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HMRC seeks ideas to fix IR35

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17th Aug 2015
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HMRC has embarked on a series of consultation sessions that could see changes to IR35 pushed through as soon as April next year. Francois Badenhorst talked to Seb Maley of Qdos Consulting about the possibilities.

Following up one of the Chancellor’s Summer Budget undertakings to review the effectiveness of IR35, HMRC has embarked on a sequence of consultation meetings to collect feedback and suggestions about its latest discussion paper on how to improve the personal services company taxation regime.

According to Maley, “It’s still very much in the stage where they’re pooling everyone’s responses. So if an accountant has strong views on the subject, I’d encourage them to contact HMRC with their ideas. They are literally asking for suggestions on what can be done with IR35.”

In Maley’s view the most likely outcome is a simplified employment status test. “Currently, IR35 is based on substitution, control, mutuality of obligation, as well as numerous other factors to discern whether someone is inside or outside IR35,” Maley told AccountingWEB.

More recent HMRC self-employment legislation centres on supervision, direction and control. “I’d be very surprised if IR35 doesn’t go the same way,” said Maley. “I think that’ll remove some of the grey area. It’ll mean there won’t be a dozen or so factors that people will have to consider if there’s an enquiry.”

As with most things IR35, however, significant confusion exists around the supervision, direction and control criteria. According to Maley, the Revenue will have to tidy up the confusion before any change can be made.

This will be difficult if continuing issues with HMRC’s IR35 customer service persist, he added. The main problem is the lack of impartiality as dwindling resources mean inspectors involved in tax compliance also work on the IR35 helpline.

Using HMRC’s contract review service is also risky for contractors. “It’s more dangerous to use it than not,” Maley said.

“What the Revenue always says is that they can’t give you an opinion on it unless you give them the details of who you are working for so they can go talk to them. And it’s been the case that when people use the contract review service, they could end up with an IR35 review on their plate.”

Another possibility would be to shift more of the risk to the engager of the services. “At the moment, IR35 liability lies solely with the contractor themselves,” explained Maley. “This suggestion means that the end user will have to be involved in the decision-making process at the outset. If the contractor was subsequently caught out by IR35, they would shoulder some of the responsibility as well.”

It’s not a new idea. The initial proposal for IR35 in 1999 included this provision before it was scuppered by backlash from businesses. In Maley’s opinion, making both the contractor and engager liable is the only way to make IR35 foolproof.

But it’s almost impossible to implement. “The question is how you would convince every end user to get involved with the compliance and decision making process,” said Maley. “The danger is that employers will say, ‘I’m not going to bother’ and could end up being very damaging to the flexible workforce.”

Replies (15)

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By nogammonsinanundoubledgame
17th Aug 2015 14:03

I don't understand the point of it all

Sorry, but given the change in the taxation of dividends from April 2016, isn't IR35 something of a non-issue? Why is anyone still wasting time on it?

With kind regards

Clint Westwood

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By kjevans
17th Aug 2015 14:59

The only way to make it "effective"

and fair, is to punish the deemed employers by making them pay the tax and NI they would have paid if they'd taken on an employee, instead of punishing the deemed employee. That should make the "employers" either treat freelancers like businesses or take on temps, if that's what they actually want. However, when defining "direction", HMRC could do with looking at how the world really works. Would anyone allow even a casual gardener to do whatever they liked? But HMRC defines direction as things like "having a course syllabus to work from" or having to produce a defined outcome (look at the example of the poor freelance drama teacher). Oh come on!

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By ireallyshouldknowthisbut
17th Aug 2015 16:57

.

I imagine it will blow over like the attempts each and every year to "do something" that ends with lots of shoulder being shrugged and it being put back on the "too hard" pile.

 A "shared risk" approach would be virtually impossible to implement in practical terms.  

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Jennifer Adams
By Jennifer Adams
18th Aug 2015 18:23

Please can I have your comments...

As they say 'great minds think alike' - on the same day as this article was published an 'IR35 type' article of mine was loaded. This one is specifically on the intermediaries consultation document Travel and subsistence rules see link:

https://www.accountingweb.co.uk/article/expenses-consultation-travel-and...

It goes into detail as to the proposals.

I will be submitting a response to the paper on behalf of Accweb to include any members comments so if there is anything you want to say please comment under either article and I'll include in the submission.

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By Gone Sailing
19th Aug 2015 09:01

Flexible Labour Market

The approach remains one of tax, and narrowing the gap of tax paid between an employee and a one-person ltd co.

This benefits on-one.

If the mind set was was turned to that of creating a flexible labour market where everyone was registered and on the radar, HMG would see that there would be a broader pool of itinerant specialists, taking greater personal financial risks, potentially higher rewards, properly registered and accounted, reducing employer costs (shorter term assignments), growing the economy.

Net tax revenue increase.

Why is this difficult for HMRC?

Knock some ideas around the existing 24 month rule.

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7om
By Tom 7000
19th Aug 2015 13:03

Dividend tax

 Yep 7.5%...

But next year....15%

 

and in 2020..... 25%

 

IR35 disappears.....How do you like them onions?

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By Vaughan Blake1
21st Aug 2015 09:54

Fundamentals

A Ltd company is not an employee, so why try and treat it as such?  Legislation that attempts to do this will always be too subjective to be workable. Companies have no employment rights, no sick pay, no maternity pay, no redundancy issues.  

The 'elephant in the room' has always been National Insurance.  The dividend tax goes a long way to redressing the balance.  A higher rate could be applied to close company dividends and you have basically sorted the problem with one line of additional legislation!

I agree with the comment about travel expenses, the 24 month rule is far too generous.  Six months, or say a maximum of 130 journeys to the same workplace in a tax year would be clear and simple.

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Replying to Wilson Philips:
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By kjevans
21st Aug 2015 13:09

Travel expenses

Why should a small Ltd co with a regular client who needs site visits not be able to claim travel expenses to that client's site? An employee of a big company or a local authority would be able to - there's a lot of difference between attending a site. workplace and working like an employee. Say Mr Freelance Trainer lands a good contract providing courses on site and course materials for Client A once a month for a year. On the other days he provides training in a number of other locations for other clients. Why should he not be able to claim travel expenses to Client A? What's so iniquitous about it? An employee of big training co would get expenses, no questions asked. It just seems to penalize small Ltds who get repeat business.

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Replying to lionofludesch:
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By Vaughan Blake1
21st Aug 2015 14:11

I don't disagree

kjevans wrote:

Why should a small Ltd co with a regular client who needs site visits not be able to claim travel expenses to that client's site?

I agree entirely, my point is though that if you visit that client more than 130 times a year it looks like a place of employment.  Once a month or ten times a month to the same customer would be fine under my system. 

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By kjevans
22nd Aug 2015 11:15

But when does the clock reset?

What if client A is so happy with the training that they keep asking Mr F Trainer to do more? For a year, for two years, for 5 years? Mr F T is still not working like an employee of Client A, but will eventually exceed 130 visits or 6 months.

Or what if Mr F T runs open courses at public venues? He gets a good deal from Chain Hotel Co and runs courses from two of their meeting rooms around 15 days a month, (the other 5 days or so he's delivering training on site to other clients); sometimes more, sometimes less. He's obviously running a business and booking venues, but your method would mean that he'd have to abandon his good booking deal and choose somewhere else after 130 courses - just because he's running a small Ltd co. Big Training Co wouldn't have to do that - they'd be able to pay their employees' expenses with no problem and would be given an unfair advantage.

It's just not that simple.

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By Vaughan Blake1
24th Aug 2015 09:38

Yes but...

I don't think that a Big Co employee would be treated differently in your example. Take a look at the 390 booklet and see the way it works. Under the current rules if anyone spends 180 days a year going to one location it looks rather like a place of employment to me, whether they work for Big Co or Little Co. In my example the rules would also apply to all employees, so I don't see the Big Co's advantage.

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Replying to lionofludesch:
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By kjevans
24th Aug 2015 12:44

Employees

I don't think so. Council employees, for example, can visit the same school multiple times a week for 20 years and still get travel expenses. You go into the office, you get your list of calls, you make them, you claim expenses from office to sites. I don't think many big companies would persuade their employees to travel if they weren't paid for it or got taxed on the payment. Even if Mr FT runs a course at a hotel, he still has to return to the office to do paper work, store equipment etc. He doesn't have a desk or anywhere to carry out his prep work, or print his manuals and certificates at a hotel - he just has to work a very long day.

 

of course, if he was a sole trader, he'd be fine, too.

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By Vaughan Blake1
24th Aug 2015 12:54

But the point is..

That the rules are the same whether you are employed by Big Co, Little Co or the council.

Checkout the examples in the 490 Booklet online (the 390 is the paper one!) and you will see what I mean.

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By kjevans
25th Aug 2015 19:43

Perhaps

But if you work for the Council (I used to) and a visit a site, you get expenses and don't pay tax on them. Same for big companies. HMRC would never even check. Plus spending a hour or two somewhere, even if you go often, doesn't make it temporary workplace under any sane system. Mt PA Tester tests equipment for many, many clients, he's not what anyone would call a "contractor" (nor is Mr F Trainer). He runs a testing business and one of his clients is a small cafe with a couple of rides for kids. Those have to tested daily. Mr Tester goes there once a day for about 20 minutes before his other calls - your system would catch him - even though he's not HMRC's target - and it's obviously not a workplace; it's a service call. It's never that simple and most arbitrary limits penalize micro businesses who get repeat clients.

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By Vaughan Blake1
26th Aug 2015 09:20

But


I am proposing to reduce the 24 month rule to 130 days in a tax year.  I am not  proposing to change any other rules about what constitutes a place of employment.

If Mr Tester has been doing this for more than 24 months (or his contract would make it at least 24 months)  he would not notice any difference under my system from his current situation.

Mr Tester is an interesting one.  His actual treatment would depend on how he spends the rest of his day.  If you look at the 490 booklet there are examples of the type of worker whose job it is to cover a defined area for such testing work, let's say South Warwickshire.  That makes his place of employment South Warwickshire.

The 490 booklet is one of HMRC's better guides with examples of the majority of working patterns that you are likely to meet.  It is well worth a read.  No doubt there will be someone, somewhere, with an unusual working pattern who will end up with an unfair answer.  Sadly, that's the nature of tax simplification.

Whether or not employers follow the current rules is another question for another day.

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