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Simon Sweetman on IR35 and ethics

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24th Feb 2012
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So whatever happened to IR35? A question that we have had to ask at intervals ever since the enactment of that sorry piece of legislation, explains Simon Sweetman.

Stories are emerging suggesting widespread disregarding of IR35 by various public departments, both the Civil Service and local authorities, who have been paying very senior people by way of limited companies. There is even a suggestion that members of HMRC’s advisory board have been paid this way (though as the story came from the Mail on Sunday one would have to be cautious).  None of this can exactly be a surprise: I have seen many arrangements with public bodies which seemed to me at best borderline IR35 cases, and more often cases that clearly should have come under those rules. And those are at a much lower level, but enough to show that proper regard is not being paid to tax law.

It is true that the employed/self-employed borderline is a difficult one to draw, but that does not mean that it is impossible, or that there are not many cases which fall very clearly on one side or the other. Any senior government work is very likely to be an “office or employment”, even if temporary. If the office is in the management chain, rather than a genuine short term single issue appointment, then payment through a limited company is wrong in law.

It is of course true that the original IR35 proposals would have placed a responsibility on the “employer” and that heavy lobbying by the major accountancy firms changed this. Whether or not that was the intention at the time, this scattered the problem so widely among a myriad of small companies that it became - as we have seen - impossible for HMRC to police. That is a cause of gross unfairness because detection is simply a matter of luck, and many people who ought to be employees (according to the law) make the reasonable assumption that nobody will ever catch up with them.

In the private sector, one can make that judgement. But here, there is a corruption at the heart of government. The public sector should be looking at the public good, and not be conniving at tax avoidance, which is precisely what is going on here. The reason that this has happened is that successive governments have not valued the ethos of public service but have insisted that the public sector is simply a less efficient mirror of the private sector. And the people being paid through their companies are not career civil servants, and they have almost certainly arranged things the same way when they worked in the private sector.

But they do not: the public sector is something different and it has worked to a different code of conduct. When I was an Inspector of Taxes, I knew that if I made a mistake in the taxpayer’s favour it might not be rectified, but I also knew that if a taxpayer made a mistake in HMRC’s favour then it was my job to put that right.

The UK public sector has long been looked at as a model when it comes to the avoidance of corruption. That is not because we are an unduly virtuous people, but because the Victorians recognised the essential corruptibility of man and established rules and an ethos which would keep people on the straight and narrow. The attempt to reinvent the public sector as a sort of inferior private business is flawed in many ways, but especially because it completely fails to recognise what has been a highly successful model when it comes to probity.

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By dstickl
24th Feb 2012 13:29

IR35 taints the "Rule of Law" at & from the top of HMG allegedly

YES, I broadly agree with your article, Simon, particularly your statement of "that heavy lobbying by the major accountancy firms ... scattered the [IR35 responsibility] problem so widely among a myriad of small companies that it became - as we have seen - impossible for HMRC to police. That is a cause of gross unfairness because detection is simply a matter of luck," which was enlarged on elsewhere on AWB, for example:

https://www.accountingweb.co.uk/topic/tax/ir35-lottery-part-2-steve-gretton

 

What I find problematic is that I understand - rightly or wrongly - that you were on the OTS team that apparently did not recall the 1997 wise words of the Tax Law Review Committee on the need for taxation to make economic sense, because that need was not set out explicitly - as far as I could see - anywhere in the 2011 OTS report on IR35.

 

I also find it sad that you piece failed to recognise that some commentators (like me) have made suggestions to prune the scope of IR35 so that - contrary to your above quoted statement of IR35 being "impossible for HMRC to police" - IR35 could be made more focussed, thus: Replace the words "by 5%" in ITEPA 2003 Part 2 Chapter 8 Section 54 (1) Step 1 with the following: "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 calendar days after the date his or her previous contract for service ended or (b) five per cent for all other workers."

 

QUESTION for Simon: Do you agree that  ITEPA 2003 Part 2 Chapter 8 Section 54 (1) Step 1 should be revised as suggested above in the March 2012 Budget? If not, why not, please?

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Replying to AndrewTall:
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By Simon Sweetman
27th Feb 2012 12:21

IR35

Yes, dstickl, I couldn't agree more.

It is not I think a secret that the OTS small business committee was split on the subject of IR35 and there was a significant minority in favour of abolishing or suspending it. In the end HM Treasury's caution seems to have won the day.

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Replying to Portia Nina Levin:
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By dstickl
27th Feb 2012 20:22

@oldersimon: Was a "Minority Report" considered, or disallowed?

oldersimon wrote:

Yes, dstickl, I couldn't agree more.

It is not I think a secret that the OTS small business committee was split on the subject of IR35 and there was a significant minority in favour of abolishing or suspending it. In the end HM Treasury's caution seems to have won the day.

Hi oldersimon! Please remind me: Was a "Minority OTS Report" considered by the minority including you, or disallowed by the OTS Chairperson?

 

BTW: Given the financial situation that was left to the Coalition by the previous Labour Government, I do understand the "HM Treasury's caution" in tackling the "Fiscal Horror' of IR35. Indeed, the reason for my suggestion - of a moderate change to ITEPA'03 section 54 (1) Step 1 etc - was for that very reason!

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Replying to AndrewTall:
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By adbanks
28th Feb 2012 14:31

Simplification? Yes indeed!

dstickl wrote:
IR35 could be made more focussed.

Despite the spin in the original press release, IR35 attempted to address the loophole in ITEPA Ch 8 (previously s134 ICTA) that allows agency workers to escape PAYE by using a limited company.

The whole need for IR35 could be revoked by extending ITEPA Ch 8 s46(1)(a) with the addition of "or via a company or other incorporated body, in which the worker has a material interest" (or words to that effect).

But be ready for the howls of protest from those with a vested interest (umbrella company providers, accountancy firms, contract review suppliers etc) - IR35's one success story has been the industry of anti-IR35 schemes.

 

OK, this doesn't address non-agency staff, but a similar simplication of the definition of "employee and/or office holder" could work wonders.

 

Simpler law, and less law. What a good idea!

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By petersaxton
24th Feb 2012 13:51

Easy solution

Why not say that if 80% or more of revenue is received from one organisation (or connected organisations) then the limited company has to pay a salary to the worker such that the salary and employers NIC should equal all the revenue? Travel from home to place of work would not be allowable. There can be various simple rules to get round attempts to flout the legislation and in borderline cases the situation could be reviewed by HMRC.

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By dstickl
24th Feb 2012 14:08

@ Peter: BUT how exactly do U propose to draft the legislation?

Hi Peter: OK, BUT how exactly do you propose to draft the change to the existing legislation?

As you can guess, I struggled a long time to get to my suggested words for minimal change of: Replace the words "by 5%" in ITEPA 2003 Part 2 Chapter 8 Section 54 (1) Step 1 with the following: "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 calendar days after the date his or her previous contract for service ended or (b) five per cent for all other workers."

I look forward to seeing ALL your new draft words, please, asap, in order that I could then judge whether or not I would support them in a submission to 10 and 11 Downing Street!

EQUALLY for Peter: In the meantime, do you agree that ITEPA 2003, Part 2, Chapter 8, Section 54 (1) Step 1, etc, should be revised as suggested above in the March 2012 Budget? If not, why not, please?

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By petersaxton
24th Feb 2012 15:59

Not me

I wouldn't try to draft anything. I'm too busy doing paying clients work to tangle with it. I'd let people who get paid to do it make the effort. What I would say that my simple idea to get workers to be paid a salary wouldn't result in anything too onerous for people using a company in the circumstances we are looking at.

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By dstickl
24th Feb 2012 16:36

@ Peter: May I wish you "Happy working" and remind AWEB of ...

Hi Peter!  Understood:

May I wish you "Happy working" and remind other AWEB readers of my suggested narrowing of the focus of IR35, in order to ensure a consistent application of the rule of law by HMRC, as set out in my earlier post on this thread at about 14:08pm today, etc? 

Regarding your "let people who get paid to do it make the effort", the problem I - and many other people have - is that those "people who get paid to do it" appear to me (in my opinion) to have taken on the role of public sector passengers, because I've seen no convincing evidence yet of Minister David Gauke MP (who is apparently the Treasury Minister in charge of IR35) etcetera, trying to "make the effort".  

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Replying to Michael C Feltham:
By petersaxton
24th Feb 2012 20:01

You might be right

dstickl wrote:

Hi Peter!  Understood:

May I wish you "Happy working" and remind other AWEB readers of my suggested narrowing of the focus of IR35, in order to ensure a consistent application of the rule of law by HMRC, as set out in my earlier post on this thread at about 14:08pm today, etc? 

Regarding your "let people who get paid to do it make the effort", the problem I - and many other people have - is that those "people who get paid to do it" appear to me (in my opinion) to have taken on the role of public sector passengers, because I've seen no convincing evidence yet of Minister David Gauke MP (who is apparently the Treasury Minister in charge of IR35) etcetera, trying to "make the effort".  

But I'm sure they wont take any notice of us. Remember Gordon Brown? He ignored the advice of many accountants.

 

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By carnmores
24th Feb 2012 17:27

wait for the budget ;-)

even the treasury solicitors, of all peope, were operating in such a manner

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Replying to Accountpract:
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By dstickl
24th Feb 2012 17:35

Interesting!

carnmores wrote:

even the treasury solicitors, of all peope, were operating in such a manner

Interesting! 

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By carnmores
24th Feb 2012 17:43

you might say that

i couldnt possibly comment

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By DavidW878
27th Feb 2012 10:41

Spot-on

The comments on IR35 are something of a diversion from the key point that Simon has made.  And in my view he is 100% right to make it.  At the time of the Rayner scrutinies (remember those?  The first attempt to impose private-sector disciplines on the Inland Revenue back in the 1980s) someone memorably said that you cannot run a department of state as if it were a department store.  How true.  The failed state of HMRC is all of a one with calling public service "public sector employment"; with calling taxpayers "customers"; and with valuing "private sector expertise" above commitment to doing the right thing.  I fear that, successful as many of Mrs Thatcher's achievements undoubtedly were, the conviction that every human activity is best shoe-horned into a joint stock company is proving to be one of the most disastrous legacies of her and her pale imitators.

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By petersaxton
27th Feb 2012 10:48

Is it correct?

I didn't know that Margaret Thatcher had that conviction!

Have you got a reference so I can check?

I thought her biggest mistake was Big Bang.

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By ThornyIssues
27th Feb 2012 10:52

Sticking platers, carbunckles and more sticking plasters

When are we going to see a Governement with enough balls to sort out this mess once and for all?

Everyone should have the right to choose to be self-employed or employed - end of. It should not matter one iota if you work in the public or private sector at any level. If you choose to be employed, you elect to have your employer deal with all your tax and employment issues within the law. If you choose not to be employed, you operate under what ever business framework suits your position, SE, LtdCo or LLP. You then work within those tax and employment laws.

This would remove completely the monker of "disguised employee" and the ability of HMRC to "deem" such a fabrication. If there is a REAL tax advantage, after taking the equivalent costs of pensions, sick and holiday pay etc into account, it is up to the Government to sort that out, presumable under the remit of the OTS.

Lastly, the whole kit and caboodle needs to be sorted out under radical OTS activity which not only simplifies tax law but complete removes the ridiculous ability of HMRC to operate tax law based on employment law. 

 £0.02

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Replying to happy:
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By dstickl
27th Feb 2012 19:35

@Thornyissues: Good medical practice of suggested word change ..

ThornyIssues wrote:

Sticking platers, carbunckles and more sticking plasters

RE: When are we going to see a Governement with enough balls to sort out this mess once and for all? [dstickl Answer: After 2015!]

RE: Everyone should have the right to choose to be self-employed or employed - end of. It should not matter one iota if you work in the public or private sector at any level. If you choose to be employed, you elect to have your employer deal with all your tax and employment issues within the law. If you choose not to be employed, you operate under what ever business framework suits your position, SE, LtdCo or LLP. You then work within those tax and employment laws. [dstickl Answer: Agreed BUT this'll be after 2015, won't it?]

RE: This would remove completely the monker of "disguised employee" and the ability of HMRC to "deem" such a fabrication. If there is a REAL tax advantage, after taking the equivalent costs of pensions, sick and holiday pay etc into account, it is up to the Government to sort that out, presumable under the remit of the OTS. [dstickl Answer: Agreed BUT this'll be after 2015, won't it?]

RE: Lastly, the whole kit and caboodle needs to be sorted out under radical OTS activity which not only simplifies tax law but complete removes the ridiculous ability of HMRC to operate tax law based on employment law. [dstickl Answer: Agreed BUT this'll be after 2015, won't it?]

 £0.02

MEDICAL analogy NOTE: Putting a bandage [e.g. my suggested word change to ITEPA'03 section 54 (1) Step 1] on a bandage [the existing wide spread "leaky" IR35 "scheme"] can be good medical practice, because:

* Pulling off the current bandage could cause the clots to break down, thus causing a leak of blood (tax revenues) due to the Friday [employee sackings]-to-Monday[re-hire as contractors] scandals!

* Pulling off the current bandage could also cause infection, e.g. even more widespread confusion and muddle!

* Adding a new bandage [e.g. my suggested word change to ITEPA'03 section54 (1) Step 1], onto the current IR35 bandage, could reduce the spread of anti-business sentiment exhibited by IR35!!

SUM UP: Whilst I agree with you Thornyissues that "we shouldn't have to start from here in an ideal world" the problem we face is that we professionals do NOT live in an ideal world, and we have to show skills to slowly throttle IR35, starting NOW, in order not to upset the HMRC's concerns of "re-opening" loopholes AND to meet the Coalition's concern of not having an anti-business environment, for economic recovery. Hence my moderate suggestion of a few extra words to exiting legislation - a "minimal change" if you like - in order to throttle the dreaded "deemed payment" calculation, so that HMRC could consistently police a fewer number of cases, focusing on the gross high risk abuses.

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Replying to abelljms:
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By ThornyIssues
28th Feb 2012 12:25

Reseach needed

dstickl wrote:

ThornyIssues wrote:

Sticking platers, carbunckles and more sticking plasters

RE: When are we going to see a Governement with enough balls to sort out this mess once and for all? [dstickl Answer: After 2015!]

RE: Everyone should have the right to choose to be self-employed or employed - end of. It should not matter one iota if you work in the public or private sector at any level. If you choose to be employed, you elect to have your employer deal with all your tax and employment issues within the law. If you choose not to be employed, you operate under what ever business framework suits your position, SE, LtdCo or LLP. You then work within those tax and employment laws. [dstickl Answer: Agreed BUT this'll be after 2015, won't it?]

RE: This would remove completely the monker of "disguised employee" and the ability of HMRC to "deem" such a fabrication. If there is a REAL tax advantage, after taking the equivalent costs of pensions, sick and holiday pay etc into account, it is up to the Government to sort that out, presumable under the remit of the OTS. [dstickl Answer: Agreed BUT this'll be after 2015, won't it?]

RE: Lastly, the whole kit and caboodle needs to be sorted out under radical OTS activity which not only simplifies tax law but complete removes the ridiculous ability of HMRC to operate tax law based on employment law. [dstickl Answer: Agreed BUT this'll be after 2015, won't it?]

 £0.02

MEDICAL analogy NOTE: Putting a bandage [e.g. my suggested word change to ITEPA'03 section 54 (1) Step 1] on a bandage [the existing wide spread "leaky" IR35 "scheme"] can be good medical practice, because:

* Pulling off the current bandage could cause the clots to break down, thus causing a leak of blood (tax revenues) due to the Friday [employee sackings]-to-Monday[re-hire as contractors] scandals!

* Pulling off the current bandage could also cause infection, e.g. even more widespread confusion and muddle!

* Adding a new bandage [e.g. my suggested word change to ITEPA'03 section54 (1) Step 1], onto the current IR35 bandage, could reduce the spread of anti-business sentiment exhibited by IR35!!

SUM UP: Whilst I agree with you Thornyissues that "we shouldn't have to start from here in an ideal world" the problem we face is that we professionals do NOT live in an ideal world, and we have to show skills to slowly throttle IR35, starting NOW, in order not to upset the HMRC's concerns of "re-opening" loopholes AND to meet the Coalition's concern of not having an anti-business environment, for economic recovery. Hence my moderate suggestion of a few extra words to exiting legislation - a "minimal change" if you like - in order to throttle the dreaded "deemed payment" calculation, so that HMRC could consistently police a fewer number of cases, focusing on the gross high risk abuses.

 

Tinkering with the wording of IR35 to slowly throttle IR35 is just simply not required, nor is it an issue.

With over 1600 wins against HMRC's 4, when the PCG support any member taken to IR35 tribunal, I think we can say that IR35 is in effectively neutered. The actual tax take indicated in the FoI requests show that HMRC's income has dwindled to a trickle. The current income mainly due to the uninformed "rolling over and paying up" due to lazy accountants poorly advising their clients to "tick the P35 box and pay up". What we (royal we) can't get from HMRC, by FoI request or any other means, is the true cost of IR35 in that they can't or won't disclose the costs in losing tribunals stating that they have a right to burn taxpayers money to maintain a deterrent effect. If only the public knew! This sad fact is that HMRC are intent in using tribunals to harrass and distress freelancers to the detrement of the public purse. 

Secondly, the PCG wins are a very good proof that those who are true freelancers are NOT "disguised employees". Correctly define "the right to be self-employed" and put statute in place will remove "disguised employees" and remove HMRC's ability to deem it. It also removes the Friday-to-Monday (F2M) issue as there would no longer be a tax avoidance measure. With no F2M issue, HMRC's scare tactics advice to Goverment that repealling IR35 will cause a flood of incorporation, would not materialise.

To continue the medical theme ...... no more sticking plasters, radical surgery to save the UK Plc patient. It is really not that difficult.     

 

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Replying to graweb901:
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By dstickl
28th Feb 2012 19:36

@ThornyIssus: 8 answers to your post: R U now agreed, please?

ThornyIssues wrote:

RE: Tinkering with the wording of IR35 to slowly throttle IR35 is just simply not required, nor is it an issue. [dstickl Answer 1: Sorry, NO! May I politely suggest that we should disagree, please, because it IS an issue for dstickl because of his belief that the wording of ITEPA'03 s 43(1) is contrary to the 1997 steer of Tax Law Review Committee para 1.9 regarding the need for "economic sense" in legislation? AND my suggestion is NOT just "tinkering with the wording" because there are concomitant "changes to the calculation of the numbers of the 'deemed payment' too", which your words don't seem to me to have picked up!]

RE:With over 1600 wins against HMRC's 4, when the PCG support any member taken to IR35 tribunal, I think we can say that IR35 is in effectively neutered. [dstickl Answer 2: Sorry, NO! May I politely suggest that we should disagree, please, because your "do nothing" at this stage reminds me of the Labour Government "do nothing" about immigration to England from the EU new entrant counties in the early "noughties" - possibly passed of by some ignorant and unimaginative so-called civil servant saying "scare mongering!" - which was eventually famously caught out when Mrs Gillian Dufy televisually interrogated that apparent buffoon Gordon Brown MP!!]  and

[dstickl Answer 3: IF it's true that "IR35 is ... neutered" THEN why is there any objection to add a few extra words to ITEPA'03 s 54(1) Step 1? Is it because it was not invented here (NIH) at PCG? Is it because the PCG does not understand the need for specific "economic sense" to take away worry from people wishing to set up as self- employed? Is it because the PCG is self-serving in that it wishes to sign up anyone and everyone worried by the "Fiscal Horror" of IR35? Why doesn't PCG just do the gracious thing and support the addition of a few moderate words to ITEPA'03 s 54(1) Step 1? please tell us on AWEB!]

RE: The actual tax take indicated in the FoI requests show that HMRC's income has dwindled to a trickle. The current income mainly due to the uninformed "rolling over and paying up" due to lazy accountants poorly advising their clients to "tick the P35 box and pay up". What we (royal we) can't get from HMRC, by FoI request or any other means, is the true cost of IR35 in that they can't or won't disclose the costs in losing tribunals stating that they have a right to burn taxpayers money to maintain a deterrent effect. If only the public knew! [dstickl Answer 4: NO! The public do NOT want to know any of this nonsense! What the public want is to restrict the scope of IR35 by focussing the words of ITEP'03 as indicated above!] 

RE: This sad fact is that HMRC are intent in using tribunals to harrass and distress freelancers to the detrement of the public purse. [dstickl Answer 5: Agreed!]

RE: Secondly, the PCG wins are a very good proof that those who are true freelancers are NOT "disguised employees". [dstickl Answer 6: NO! The many worrying law cases just confirms that Parliament passed - like water perhaps - a "Fiscal Horror" by an ANTI-business Labour party!]

RE: Correctly define "the right to be self-employed" and put statute in place will remove "disguised employees" and remove HMRC's ability to deem it. It also removes the Friday-to-Monday (F2M) issue as there would no longer be a tax avoidance measure. With no F2M issue, HMRC's scare tactics advice to Goverment that repealling IR35 will cause a flood of incorporation, would not materialise. [dstickl Answer 7: NO! Just fix ITEPA'03 s 54(1) Step 1 as indicated above please, and move on!]

RE: To continue the medical theme ...... no more sticking plasters, radical surgery to save the UK Plc patient. It is really not that difficult.  [dstickl Answer 8: Agreed, IF what you're saying is that it is not that difficult to: Just fix ITEPA'03 s 54(1) Step 1 as indicated above please, and move on, THEN let's]    

[/quote]

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David Kirk profile image
By David Kirk
27th Feb 2012 11:44

Is it really IR35?

I think that there is something being overlooked here: none of the whistleblowers are telling us whether the contracts with these public sector bodies are between them and the individuals themselves, or with their companies (quite probably because they don't know).  If with their companies then IR35 should apply, and it should not be a difficult matter for HMRC to get details from the various government departments to find out who these companies are to establish whether it is being operated (a very quick look at their accounts will tell you whether it is likely to be).

 

It is more likely, I would suggest, that the contracts are with the individuals doing the work, who have merely asked for payment to be made to their companies.  If so, then IR35 is not in play: these are straightforward employment contracts and PAYE and NI should be deducted from payments made on them, whether it is a company or an individual that is actually paid.  It should surely be very easy for Revenue & Customs to police that.

 

If it turns out that the contracts are with companies, there needs to be a policy decision as to exactly when this is allowed and when not.  That could probably only apply to central government and its agencies, but that would be a considerable part of the total.

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Replying to Vaughan Blake1:
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By dstickl
27th Feb 2012 19:54

@davidkirk:R U suggesting that Statements shud B added RE: IR35?

davidkirk wrote:

I think that there is something being overlooked here: none of the whistleblowers are telling us whether the contracts with these public sector bodies are between them and the individuals themselves, or with their companies (quite probably because they don't know).  

...

If it turns out that the contracts are with companies, there needs to be a policy decision as to exactly when this is allowed and when not.  That could probably only apply to central government and its agencies, but that would be a considerable part of the total.

Hi davidkirk: In view of the uncertainties in this area [e.g. U say: "none of the whistleblowers are telling us whether the contracts with these public sector bodies are between them and the individuals themselves, or with their companies (quite probably because they don't know)" ] it seems to me that you are suggesting that the Annual Report and Accounts statements of these sorts of companies - and maybe all companies - should have to have EXTRA Statements added to clarify (for users of these AR & As)  whether:

(1) any of the employees of the company are caught in the IR35 net, and

(2) or not all IR35 "deemed payments" due under IR35 legislation have been paid to HMRC.

 

Do you agree that's what you are calling for with your various phrases of:

* "it should not be a difficult matter",

* "it surely should be very easy for HMRC to policer", and

* "there needs to be a policy decision as to exactly when"?

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By bseddon
27th Feb 2012 12:02

While it seems too obvious to be be considered realistic I agree with ThornyIssues Employment by a third party is an anachronism that is not suitable to everyone and leads to massive problems with pensions.  Back in the days when one might stay with an employer for a lifetime or if the employee doesn't want to or is unlikely to be competent to run their affairs and report taxable income, then traditional employment is an option.  But it comes at such a cost.  For example, my employer from 30 years ago and for whom I worked for 11 years no longer exists and the actuaries write every year to explain the pension fund is underfunded and not likely to be funded.  The group scheme from another is subject such high management charges that I'm not likely to see any pension benefit by retirement. I suspect I'm not alone.

Sure there's a risk that the self-employed would not report income accurately but there a simple fix: everyone who is self employed has to have a nominated accountant to report income in the same way the accounts department of a company must report income.  If the self-employed do not have an nom acc it would be an offence.  If the nom acc does not receive income information from the self-employed (or notification of change of a nom acc) this is also an offence.  By out-sourcing this responsibility for the self-employed those who are self-employed are in a better position to look after their future which is good for all of us while the current system is a disaster that continues to unfold before us.

 

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Replying to Taxhurts:
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By dstickl
27th Feb 2012 20:13

@bseddon: Isn't this just anti-business "special pleading"?

bseddon wrote:

 If the self-employed do not have an nom acc it would be an offence.  

Hi bseddon: Isn't the above just anti-business "special pleading"?

Why shouldn't the law be simple and clear enough for the self-employed to be able to do their own Annual Reports and Accounts and Tax themselves?

Or are you hinting at the decline in education in this country, and its immigrants?

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Replying to Portia Nina Levin:
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By bseddon
28th Feb 2012 12:47

" Isn't the above just anti

" Isn't the above just anti-business "special pleading"?"

I don't see how you get there. This has nothing to do with business anti or otherwise.  It, like IR35, is to do with tax which is inherently regressive.

I was supporting the notion that it should be possible for anyone to be self-employed whether they "work" for a company or contract.  However a reasonable objection to letting anyone be self-employed is that there would be massive scope for tax evasion either explicitly or accidentally (forgot to complete the returns or didn't know how to).  By ensuring all self-employed individuals are registered with a nominated accountant (or similar) there's a built-in process for tracking whether or not the self-employed are declaring income.

 

 

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By grahamatgward
27th Feb 2012 12:25

IR35 and ethics

As an ex-civil servant & an ex-contractor coping with the absolutely lousy IR35 legislation I agree with Simon when he says
"The reason that this has happened is that successive governments have not valued the ethos of public service but have insisted that the public sector is simply a less efficient mirror of the private sector" although I think that "always a less efficient mirror" would be more accurate.

The values of public service have been in distressing decline throughout my working life - and not surprisingly - if you are so persistently told you are rubbish, where's your pride?

Once there was a Service, with an ethos.  Now so much of the public sector is Agencies & Quangoes & other hybrid vehicles. They were supposed to reap the business expertise from board members drawn from the private sector (or opportunists from completely unrelated public sector organisations) - actually this led to staff being directed by people who didn't even know the legal basis of the organisation's work, let alone the practical difficulties. Middle managers (who did) were fired as obstructive & too too tiresome. All the time probity, fairness, careful consideration got short shrift. Yes, it could be inefficient, dim, unimaginative - but not everywhere, or all the time.

Given all that is it a surprise that for a public organisation whose budget has just been clipped by HM Treasury, contracting out looks attractive - it saves their money, and the devil take HMT.   Common good? Wider public good? What's that these days?

We will soon be back to the 17th & 18th century: the purpose of involvement in public life will be to plunder the public purse.

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Replying to Tim Vane:
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By dstickl
27th Feb 2012 20:31

@grahamatgward: Surely a case for whistle blowing?

grahamatgward wrote:

 - actually this led to staff being directed by people who didn't even know the legal basis of the organisation's work, let alone the practical difficulties. 

Hi grahamatgward: Surely the above is a case for whistle blowing? 

IF you did not, why not?

Incidentally, I was appalled many years ago when a defence contractor was apparently allegedly cheating a cost plus arrangement, BUT the cost accountant who objected suffered whilst the transgressing defence contractor was not.

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By edmundwright
27th Feb 2012 19:22

IR35

A point which my quick scan did not pick up, (some-one may have made these points)

1) by paying a ltd company, no accrual for pension needs to be paid, (and we know how much a real public sector pension actually costs)

2) at the end of the work, the dept involved can simply say "Thanks - goodbye" and if the person was an employee, how often do we see REAL redundancy in government service?

Neither of these are strictly relevant to IR35, but the cost savings to the depts invovled are real, and in the greater scheme of things the monies are mostly spent and go into the economy without going through HMRC first, and thus in a quicker AND more productive way.

The assuption is that who ever let these methods exist in government is a rogue or corrupt; I am not at all convinced that is fair or correct.

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Replying to lionofludesch:
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By dstickl
27th Feb 2012 20:42

@edmundwright:Lack of focus on IR35<=>Anti-business views by MPs

edmundwright wrote:

A point which my quick scan did not pick up, (some-one may have made these points)

1) by paying a ltd company, no accrual for pension needs to be paid, (and we know how much a real public sector pension actually costs)

2) at the end of the work, the dept involved can simply say "Thanks - goodbye" and if the person was an employee, how often do we see REAL redundancy in government service?

Neither of these are strictly relevant to IR35, but the cost savings to the depts invovled are real, and in the greater scheme of things the monies are mostly spent and go into the economy without going through HMRC first, and thus in a quicker AND more productive way.

The assuption is that who ever let these methods exist in government is a rogue or corrupt; I am not at all convinced that is fair or correct.

You are correct,  edmundwright, a lack of understanding of IR35 by MPs has resulted in an anti-business stance! This is the point I made when the SLC story first broke on 2nd Feb'12:

 

IR35 - IF Ed Lester paid IR35 monies due THEN is there a story?

IR35 - IF Ed Lester paid IR35 monies due under S.I. 2000/727 section 7 (1) Step One etc, THEN is there a story?

Surely that is the key question [did Ed Lester declare that he etc was caught by IR35 as a "disguised employee" etc] that Margaret Hodge MP should ask at the HoC PAC, shouldn't she?

Otherwise, in my opinion, it would seem that IR35 is NOT being properly policed by HMRC when clear cases of employment income paid gross come to their attention, e.g. as in my opinion was clear for the clearance for "Our ref 29269 42328" of Date: 14 October 2010!

And if HMRC missed an IR35 opportunity on 14 October 2010, was there a case of "misconduct in public office" by HMRC?

 

CONCLUSION: To help MPs understand IR35 better, the scope should be narrowed by, yes you've guessed already, reducing the scope of ITEPA 2003, section 54 (1) Sep 1, etc!

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By pauljohnston
28th Feb 2012 08:54

DUMP IR35

We want our economy to grow and contracting thru a Ltd means that the company wanting the services can put a fixed cost on paying for them.  Above are many ideas to increase the tax yield but if by trying to increase the tax yield we reduce the economic yield this is self-defeating.

So dump IR35 lets get our economy out of the mess and then dream up the son  of IR35.  Remember the lower the effective tax rate the less the drag on the economy and less for politians to waste.

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Replying to Wieslaw:
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By dstickl
28th Feb 2012 10:31

IR35+StartUps:Labour's "5% deduction" is ANTI -business @ low ..

pauljohnston wrote:

We want our economy to grow and contracting thru a Ltd means that the company wanting the services can put a fixed cost on paying for them.  Above are many ideas to increase the tax yield but if by trying to increase the tax yield we reduce the economic yield this is self-defeating.

So dump IR35 lets get our economy out of the mess and then dream up the son  of IR35.  Remember the lower the effective tax rate the less the drag on the economy and less for politians to waste.

Hi pauljohnston: I agree with your first paragraph BUT not your second one, because just "dumping IR35" may NOT get us out of the mess IF it re-opens loopholes as feared by HMRC.

My view is that, for small business StartUps, Labour's "5% deduction" [as set out in ITEPA 2003 section 54 (1) Step 1] is ANTI -business, and should be sensibly attacked asap!! This is because at low company income - which is inevitable for a start up business - a "5% deduction" just does NOT cover initial start up and running costs.

 

For example see AWEB post of

https://www.accountingweb.co.uk/anyanswers/question/self-employment-0

where the new start up is advised to:

Generally, set out as professionally as you can afford from day one. It is tempting to go as a cheap as possible but think .... would you even trust your car to some shoddy back street set up let alone your accounts & tax affairs to someone working on the kitchen table?

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By ThornyIssues
28th Feb 2012 12:37

Wrong!

@dstickl  ".... I agree with your first paragraph BUT not your second one, because just "dumping IR35" may NOT get us out of the mess IF it re-opens loopholes as feared by HMRC."

Nothing to do with "fear". HMRC want to maintain their abiltiy to use fear, uncertainty and doubt (FUD) and thus have a vested interest in measures such as IR35 and S660A. Thankfully S660A was laid to rest by the determined efforts of the PCG though.

Using the scare tactic of "mass incorporation" to justfiy maintaning IR35 is beyond the pale.  

  

 

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By Simon Sweetman
28th Feb 2012 15:24

Ir35 and all that

Two things

First of all the committee I sat on was advisory to OTS and did not produce a report itself, so there would have been no sense in a minority report (which would probably have had to encompass everyone from outright abolitionists to suspenders).

As to the notion that every self-employed person should be compelled to seek advice from an accountant - whoa there !  It must be part of the plan to make it possible for very small businesses to deal with their own tax affairs (and imagine trying to define "accountant" for these purposes).

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Replying to Jackie in Wiltshire:
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By dstickl
28th Feb 2012 18:33

@oldersimon:Thanks 4 Ur 2 things, BUT did OTS consider TLRC 1.9?

oldersimon wrote:

Two things

First of all the committee I sat on was advisory to OTS and did not produce a report itself, so there would have been no sense in a minority report (which would probably have had to encompass everyone from outright abolitionists to suspenders).

As to the notion that every self-employed person should be compelled to seek advice from an accountant - whoa there !  It must be part of the plan to make it possible for very small businesses to deal with their own tax affairs (and imagine trying to define "accountant" for these purposes).

Many thanks for your "Two things" comments above, BUT please tell me: Did OTS consider the need - as a necessary part of Tax Simplification - to recognise  "failure to base the tax on sound economic principle"  message of TLRC (the Tax Law Review Committee) report "TAX AVOIDANCE" November 1997 para 1.9 on page 2 of:

"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 my opinion, Labour had an ANTI-business approach on IR35 when it failed to recognise the basic economics of 'small business' of:

* Some appreciable fixed costs, e.g. to pay bills to eat etc, but

* A possibility of some business income, which may remain very small or "didly squat" in the start up phase!

The "5%" deduction figure [allegedly to cover costs] in the early years of a start up may only amount to "5% of didly squat!", i.e. only a few pennies in a start up phase!

Please note that dstickl - despite written and verbal enquires - has been unable to establish the exact basis of the current "5%" figure, neither David Gauke MP (the Minister in charge of IR35 policy)  or PCG have been able to explain it!

Of course, IF a PCG reprsentative can explain the basis of the "5%" figure in IREPA 2003 section 54 (1) Step 1, THEN  I look forward to seeing it in print on AWEB please!

 

In the absence of any such explanation: It would appear that the "5%" figure of ITEPA'03 s 54(1) Step1 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!

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By adbanks
28th Feb 2012 20:51

dstickl's obsession

I've lost count of the number of threads (never mind posts) that dstickl has posted the same message.  But tinkering with the expenses allowance is a deckchairs on the Titanic scenario

 

Whilst I agree that the 5% is arbitary, that is, of course, over and above the normal expenses regime that ordinary workers are allowed to offset.  And where we will have to disagree is the simple fact that, despite their protestations, the target for IR35 (the incorporated agency worker) is no more in business than the unincorporated agency temp, or the employee they are sat next to.

 

And equally, a significant majority of said incorporated workers are only using a limited company because their agency told them they needed to (thus removing the need for the agency to operate PAYE).

 

IR35 needs to be reappraised from top-to-bottom to see if it achieves its stated aims... and reformed accordingly.  The 5% is a smokescreen.

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By dstickl
29th Feb 2012 07:15

@adbanks:The obsession is that "economic sense" is a necessary

Hi adbanks: The obsession is that explicit "economic sense" is a necessary feature of sensible taxation, as set out in the Tax Law Review Committee - at the start of the Blair / Brown "New Labour" Government - in its November 1997 report, in paragraph 1.9 on page 2.

I will admit that, and I will also admit that I wish to persuade as many sensible people on AWEB as I can to look at the wise words of 1997 of the Tax Law Review Committee, and to THINK about the consequences of those words - particularly in the context of IR35 - and then to ACT on them.   I do NOT believe that making economic sense "is a smokescreen". 

As a potential business man whose trade is restrained by IR35, and as I believe that I'm not alone in these views even if the "silent majority" appear to remain silent on IR35 on AWEB, I believe that - in the interest of helping my country getting out of the economic mess (e.g. the defeated Labour Government's alleged voluntary admission that "there's no money left" allegedly by Liam Byrne) - the economic "show must go on" and, contrary to adbanks, that "tinkering with the expenses allowance is NOT a deckchairs on the Titanic scenario".

In particular, the challenge of current IR35 legislation is - to me - very much like having to deal with a puncture on a vehicle moving at slow speed, i.e. the situation demands skill and a minimum but necessary change, of a few words to be added to ITEPA'03 s 54(1) Step 1, as set out recently elsewhere on AWEB.

OR, if you'd prefer an IT analogy, the challenge of current IR35 legislation is like a cut over from an old IT system to a new IT system, without a loss of customer service!   "Minimal change" - or "tinkering" to use adbanks' word - is of course highly desirable in such a situation!

I disagree regarding adbanks' alleged "target for IR35 (the incorporated agency worker)", because IR35 also rediculously "targets" the "incorporated non-agency worker". 

I also disagree with adbanks' assertion that "The 5% is a smokescreen", because IR35 could make some economic sense IF it recognised that, at very low levels of company income, "5%" of a very low variable figure is an UNFAIR recognition of necessary business fixed costs. 

Once this UNFAIR "5%" figure of ITEPA'03 s 54(1) Step 1 is tinkered with to make "economic sense", adbanks would be able to interpret my subsequent silences as "being on the job" elsewhere. 

 I feel sure that you will agree that's a sensible "target" for "l'affaire IR35".

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By adbanks
29th Feb 2012 07:48

With respect {anonymous}, IR35 only targets non-agency workers in situations where you would have failed the "traditional" self-employed tests (witness the recent furore re: government office holders) and any genuine business should be able to negotiate terms that preclude IR35 being relevant.

 

Equally, I would be interested in any statistics showing non-agency businesses are being targetted under IR35... certainly in my time with the PCG I don't recall any.  Of course, there are those who pay up anyway, but you cannot legislate for stupidity.

 

On the 5% angle (as I said before, I agree it is an arbitary figure) but I also suspect that any worker/businesses who is genuinely exceeding this level is probably outside of the scope of IR35 anyway.

 

As for "tinkering" being desirable, then this depends on your circumstances.  Repeatedly pumping air into your punctured tyre solves the immediate issue, but doesn't fix the underlying fault.

Tweeking the 5% level may address *YOUR* personal gripe, but for me IR35 is fundamentally flawed and no amount of tinkering will fix that.

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By dstickl
29th Feb 2012 08:20

Thanx 4 confirming "Tweeking the 5% level may address" the ...

Hi adbanks! Thank you for confirming that  "Tweeking the 5% level may address" the professional gripe that explicit "economic sense" is a necessary feature of sensible taxation, as set out in the Tax Law Review Committee in its November 1997 report, in paragraph 1.9 on page 2.

Equally, I look forward to HMRC tax policy professionals - e.g. as identified in the "IR35 Forum" publicly available Minutes of Meetings - recognising that IR35 could make some economic sense:

* IF it recognised that, at very low levels of company income, "5%" of a very low variable figure is an UNFAIR recognition of necessary business fixed costs, and

* IF it were to be appropriately tweeked in ITEPA 2003 section 54(1) Step 1. 

Thank you again.

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David Kirk profile image
By David Kirk
29th Feb 2012 09:41

Is it really IR35?

Hi dstickl,

 

You say

 

 In view of the uncertainties in this area [e.g. U say: "none of the whistleblowers are telling us whether the contracts with these public sector bodies are between them and the individuals themselves, or with their companies (quite probably because they don't know)" ] it seems to me that you are suggesting that the Annual Report and Accounts statements of these sorts of companies - and maybe all companies - should have to have EXTRA Statements added to clarify (for users of these AR & As)  whether:

(1) any of the employees of the company are caught in the IR35 net, and

(2) or not all IR35 "deemed payments" due under IR35 legislation have been paid to HMRC.

 

Do you agree that's what you are calling for with your various phrases of:

* "it should not be a difficult matter",

* "it surely should be very easy for HMRC to policer", and

* "there needs to be a policy decision as to exactly when"?

 

No that's not really what I am saying at all.  My main point is that if the contracts are with the individuals, not their personal service companies, IR35 is not in issue: it is a straightforward case of PAYE and NI having to be operated under normal (i.e. pre-IR35) legislation - that is to say, the Government body needs to deduct PAYE on the payment to the personal service company.  My guess is that in the public sector the contracts would normally be with the individuals, and if they are not it should become Government policy that they should be.  That would just require an edict from the Treasury.

 

HMRC can very easily police this by simply asking the public sector bodies concerned what companies they have paid for personal services (a) when they have a contract to pay an individual not a company, and (b) when they have a contract to pay a company under which an individual is required to give personal service to them.  I think that they have existing powers to do this, but even if they do not it could become a matter of policy that the Govremnent bodies respond to any such requests.

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By dstickl
29th Feb 2012 10:12

OK but the inconsistent application of IR35 shows that HMRC has

OK, davidkirk, but the inconsistent application of IR35 shows to me that HMRC has currently got insufficient resources to professionally deal with " Labour's" legacy of very wide ranging "worker"/IR35 legislation and the concomitant tax mess ...

AND the economic mess that Labour left behind => ever reducing resources available to HMRC!

CONCLUSION: I wish your suggestion luck, but put this one back to you:

Why not make it a statutory requirement that ALL limited companies and partnerships have to make Statements covering each area you've identified, in their Annual Report and Accounts? This could reduce investigatory costs to HMRC!

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By pauljohnston
29th Feb 2012 10:41

This post hasproved two things

1  That IR35 is a contentious subject

2 There is not consensus on how to reform

but every one is looking just at the tax angle.  Why?  Surely the economy is more important.  What has been the economic cost of IR35?

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By Huw Williams
29th Feb 2012 12:03

What has IR35 to do with it?

Have I missed something? 

Surely a decision to engage a contractor company rather than employ an individual is not a case of flouting the IR35 rules.  My understanding is that this is often the rule in certain industries because it means the engager avoids all the tricky employment issues.

Whether or not IR35 should be applied is then an issue for the contractor (and HMRC), not for the government department or other engager.

I cannot see how a government department can be at fault under IR35 unless it is giving poor tax advice on the effect of the engagement.

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By pauljohnston
01st Mar 2012 11:14

See Taxation 16 Feb 2012

for more info about the NPW

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Replying to bigdaddy:
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By dstickl
02nd Mar 2012 08:39

@pauljohnston: Can U give us an e-link, please, to the NPW info?

pauljohnston wrote:

for more info about the NPW

Hi pauljohnston: Can you give us an e-link, please, to the NPW info in Taxation 16 February 2012 ?

Thanks in advance.

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By pauljohnston
02nd Mar 2012 10:44

Sorry

Dont have one its in taxation magazine

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By adbanks
17th Mar 2012 16:59

Employee Benefit Trusts

If I remember correctly, a number of the IR35 Avoidance mechanisms touted around the inter-web centered on the use of EBTs.

 

In light of the current issues at Rangers and their use of EBTs (see other posts) has anyone assessed the likely impact on gullible contractors?

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