IR35 extended to office holders for tax purposes

IR35 has been extended to ‘office holders’ in Finance Bill 2013, which could have implications for accountants, according to IR35 consultants  Qdos Consulting.

The amendment to clause 22 of the legislation (as outlined in the explanatory note) equalises the tax treatment of office holders engaged through third parties, with the treatment under the relevant NI legislation.

The issue with the amendment however, according to Qdos operations director Seb Maley, is that there is no statutory definition of what an office holder is.

“In HMRC’s status manual, the judicial definition of office holder is a...

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Comments
johnjenkins's picture

It still

johnjenkins | | Permalink

won't make any difference. IR35 is dead and buried. HMRC are clutching at straws if they think this will give them a renewed attack on SME's.

Seb Maley's picture

Risen From the Dead    1 thanks

Seb Maley | | Permalink

johnjenkins wrote:

won't make any difference. IR35 is dead and buried. HMRC are clutching at straws if they think this will give them a renewed attack on SME's.

Some would have said IR35 was dead and buried a couple of years ago, but more recently it has experienced a dramatic resurrection. We've had an unprecedented rise in the number of enquiries amongst our clients and this is mirrored across the industry.

HMRC are taking IR35 very seriously at the moment, particularly in the public sector. Whether or not their record in winning cases will improve is another matter, but the risks of being on the receiving end of an enquiry are significantly increased.

 

johnjenkins's picture

I'm sure HMRC

johnjenkins | | Permalink

think they are on to a good earner but they forget a number of things.

They are trying to take away a legal entity by bypassing Limited Companies rules.

If they prove that the subbie should be on PAYE then it is up to the contractor tp pay.

Contracts will be made tighter and tighter according to the tribunal cases.

Now if HMRC want to waste their time, but then that is what they do these days, in the hope of raising money to waste more money on other stuff that won't work, good luck.

.

ireallyshouldkn... | | Permalink

Er?

"Accountants working for one main client, i.e. in an FD role, could be directly affected by the amendment

Surely they would have been "at risk" to start with if you spend (say) 3 days a week as FD of a single company? 

Even if HMRC do manage 2,000 enquiries a year (which is a good 200 times what they have been doing), it's still a drop in the ocean compared to how many contractors there are. 

Seb Maley's picture

At Risk

Seb Maley | | Permalink

ireallyshouldknowthisbut wrote:

Surely they would have been "at risk" to start with if you spend (say) 3 days a week as FD of a single company? 

Yes, but there's a big difference between being 'at risk' and being automatically caught. There were just 23 IR35 enquiries in 2010/11, so the likelihood of being picked up was very slim. I think a lot of people took advantage of this, hence HMRC's current crackdown.

.

ireallyshouldkn... | | Permalink

Seb - should you not point out you are from Qudos, ie behind this article?

Moreover all this change seems to do is to confirm what we already know. Ie if you step out of your job on a Friday and go back on a Monday as a conctractor so in effect you are still "embedded" in the management struuctur. For example you have direct staff reports, appear on the company website as their FD, then quite frankly you haven't got a leg to stand on.

The only difference from a couple of years ago and now is HMRC seem to be doing something about it, or at least making noises as if they are. This is a good thing. 

Seb Maley's picture

.    1 thanks

Seb Maley | | Permalink

Sorry, I thought that would be obvious. I'm just answering questions that arise from the article.

I think the point is that over the past few years more and more people are using PSCs to minimise tax without paying any attention to IR35. You shouldn't have a leg to stand on in that situation, but hundreds (or thousands) of people have been happily operating in that manner without any problems.

johnjenkins's picture

Is it really up    1 thanks

johnjenkins | | Permalink

to HMRC to decide the way we do our work and what vehicle we use?

Is it wrong for someone to be on PAYE on friday and the following monday be self-employed with the same duties? Surely that is market forces and we all know what happens when you start dabbling with market forces.

We are taxed left right and centre and our money is wasted, so to cover that waste government want more.

We will end up like the rest of the EU, of that there is no doubt.

Zero Hour Contracts    1 thanks

trecar | | Permalink

I'm now wondering if the growth in zero hour contracts could impact more here. According to the FT there are now over 100,000 contracts in existence in the NHS and they are increasingly being adopted by other types of organisations in the current economic circumstances.

It does start to undermine some of the arguments put forward about what does or does not constitute a contract of employment. After all any sane person would find it difficult to understand how you can be contracted to work zero hours, be un-remunerated with no benefits or statutory contributions made and yet still be classified as an employee for tax purposes. Where is mutuality of obligation? The employer has also made a declaration that no actual employment exists until work is available and so is in no position to control the time element. This rather suggests that unless there is a contracted obligation to perform at a time and place of the employer's choosing for a given amount of time then the employee is master/mistress of his/her own fate. Not sure if I have got it right. Perhaps the 2,000 odd enquiries could be swallowed by this problem.

johnjenkins's picture

There are

johnjenkins | | Permalink

many different contracts about that bypass IR35 and if HMRC win a case there will be other contracts to suite.

This is one HMRC have no hope of winning and the sooner they realise the better.

The past does not equal the future

davechaplin | | Permalink

HMRC certainly dropped the IR35 legislative ball in previous years, but as the saying goes "The past does not equal the future". The minimal investigations in previous years did encourage  complacency amongst contractors, and there are sitting ducks waiting to have their tax feathers plucked. If the new HMRC IR35 investigation machine yields a positive return there will be every reason to scale it up. The jury is currently out as to how well they will do - but for the sake of a few quid to protect yourself, why gamble?

Those in office holder type positions are undoubtably more at risk of being investigated, simply because they are bigger ducks with more tax feathers to pluck. Why go after someone earning five figuresa  year when you can go after someone earning six.

I agree entirely with John that contractors should have the freedom to contract and HMRC shouldn't have the powers to override how people have decided to conduct business. The problem is that the tax taps are drying up and they need to try and get as much as they can from as many areas as possible.

 

johnjenkins's picture

@dave

johnjenkins | | Permalink

[The problem is that the tax taps are drying up and they need to try and get as much as they can from as many areas as possible.]

That is exactly why HMRC should steer well clear of IR35.

 That is exactly why thTTahshsn  Tttttt

IR35 is a political hot potato

davechaplin | | Permalink

Given the economic climate, and the kind of service company witch hunts encouraged by Hodge, HMRC have to be seen to at least try and enforce the legislation. This means contractors will still get investigated, irrespective of whether HMRC will end up with a net gain.

Whilst many contractors adopt the "ostrich defence" towards IR35, the fact remains that if you are are put under the kosh by HMRC it can get expensive. It's far cheaper to take a proactive approach and get all ones ducks in a row just incase they come knocking.

There are indeed much bigger fish HMRC could be going after with their limited resources, but we don't know yet whether IR35 will be a case of spending £10 to get £9 or less back.

cfield's picture

Grabbing too many nuts

cfield | | Permalink

HMRC are a bit like the monkey trying to grab too many nuts out of the jar. Unless they are prepared to let some go, they won't get any at all.

The Business Entity Tests are a prime example. They've made them so unrealistic that all the extra resources they're throwing at IR35 will be wasted by poring through thousands of cases that fail the tests but will ultimately escape IR35.

Osborne told them to make IR35 work better. They appear to be doing the complete opposite. We can only hope (or maybe not hope) that they have 2 sets of tests - the official one to scare people into thinking they're caught by IR35  and another for deciding on the real priority cases (internal use only).

As for the new office holders rule, if this is just to equalise the tax and NI rules I can't see what difference it makes. People work through companies (amongst other reasons) in order to dodge NI, not tax. You have to pay higher rate tax on the dividends anyway so you don't save much on that front, unless you retain profits for years when you are not working or extract them as a capital gain when you finally close the company.

So, if "office holders have always been caught by IR35 for NIC purposes" as stated in the article, what difference does it make? I suspect it's just another way of catching the likes of Ed Lester by putting senior public officials squarely in the IR35 frame.

Incidentally, a bit of anecdotal evidence. One of my contractor clients who works for the NHS was asked by his manager today to get an accountant's letter to confirm that he was paying taxes. At first I was worried they might be looking for confirmation that he was putting all his fees through the payroll, but the instruction was suitably woolly. The exact words were as follows:

"I need to get the HR taxation form signed off by the Director of finance tomorrow.  To do this he needs to have evidence that you are paying tax.  Payslip, accounts, letter from your accountant should do."

Clearly NHS managers regard this latest political obsession as a damn nuisance to be got out of the way as quickly and with as little fuss as possible. Unlike politicians who are driven chiefly by their own self-image and public opinion, these people understand the realities of running a public service. They want to keep valued contractors on board at all costs, not drive them away by giving them the 3rd degree about their personal tax affairs.

 

 

johnjenkins's picture

And one wonders

johnjenkins | | Permalink

why the NHS is in such a mess.

spouses...

Carl London | | Permalink

cfield wrote:

People work through companies (amongst other reasons) in order to dodge NI, not tax. You have to pay higher rate tax on the dividends anyway so you don't save much on that front, unless you retain profits for years when you are not working or extract them as a capital gain when you finally close the company.

You are forgetting that lots of contractors have issued shares to spouses etc, so also lots of tax dodged here across the contractor industry....

cfield's picture

Spouse dividends

cfield | | Permalink

Carl London wrote:

You are forgetting that lots of contractors have issued shares to spouses etc, so also lots of tax dodged here across the contractor industry....

Good point, although in my experience most contractors don't actually bother with that, probably because their spouses are working too. Childcare vouchers is another good tax dodge that would be lost under IR35, as they are not deductible from the Deemed Payment as pension contributions are.

By and large it is the NI that makes the difference, and to that extent, I think the office holders change does not make much difference to ordinary contractors.

johnjenkins's picture

You are talking as though

johnjenkins | | Permalink

working through a limited comapany is a tax dodge. Wrong it is a perfectly legitimate way of working, there is nothing artificial about it. I think it's about time someone put a lid on this so I'll make it perfectly clear. It is not up to HMRC to decide a method of work. There is nothing wrong with being on PAYE on friday and Ltd Comapany on monday. The only reason they stick their noses in is to try and get more revenue. That is not their job. That's why IR35 is dead and buried and will never be able to be enforced.

cfield's picture

No it's not dead

cfield | | Permalink

johnjenkins wrote:

That's why IR35 is dead and buried and will never be able to be enforced.

Unfortunately it's not dead and buried though, is it? It's been given a new lease of life, and we as accountants have to deal with it, so rather than moaning about it or sticking our heads in the sand, let's tackle it and minimise its impact as much as possible.

Actually, there is something wrong with Fridays to Mondays as more often than not there is a substantial degree of arm twisting involved, with the consequent loss of employment rights such as unfair dismissal. That's what the famous Muscat case was all about. There was a lot of that going on in the late 90s, and if IR35 had been restricted to such cases, it might not have been such a bad thing. They missed a golden opportunity to reform it with the OTS report a couple of years ago. IMHO, restricting it should been one of the options presented to Osborne.

By the way, when I used the phrase "tax dodge" I did not mean it in an underhand or immoral sense. As you say, nothing wrong with working through a company. Tax dodge in common parlance can mean tax breaks that Parliament intended (such as childcare vouchers) as well as the exploitation of unintended loopholes.

johnjenkins's picture

Working through

johnjenkins | | Permalink

a limited company is not a loophole. Working methods should be decided between those that give out the work and those that do it, without interference from HMRC. Tax dodge to me means just that. Tax breaks also mean just that.

The OTS is defunct as no one in power takes notice. IR35, whatever they try and do to it, is long gone. Contract for services now can cover all aspects.

The main reason why IR35 could never work is because if you take away the limited company status, you are left with a PAYE situation, which really has to be paid by the entity giving out the work. HMRC can't just transfer PAYE status from one entity to another.

I have been an Accountant for over 45 years (too lomg you may say) and I have never seen such an attack from HMRC on the self-employed (in whatever form) with little reward, in fact it would appear the harder they push the less revenue they receive.