35 tax obligations, which should, after my recommended revision, be applied in a limited and a fair way BECAUSE the higher costs allowances (rather than just the current 5%) would make economic sense, at last!

Ever heard of the phrase "TL;DR" ?

mikewhit | | Permalink

@dstickl:

Methinks that Mr Cameron would benefit from receiving a half-page "executive summary" of your letter, with all the references as an appendix.

He might then be more likely to take your argument on board !

Look at the letters pages of the broadsheet newspapers - most often, a published letter is a simple point, simply made.

PS I did read (most) of it ...!

@ mikewhit: Good idea! Could U do 1 4 me please?

dstickl | | Permalink

@ mikewhit:

Good idea! Could you do one for me, please, as part of your submission(s) on Budget 2012? 

 

Please note that there is NO copyright claimed by me on my open letter dated 15 February 2012, so any AWEB reader can use it ...

 

I am so cross about the nonsense at and from the top on IR35, as you've probably guessed, that I'm unable to yet, and may therefore miss the Budget "drop dead" date/time.  My minimum MUST is to meet that deadline, anyway I can.  As a greater man than me wrote "Apologies for the long letter, I'm sorry but I don't have time to write a shorter one!"   Whilst I agree in KISS, I regret that NO: What does the phrase "TL;DR" mean in polite circles, please?

 

I look forward to hearing from you!

Red Leader's picture

Too Long; Didn't Read    1 thanks

Red Leader | | Permalink

=TL; DR.

Ever tried speed reading?

dstickl | | Permalink

Ever tried speed reading?

Err...

markfd | | Permalink

...does this not save the taxpayers (of the future) a bucketload of final salary pension payments?

frustratedwithhmrc's picture

The issue of pension payments is irrelevant    3 thanks

frustratedwithhmrc | | Permalink

markfd wrote:

...does this not save the taxpayers (of the future) a bucketload of final salary pension payments?

If a government department ignores the tax laws and regulations of this country (PAYE, NIC and IR35) then they should be prosecuted as any other business would be.

IR35    1 thanks

Ian Bee | | Permalink

This is referred to in the comments above. But my understanding is that it is the responsibility of the individual to address IR35 under self assessment, assuming that it applies in these cases.

If Government bodies want to pay limited companies rather than take people onto the payroll, that is unusual but not prima facie one of tax avoidance. It might save significant amounts for, say, pension contributions and redundancy.

Now that HMRC know that it is going on in Whitehall, they can easily find out the names of the individuals and confirm that they have correctly assessed under IR35, if indeed that is applicable.

For staff who are not directors of limited companies, ESC A37 cannot apply, and it is precisely these sort of arrangements where payment is made to those who are effectively employees, that IR35 exists in the first place.

frustratedwithhmrc's picture

Remember - We're all in this together    1 thanks

frustratedwithhmrc | | Permalink

Ian Bee wrote:

If Government bodies want to pay limited companies rather than take people onto the payroll, that is unusual but not prima facie one of tax avoidance. It might save significant amounts for, say, pension contributions and redundancy.

The operation of PAYE is not optional and neither government departments nor private companies may decide at their own discretion when not to operate it.

There are circumstances where someone may undertake an assignment at a government department or a private company on a "Contract for Services" basis, however these are matters of fact (albeit often disputed fact).

Although I could envisage someone being brought in as a contractor to run a government department or agency as an interim manager (while a permanent replacement is found), this can only be on a temporary or short term basis.

If the interim manager is considered sufficiently capable that he is appointed to the role of permanent manager then PAYE should be paid from that point onward and all previous payments through the company must cease.

Equally, even where these circumstances apply, there is a question as to whether IR35 should also apply.

If the contractor is part-and-parcel of the organization and works for no other organization on a comparable basis, I would suggest that IR35 would have to apply.

So back to my earlier point, time for these people to get on the departmental payroll or resign.

There is clearly either a failure to operate PAYE on behalf of the government department / agency or there is a potential failure to operate IR35.

Time for HMRC to jump in with hobnail boots on to make sure they ALL "Pay the Right Amount of Tax".

After all, "We're all in this together" - Aren't we?

 

Third option, surely ? Abide by IR35 deemed pay    2 thanks

mikewhit | | Permalink

@frustratedwithhmrc:

"So back to my earlier point, time for these people to get on the departmental payroll or resign."

There is of course a third option, namely, to operate the deemed income aspect of IR35 correctly.

No-one has said that it's illegal to work as a Limited Company worker - it's just that they must pay the correct amount of tax.

See here [www.hmrc.gov.uk/ir35/ir35.xlt] for HMRC's own payments calculator.

frustratedwithhmrc's picture

Someone actually operating IR35 correctly? Surely not!

frustratedwithhmrc | | Permalink

mikewhit wrote:

No-one has said that it's illegal to work as a Limited Company worker - it's just that they must pay the correct amount of tax.

Quite correct. It genuinely hadn't occurred to me that these Limited Company workers would be operating IR35 correctly. If so, then fair enough.

I would still prefer them to be on PAYE as that more accurately reflects the reality of the situation in the cases thus far described.

Still, if they are "Paying the Right Amount of Tax" then I suppose we must accept that.

And in breach of EU law?

hedleyg | | Permalink

Expanding the issues...

If the contract payments are sufficiently high, surely they should have put out on an open tender so all EU companies have a chance of securing the contracts.

And another thing...

francereeny | | Permalink

.. Taxpayer's hat on - the reasoning for this seems to be that it was a way to get around the Cost structures within the Depts. As a taxpayer, if we and the Govt impose restictions on pay I don't want the Depts in question to ignore that and just pretend that they're not employing people. Rules is rules. Or not.

IR35 is wrong

dominovision | | Permalink

When is a company not a company? when the tax man wants to screw you for everything he can get and says your not really a company. So you sacrifice job stability, holiday pay, sickness pay, no pension, incur insurance costs, accountancy fees, pay corporation tax, collect VAT. Thats when.

 It's anti-business (oh I cant take on some one short term - oh won't bother then) and stops entreprenueurs (what's the point trying to work freelance when you work until June for the government).

With a 50% tax rate, punitive taxes at all levels, to pay for a bloated public sector, no wonder this country is in a socialist mess. Legislation concieved by envious bureaucrats with no private sector practical experience. Personally am thinking of moving to Switzerland, or Singapore.

head count

graeme kempson | | Permalink

No they should be on the payroll if that is their function

The numbers of civil servants should be known and transparent. 

By taking them off it makes it look like the private sector % (to public workers) is increasing when it is transparently not......

 

Jon Stow's picture

Nothing to do with tax avoidance

Jon Stow | | Permalink

The Government policy in engaging workers as contractors through limited companies is to avoid their responsibilities as employers, such as notice requirements and pension obligations. That is why we have such double standards carried over from the previous administration.

Civil Service Ethics

spurs1952 | | Permalink

How low they have fallen.  What an example that this has set.  Hang your heads in shame.

pawncob's picture

IR35    1 thanks

pawncob | | Permalink

I can't wait to see "investigative reporting"  on this subject on the BBC. As most of the BBC reporters have established their own shell companies, will they have to declare an interest?

frustratedwithhmrc's picture

You have to be joking

frustratedwithhmrc | | Permalink

pawncob wrote:

I can't wait to see "investigative reporting"  on this subject on the BBC. As most of the BBC reporters have established their own shell companies, will they have to declare an interest?

The BBC might very well attack the politicians (especially the Tories), but they would never attack the Civil Servants. It is the Civil Servants that keep the BBC in the style to which it has become accustomed, via the Royal Charter.

If it wasn't for Civil Servants the BBC would have been privatized years ago.

Only in a large corporate or the civil service

The Black Knight | | Permalink

Could you have a problem designed and implemented so a different department (HMRC & the treasury) could identify a problem and come up with a fix (IR35) that didn't work. That created a lot of work for another department (HMRC's legal team and the courts) and still didn't work. That started a whole industry of tax avoision and offshore services and umbrellas. That led to even more tax lost and greater publicity to advertise these services.

All in all it looked as if they had created perpetual motion !.......... except

This had to be paid for ? Stick it on the national credit card and only talk about the growth above which will enable you to borrow even more. Supplement this with a 10% add on to GDP for missing trader fraud and you have on paper a vibrant and modern economy that has no need for manufacturing or anything real.

I am sorry but this sounds like a copy of of a banking Idea based on sub prime lending being re badged and sold again. A right Enron of an idea ?

And still they cannot see what they have done.

I will not mention the teeming and lading model with the tax cash flow techniques.

Just because you have your head in the sand and are being very quite and not twitching a muscle, does not mean the lion will not bite you in the behind.

True you will not see it coming and perhaps live happily up until that point.

This debacble has just    2 thanks

ThornyIssues | | Permalink

This debacble has just brought into focus the ridiculous tax and employment law mess that we operate in this country.

Firstly, there should be a "right to be self-employed" and choose to earn from that vehicle. One either signs a Contract of Service or a Contract for Services.

If one signs a Contract of Service, you are an employee under PAYE and your employer is solely responsible for operating your employment to meet current employment and tax laws.

If one signs a Contract for Services then one operates under whatever business entity one chooses (SE, LLP, LtdCo etc) and therefore become a supplier to a client (one or many, it should not matter).

That would completely remove the concept of a "disguised employee" and neuter HMRC's ability to "deem" employment for tax purposes and remove the employment and tax law ambiguity that is continually examined time and time again at IR35 tribunals. If there is a tax advantage then this is a job for the OTS - providing the true business reality is taken into account e.g. holiday pay, pensions, sickness etc, etc.

 

Change the IR35 Rules!    1 thanks

janefg | | Permalink

The best thing to do would be to change the IR35 rules so that, if a company/partnership falls foul of it, then the liability to pay the tax and NI should fall on the organisation for whom they are doing the work.  This would get around the main problem which is organisations trying to avoid employment taxes and obligations.

I have come across the case of someone (just having left university) being taken on by a firm only on the basis that they should have their own company.  The firm avoids all the problems above and the onus is on the young person to abide by the very complicated IR35 rules,run a company, with no training or knowledge in how to do it, pay the NI, and have none of the protection or benefits of being employed..  The young people are so desperate for work that they just do so and are being cynically exploited by "employers".

frustratedwithhmrc's picture

Blame the lobbyists and politicians for this idiocy    2 thanks

frustratedwithhmrc | | Permalink

janefg wrote:

The best thing to do would be to change the IR35 rules so that, if a company/partnership falls foul of it, then the liability to pay the tax and NI should fall on the organisation for whom they are doing the work.  This would get around the main problem which is organisations trying to avoid employment taxes and obligations.

This was how IR35 was originally designed, so that those with the deepest pockets (i.e. the company), ended up paying.

However, not surprisingly the very large companies that used contractors objected to this, so we have IR35 in the current unuseable and unworkable form that exists today.

If you want to blame anybody, blame the lobbyists and politicians for this idiocy.

Does everyone actually want to be self-employed?    2 thanks

Romanista | | Permalink

Many people do not want to be self-employed but are being forced to form limited companies to obtain work.  Many would no doubt prefer the security and additional protection that employment can bring. The government has helped to create this mess by milking employer NIC contributions.  It then compunded matters by squeezing all its sector's budgets and each sector has responded by employing 'self-employed'/ one man company workers to avoid employeer's NIC and so apparently reduce their overheads. 

Most of the latter apparently ignore the IR35 rules and HMRC does not seem too bothered.

The Office of Tax Simplification recommended a complete removal of the distinctions between employed and self-employed rules as they apply to expense deductions, tax and NIC together with recommendations for dealing with individuals who take remuneration from a company in the form of dividends.  This is sensible but the recommendations will fall on deaf ears as too many people obtain an advantage from the rules as they stand.

even better    1 thanks

The Black Knight | | Permalink

Saw an MOD employee being made redundant to be rehired via a limited company or an umbrella company, carrying out the same duties but on twice the salary (now £50K).

Could we help with ltd co, yes but could not match the tax savings of an umbrella company where according to the deal you could claim.

1. your travel to and from work

2. £10 for breakfast on site, £10 for lunch and £10 for tea.

3. A whole host of other expenses that would not otherwise be claimable.

So much so that only a little of the £50k was taxable anyway.

Made me feel pretty pointless, but I had to agree everyone was doing it, why not.

All mirco issues really. The    1 thanks

dominovision | | Permalink

All mirco issues really. The UK is fast becoming the place not to do business... there won't be any jobs for the university leavers (apart from the very brightest) regardless of whether they are engaged via a company or directly via a Payroll. Do you think the big companies will hang around when they can employ skilled people oustide of the EU (I know some have policies and targets to specifically to move jobs out of the UK). We need to make the UK as flexible as possible to attract talent and to enable small / large companies to engage people on whatever basis to suit their growth / operational requirements without the fear of HMRC trying to steal the fruits of their labour.

How Low has the Civil Service sunk?    1 thanks

taxbakbristol | | Permalink

Another raft of high paid big wigs trying not to pay the correct tax ! I hope that HMR&C throws their weight behind prosecuting ALL these unethical and immoral fraudsters in the same manner as they did with Artic Systems Lts et al.......dont hold your breath .As i said in an earlier post DH should look at his own organisation as from what a little bird told me hisOrganisation is rife with the same ticks as the other  bunch of criminals.....

pawncob's picture

$64,000

pawncob | | Permalink

Here's the big question.  How many HMRC "consultants" or ex HMRC employees use IR35 companies to shield their income?

£100 reward for the first half dozen to be named and shamed.

Temping

mikewhit | | Permalink

@The Black Knight:

"Could we help with ltd co, yes but could not match the tax savings of an umbrella company where according to the deal you could claim.

1. your travel to and from work

2. £10 for breakfast on site, £10 for lunch and £10 for tea.

3. A whole host of other expenses that would not otherwise be claimable."

Haven't they heard of the temporary workplace / 24 month rule ?

Consistency    1 thanks

mikewhit | | Permalink

@taxbakbristol:

"I hope that HMR&C throws their weight behind prosecuting ALL these unethical and immoral fraudsters in the same manner as they did with Artic Systems Lts"

Arctic Systems were not fraudsters, and the case was not an IR35 one. Neither are this bunch fraudsters - but the IR35 rules on deemed salary for disguised empoyees must be operated consistently.

To be kicked into the long grass......    1 thanks

yourobedientservant | | Permalink

Anyone for an independent judicial enquiry? What's Baron Hutton up to these days? - it'll all end up like the MP's exspenses debacle. How much tax, NIC, interest amd penalties was collected by HMRC due to incorrect WNE claims by these MPs? Now there's an interesting Freedom of Information question!

Perhaps HMRC should spend more time getting Governments house in order than berating sole traders with ridiculous bureaucracy such as record checks. Someone at HMRC (presumable someone oaying PAYE) should instigate a targeted review of ALL personal service contracts across all the public sector including the BBC. Let's start at all contracts over £150k? They would collect massive amounts of tax.

I did not mean Artic Systems    1 thanks

taxbakbristol | | Permalink

I did not mean Artic Systems were fraudsters ,,,I meant that I hope HMR&C make the same strenuous actions in prosecuting these Civil Service " Fraudsters" as they did with a legit company ie Artic Sysyems Ltd

I still contend that the Civil Service knew what they were doing and evaded tax and National insurance.In my book.... FRAUD!

DMGbus's picture

Avoidance not evasion

DMGbus | | Permalink

It has been a long standing and legitimate tax strategy to avoid National Insurance costs by the use of Ltd Companies (for the worker as well as the engager).

The engager (in this case the taxpayer) has as a result saved on NIC costs as well (I hope) on other employment related costs like termination pay-offs.

Not something new, I think, for a state run organisation to take the advantages to be had by this legitimate tax strategy.   [ In this context am I correct in thinking that the BBC at one stage had a DG engaged by a Ltd Co? ].

So, no evasion going on, and in isolation, the organisation choosing to use a Ltd Co under contract instead of an employee is to be congratulated for its commercial stance saving the organisation NIC and other employment related costs.

Attention should instead be turned to the Ltd Cos being used, who, as sure as night follows day, should be caught by IR35 rules?    I wonder if IR35 really is being applied by these Ltd Cos.  That's where the attention should be focussed. 

To hold an important office / title (head of an organisation for example) via a Ltd Co must fall into the category of " being part and parcel of the organisation" and fall foul of any "substitution" rules, hence my view that HMRC should be vigorously investigating the Ltd Co contractors used for IR35 (non) compliance - as opposed to the Government departments who clearly are not breaking any tax laws.

 

Cosy Deals

yourobedientservant | | Permalink

I agree wholeheartedly withDMGbus. I sincerely hope HMRC have not "blessed" some of these arrangements.

pawncob's picture

Silly Question

pawncob | | Permalink

Several of them were named in the Mail on Sunday.

frustratedwithhmrc's picture

HMRC were at it as well it would seem    1 thanks

frustratedwithhmrc | | Permalink

DMGbus wrote:

To hold an important office / title (head of an organisation for example) via a Ltd Co must fall into the category of " being part and parcel of the organisation" and fall foul of any "substitution" rules, hence my view that HMRC should be vigorously investigating the Ltd Co contractors used for IR35 (non) compliance - as opposed to the Government departments who clearly are not breaking any tax laws.

Since two of those accused were officers of HMRC (Deepak Singh and Jim Morrison) are HMRC going to investigate themselves? There is however some mitigation for HMRC, in both cases these were interim roles for relatively short periods of time, but it should be pointed out that the 3-month contract given to Mr. Singh was following his employment with HMRC on a PAYE basis, so seems to directly conflict with the Friday-to-Monday aspect of IR35.

Given the amount of grief that HMRC have given small companies over IR35, they need to think seriously about why such disguised employment would be allowed to take place within the very walls of HMRC itself.

@ Mike

The Black Knight | | Permalink

mikewhit wrote:

@The Black Knight:

"Could we help with ltd co, yes but could not match the tax savings of an umbrella company where according to the deal you could claim.

1. your travel to and from work

2. £10 for breakfast on site, £10 for lunch and £10 for tea.

3. A whole host of other expenses that would not otherwise be claimable."

Haven't they heard of the temporary workplace / 24 month rule ?

I don't know.

but it is traditional to apply this to temporary workplaces !

There was nothing temporary in my example.

It does seem that umbrella companies can claim whatever they like,( via an overarching employment contract?) even if it is on a process what we got attitude.

Latest one I have seen is private mobile phone all expensed via ltd co processing center.

Perhaps whether it is legal or not is no longer of any relevance. It is whether the practice is allowed by non enforcement.

 

employed or self employed

The Black Knight | | Permalink

I thought the civil service had rules about accepting advice from external contractors ? or subcontract work !

and I bet if they get the sack they will claim employment rights following Muscat v Cable and Wireless ?

Are HMRC now to run around in circles chasing tax that perhaps never existed ? As tax is to pay for public services  ? Is this not a loss making excercise to make work for the civil service.

It would not be so bad but all of this is a repeat of the same behaviour that has been replicated throughout western economies ?

 

frustratedwithhmrc's picture

With an umbrella it is all about the dispensations

frustratedwithhmrc | | Permalink

The Black Knight wrote:

It does seem that umbrella companies can claim whatever they like,( via an overarching employment contract?) even if it is on a process what we got attitude.

Latest one I have seen is private mobile phone all expensed via ltd co processing center.

Perhaps whether it is legal or not is no longer of any relevance. It is whether the practice is allowed by non enforcement.

From the Umbrella contracts I've seen thus far, these make a great deal of their 'dispensations signed off by HMRC' in their marketing material which allow the 'employee' to claim a large number of ancillary items as expenses.

If it weren't for these dispensations your average umbrella would have very little advantage to claim.

Equally, I would argue that much like the services provided with Premium Bank Accounts the actual value of these items is less than the claims made for them.

mmm

The Black Knight | | Permalink

frustratedwithhmrc wrote:

From the Umbrella contracts I've seen thus far, these make a great deal of their 'dispensations signed off by HMRC' in their marketing material which allow the 'employee' to claim a large number of ancillary items as expenses.

If it weren't for these dispensations your average umbrella would have very little advantage to claim.

Equally, I would argue that much like the services provided with Premium Bank Accounts the actual value of these items is less than the claims made for them.

and I thought dispensations had to be based on real and allowable expenses ?

Do these companies actually have an unfair advantage (special deals arranged with HMRC) or is it just misleading marketing ?

The other thing that occurred to me is that if you have a 1000 or more of these clients via ltd co's, you can self insure and pay the tax on the one that gets pulled ? or afford the argument in the courts which also works as a deterrent to HMRC perhaps ?

So thats okay then..

Roland St Clere... | | Permalink

These people, like so many otheers of their kind, think that they just have to apologise and every thing is okay.

I have some news for them. As far as I am concerned an apology is only acceptable if the behaviour that led to the apology is stopped and we the ordinary tax payers get our money back.

Fat chance !

 

Freedom to review    1 thanks

mikewhit | | Permalink

Are these peoples' contracts covered by FOI, since they are within the Govt. - someone should be able to get hold of them and submit to HMRC for an IR35 review.

HMG made WRONG decision for SLC, DoH, etc? Why? ...

dstickl | | Permalink

Roland St Clere-Smithe wrote:

As far as I am concerned an apology is only acceptable if the behaviour that led to the apology is stopped and we the ordinary tax payers get our money back.

Surely, HMG made WRONG decision for SLC, DoH, etc, in asserting that

(a) they were apparently putting the highly paid workers on highly paid salaries/public sector gold plated pensions, and

(b) NOT saying anything about chasing these same people for any outstanding "deemed payment" that may be due under IR35,

didn't they?  Surely this just boils down to: HMG lavishly spending public money to preserve the "Fiscal Horror" (CIOT's words) of IR35?

 

Why could this be?  

Could it be that the LibDems continue to be ignorant of IR35, just like Charles Kennedy was way back in 1999?

Or could it be that HMG - with the guidance of HMRC - prefer to spend public money (derived from tax and borrow) rather than get a real grip on IR35?

Surely this is the BIG conundrum that PAC - the House of Commons Select "Public Accounts" Committee - under the chair of Margaret Hodge MP should explore, isn't it?

Who's going to be next to contact PAC? I believe that their Secretary's e-mail address is: pubaccom@parliament.uk

johnjenkins's picture

I don't see a problem!

johnjenkins | | Permalink

The question was "are the staff paid via Ltd Co." answer no. We are being saved money by no ers nic. Surely that is a good thing.Government hypocrisy? Well do we expect anything else? Of course not. The problem might come if HMRC decides that they should have been on PAYE (forget IR35) then we will be saddled with a nice bill.

HMRC to tell us IF due IR35 unpaid "deemed payments" be paid?

dstickl | | Permalink

johnjenkins wrote:

The question was "are the staff paid via Ltd Co." answer no. We are being saved money by no ers nic. Surely that is a good thing.

Agreed, that's why Danny Alexander announced a WRONG decision.

However, some of the LibDems have form in not knowing - or perhaps not being correctly briefed on IR35 by their so-called "Civil" servants, or some of their othwr advisers, e.g. their then Leader Charles Kennedy in 1999, as illustrated on BBC website.

 

RE: Government hypocrisy? Well do we expect anything else? Of course not. The problem might come if HMRC decides that they should have been on PAYE (forget IR35) then we will be saddled with a nice bill:

I'd comment that:

(1) it seems very odd to me to apparently spend money raised by other taxes, to protect IR35 which apparently raises little taxation of itself. [HMRC's argument that to remove IR35 would cause other loopholes to emerge - e.g. the "Friday to Monday" abuses - means that IR35 has to be nibbled at, rather than being removed "at a stroke".] and

(2) HMRC - rather than deciding "that they should have been on PAYE" - should do the decent thing and formally announce that they will pursue ALL "the [HMG's] staff paid via Ltd Co." for any as yet unpaid "deemed payments" due under IR35, in order to reassure "end clients of public services" like myself that IR35 is being applied in a consistent manner at and from the top of HMG. As such, I do not believe that M Hodge (Chair of PAC) could justifyably any more nonsense of "taxpayer confidentiality" from D Hartnett and his HMRC workers.

johnjenkins's picture

IR35 doesn't exist in my mind.    1 thanks

johnjenkins | | Permalink

If you are able to prove that the worker should have been on PAYE then the payer is liable for tax and nic on the money that the worker has received. You can't make the worker pay their own tax and nic when HMRC have proved they should be on PAYE which is what IR35 is trying to do. Little wonder it's not getting anywhere. My view has always been it should be up to the worker whether they want to be SE, Ltd Co or PAYE.

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