Lords open inquiry into 'clumsy' IR35

Parliament TV

A leading tax expert told peers reviewing the controversial IR35 legislation that its original design, based on contract by contract policing, was “innately clumsy”. Andrew Goodall reports on Monday's hearing.

John Whiting, director of the Office of Tax Simplification (OTS) and a non-executive director at HMRC, was giving evidence to the House of Lords personal service companies committee investigating “the consequences of the use of personal service companies (PSCs) for tax collection”.

In the inquiry’s first public hearing on Monday, the committee also questioned Rowena Fletcher, HMRC’s deputy director with overall responsibility for employment status matters, and Robin Wythes, employment status team leader at HMRC.

The committee is led by Baroness Noakes, a former president of the ICAEW. “We need to ensure that our tax system does not place unreasonable burdens on taxpayers,” she said earlier this month.

HMRC estimates the current PSC population at around...

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carnmores's picture

well overdue look at this , £10m !!!!

carnmores | | Permalink

the rules are a mess, is there an acceptable answer to scrapping 'IR35' , how about abolishing a PA for employees of such companies and a special rate of CT

frustratedwithhmrc's picture

As per usual, ignore compliance costs    6 thanks

frustratedwithhmrc | | Permalink

As per usual with these matters, it completely ignores the compliance cost or the amount of hours lost to IR35 compliance / hoop jumping that could have been spent by agents and clients on actual revenue generating business.

IR35 is attempting to plug a hole that only exists because of the difference in taxation between highly paid, highly skilled employees and those operating through limited companies using low salary + high dividends.

The main problem here is not just IR35, but charging Employers NI for one-man-band limited companies, which only really exist because of various regulations introduced by previous governments to prevent contractors working for companies on a self-employed basis where there was genuine self-employment (agency regs, msc regulations, etc.)

 

 

.    8 thanks

ireallyshouldkn... | | Permalink

It goes to show that most people do what we do - draw up on the basis its outside, stick a big dislcaimer in and hope you are not looked at.

If they have 40 people on the team and they have started 112 investigations and completed 65 contract reviews, what exactly do the other 38 people do all day?

 

the other    7 thanks

justsotax | | Permalink

38 are subcontracted via Ltd Co's and do bits of consultancy... 

It could be so simple.....

Vaughan Blake1 | | Permalink

Who remembers "investment income surcharge" & "close company apportionment"?

Both were relatively straightforward and simple to operate.  It would therefore be fairly simple to re-introduce investment income surcharge on close company dividends over a certain level.  The level could be an actual income level or a percentage of profit or even a percentage of PAYE'd income. 

It would not only fix the IR35 companies it would also cover the other companies that use the low salary high dividends that even a perfect IR35 wouldn't touch.

johnjenkins's picture

"Innately Clumsy"    1 thanks

johnjenkins | | Permalink

that's got to be one of the biggest understatements of the year.

"Illegal" and many other spring to mind. Why illegal? If it is shown that the working relationship is one of employment then the contractor is liable to foot the bill not the subbie. You cannot put a limited company on the payroll therefor if you take that staus away (IR35) then you are left with a worker (either self-employed or employed). There is no other scenario.

Anyway there are so many contracts for services out there that really nobody should get caught by IR35.

dialm4accounts's picture

Complete overhaul for the modern world    2 thanks

dialm4accounts | | Permalink

The UK's tax system needs a complete overhaul so that it fits with today's working practices.

As well as the removal, or adaptation, of IR35, we need:

 - A tax allowance for meals for groups of freelancers who work together as an informal "team" but each have their own business.

 - A tax allowance for sole traders who work in coffee shops - effectively they buy coffee regularly instead of paying rent at a serviced office etc, and that rent would be allowable, so they should have an allowance for their coffee.

 - Clear guidance on the tax treatment of meals for directors of one-person limited companies.

 - Guidelines around where a company is "controlled and managed" if its directors live in different countries and have "board meetings" over Skype or similar.

M

Locutus's picture

Freelancing - good or bad?    4 thanks

Locutus | | Permalink

A problem within Government, HMRC and to some extent society in general, is the belief that freelancing is only done to avoid / evade tax, so must be clamped down upon to minimise the tax loss and to minimise the "exploitation" of those workers.

It's just the way many skilled workers / contractors wish to work with each other in the modern world and instead of being punished, should be encouraged.

I wish they would scrap just IR35 in all but the most blatant of cases. Perhaps the annual tax take would fall by say £500m, but efficiency across the whole economy would increase by probably double that amount - particularly in Government Departments that are currently shunning freelancers!

Mark Three's picture

Long answer, short ?    2 thanks

Mark Three | | Permalink

Apply IR35 to the client rather than contractor.  If under IR35 HMRC can look through from contractor to client to establish the relationship it could work the other way.

Better answer - allow workers to keep more of their earnings by whatever route. Reduce employment taxation (NI), increase personal allowances so that no one pays tax or NI at minimum wage over a normal working week - so a PA and NI threshold of £6.31 x 40 x 52 = £13125.  Genuinely 'make work pay'.

IR35

Oppco | | Permalink

The government went wrong by not putting the burden of operating an IR35 type system on the payer. 

Totally agree

hiu612 | | Permalink

There are a million and 1 reasons why people operate other than as employees. Tax is only 1.

The IR35 Industry

jdixon2614 | | Permalink

IR35 has been a mess since it was first introduced. I think that most people who have any involvement at all (excluding HMRC) with the legislation accept that it is unfair and doesn't work very well. Of course a huge industry of tax advisers and tax insurance providers has grown up over the past ten years or so, so there are plenty of people who (secretly) are probably quite happy that it exists.

John Dixon
www.MyBookkeepingManager.com

IR35 Loopholes    1 thanks

ramorrison1 | | Permalink

I find it frustrating that people can masquerade under the illusion of a limited Company to avoid higher rate tax and 100% of NI contributions, whilst also helping their "employers" save on administration and employers NI. The oil & gas industry is riddled with this, people who work off-shore are told they won't get a job unless they set up as a limited company. This happens and those of us who are employed and pay full tax and national insurance get made to look like mugs as others are able to get away with paying lower rate Corporation Tax and no National Insurance. Coupled with this being they are able to pay themselves a salary above the threshold to be entitled to a state pension but below the threshold for actually paying any tax and NI. Therefore gaining even more from our country over their lifetime. HMRC MUST clamp down on this sort of thing. It only brings unease and unrest to those of us who pay our taxes and NI accordingly. I am all for promoting entrepreneurs but an easy loop-hole to avoid tax is another matter.

Jobs for the boys    1 thanks

MartinGatehouse | | Permalink

Why are they all wasting their time (and our money) talking about this in the House of Lords??

Building a simple taxation system is simple. Period.

 

Scrap IR35?

ramorrison1 | | Permalink

Therefore every single person in employment would become a contractor and NO National Insurance would ever get paid and people would only ever pay Corporation tax at 20%????? This would also mean that everyone would lose their employment rights.

Not for the first time,......    2 thanks

nickja | | Permalink

....no-one seems to be acknowledging that much of the problem is caused by employers who want to pare employment costs to the bone.  Many people have service companies because their former employers pretty much told them that their continued income was dependant on them taking that step, thereby moving NIC, holiday and sick pay costs from the employer to the (former) employee, more often or not with little or no explanation of those financial consequences.    It seems to me bizarre that individuals affected in this way not only suffer financial disadvantage but are pursued far more vigorously for their tax compliance than are their former employers for compliance with employment law.

If somebody sits in your office, using your resources to provide benefit to your business, they are your bloody employees.   If that issue was properly enforced, IR35 would be largely unnecessary.

The Politics of Envy!    1 thanks

Michael C Feltham | | Permalink

We can thank the NuLab Paymaster General, Dawn Primarolo for the abortion of IR35.

It sprang from two causal drivers: the politics of envy and the profligate greed of HM Government, determined to drag everyone into the land into the clumsy and archaic PAYE system.

As we know, both HMRC and the Department of Employment mounted blitzkriegs on all sorts of contractors, determined from the get go to "Prove" they were not actually contractors, per se, but employees. In order they too might be added to the PAYE net.

Now, I fully accept many previously employed IT workers were shifted onto contracts, operated by outsource agencies and encouraged to set up close companies to launder the pay: when in truth, these workers were shadow employees.

However, as big biz has become evermore venal, and eschews actually employing people, when they can rely on constantly churning temps and contracts, then it is hardly surprising so many of these moved their earnings basis to Ltd companies.

As earlier stated by frustratedwithhmrc in the 1970s the then Board of the Inland Revenue ordered government within a Finance Act to preclude the self-employed from many areas of honest endeavour and the result was a flood of conversions to limited liability companies: which IR accepted without a whimper.

Let's face it, even self employment was attacked by Thatcher when her government introduced Class IV NIC: for which privilege, the self employed receive absolutely no forward benefit. It was and is purely a tax on self employment: or looked at another way, a non-selective employment tax (for those old enough to remember Selective Employment Tax).

Having been deeply involved in ICT, my main objection is over skills and equipment costs: in order to keep right up to date, techies must fork out a fortune on the latest hardware and software systems as well as attend a plethora of seminars and courses: all of which they have to fund.

IR35, however, makes absolutely zero allowance for such costs. With technology advancing at the speed of light, the techie who fails to keep right up to speed soon becomes an unemployed contractor and worse, an unemployable techie!

I wonder just how many of the old trouts involved in this enquiry, have actually started a business and/or run a business in the real world?

My answer would be few to none......

 

 

Why give freelancers perks that the rest of us dont get?

margaretferguson | | Permalink

The guidelines for control and management are clear enough. Presumably they just don't suit you?

Locutus's picture

Yes, scrap IR35    2 thanks

Locutus | | Permalink

ramorrison1 wrote:

Therefore every single person in employment would become a contractor and NO National Insurance would ever get paid and people would only ever pay Corporation tax at 20%????? This would also mean that everyone would lose their employment rights.

No quite true, ramorrison1.  Some people don't want employment rights and would prefer to pay less tax and have more flexibility.

Others prefer the security and benefits of employment, which is fair enough.

Give workers the choice.

Complete overhaul needed    1 thanks

Colin Lothian | | Permalink

The root of the problem here is the discrimination applied by the tax system between the self employed, PSCs and the bulk of the population on PAYE. If National Insurance and income tax are merged as was proposed some time ago, the need for Status Inspectors and all the paraphernalia of IR35 would disappear at a stroke. As usual this government is simply tinkering at the edges.

IR35 Mk I sought to do just

adbanks | | Permalink

.

Agree with NIckja

davegibson00 | | Permalink

nickja wrote:

....no-one seems to be acknowledging that much of the problem is caused by employers who want to pare employment costs to the bone. 

What the authorities, and even Mr Whiting it appears, consistently fail to realise is that the situation is very often by demand of the end client in order to evade/avoid employment law obligations, rather than through any choice of the contractor.

And what's the cost of running this committee and review?

davegibson00 | | Permalink

Ten million or so?

Commodities in a box    4 thanks

adagen | | Permalink

It appears that we are living in a state which can only see one valid way of working - as a faceless commodity corralled in a large box with large numbers of other faceless commodities. It's a mass production model which creates a nice neat situation whereby tax inspectors only have to deal with the top management of such organisations, or, at the lowest level, people who are paid to spend their time on understanding PAYE administration as defined by HMRC rather than as defined by the law. For that mindset, one man companies are way too messy and inconvenient.

Independence and innovation are being viewed as subversive, something to be discouraged through the might and inertia of the tax regime. If you go back a few months, Lord Browne announced on the Today programme that the only valid model for a small company is to aim to grow into a big company. Yet, at the same time, large US companies are sponsoring academic research to find out how to regain the flexibility and fresh thinking which comes so easily to small companies. The more the UK kills off all but the behemoths, the further this country will fall behind the rest of the world.

We really need a 'small is beautiful' movement to emphasise the value of people who want to operate as individuals or in small groups, whether that is as a family business with no aspirations beyond supporting a family, or as specialists dedicated to their specialism rather than the corporate greasy pole, or as lifestyle businesses who choose a workstyle which offers flexibility and variety.

frustratedwithhmrc's picture

Certainly, if the fiction of Employers National Insurance is too    2 thanks

frustratedwithhmrc | | Permalink

Colin Lothian wrote:
If National Insurance and income tax are merged as was proposed some time ago, the need for Status Inspectors and all the paraphernalia of IR35 would disappear at a stroke.

The problem here is that the economic incidence of the Employers NI is actually carried by the employee, from the employers perspective all aspects of PAYE are the cost of employing the employee.

The problem with loading this onto income tax would be that people earning relatively modest incomes would suddenly realise the state is taking a vast amount off them in tax, probably upwards of 50% of their total salaries.

Although such a move would in reality be tax neutral, it would look like a massive hike and the opposition would portray it as such regardless of the reality.

should_be_working's picture

It's not just about tax    1 thanks

should_be_working | | Permalink

davegibson00 wrote:

nickja wrote:

....no-one seems to be acknowledging that much of the problem is caused by employers who want to pare employment costs to the bone. 

What the authorities, and even Mr Whiting it appears, consistently fail to realise is that the situation is very often by demand of the end client in order to evade/avoid employment law obligations, rather than through any choice of the contractor.

 

True, but you can't necessarily blame the client for that either - there's a limit to the level of employment regulation that can be tolerated by a labour market just as there is an optimum level of tax that can be sustained by an economy. With burdens like auto-enrolment coming in such factors will only become greater.

raybackler's picture

The politics of envy and a failed system    1 thanks

raybackler | | Permalink

So who doesn't want small businesses to grow and employ staff?

Most small businesses start as self-employed and they avoid employer's NI (13.8%) and pay a lower rate of NI (9%) compared to employee's NI (12%).  The self-employed lose sick pay, holiday pay, paternity pay, maternity pay, job security and many benefits.  Employers incur additional costs to train staff and provide the employee with most, if not all, of the equipment to do the job.  The self-employed have to fork out for this and for marketing their business.  The balance between employment and self-employment taxation seems fair to me.

Once a business has grown to a certain level of profitability, then it makes sense to incorporate.  There is a saving in NI compared to self-employment, but there are additional costs in administering a limited company, so there should be some trade-off in taxation.  It is these people who take huge risks when employing staff and they are the engine room of economic growth.  They should benefit from tax breaks to make this happen and to offset the risks.

Then there are contractors, one-man band companies, who generally have no desire to employ staff and haven't been through the painful steps of growing a business through the self employed route and eventual incorporation.  Because of the scale of the fees they can earn and with their contracts being longer term, they can go straight to incorporation.

Employers often want to take on contractors for project work, which causes an increase in workload, where there is no desire to employ the contractor at the end of the project.  This seems fair to me.  Employers want to avoid the problems associated with the self-employed, because of the risk of employment being established.  This is not possible when a limited company contractor is engaged.

IR35 was brought in to re-cover tax and NI because of this practice, but it didn't recognise why contractors exist in the first place.  Both the employer and the contractor need this relationship because they both need the flexibility in the labour market.  It is this relationship that normally succeeds, when HMRC challenge whether IR35 should be applied, because there is no intention by either party to be employed.

There are those who have abused employer and contractor relationship, who are really disguised senior level employees, and legislation should apply to this area.  However, the vast majority of contractors live in fear of IR35, which should not apply to them at all and for this reason it should be abolished.

kenny achampong's picture

Surely the biggest offenders    1 thanks

kenny achampong | | Permalink

Surely the biggest offenders are the government themselves, and government funded bodies. I have had numerous IR35 situations, nearly all employed by HMRC, local councils, NHS PCTs, Legal Aid Board, the LT partnership, etc. I've had a few building trade contractors but 90% of mine are funded by the government.

They are just sidestepping their own onerous employment rules, and also save the permanently increasing employers NI as well. And then they have to cheek to introduce IR35 to try and shift the blame onto their 'employees' and get them to pay the very taxes they themselves are avoiding.

It's straight out of Yes Prime Minister. 

The employment laws need to change first and then close the gap by stopping the incessant smoke and mirrors of tax decreases and NI increases.

 

Need a new way of taxing the self employed    2 thanks

Ken Howard | | Permalink

It's nonsense that the tax/nic payable should depend on the structure of the business.  If Fred Smith is "self employed", he should pay the same tax/nic whether he's a sole trader or limited company.  

One way would be for tax to "see through" a limited company structure and for tax/nic to be charged at exactly the same as if that same person was a sole trader.

The tax system only has two categories- either employed or business.  Self employed people may or may not be in business in the true sense of the word.

The biggest problem with IR35 is indeed employers NIC - a sole trader only pays NIC at 9% plus Class 2, but a limited company owner pays circa 25% when adding both employee and employer NIC - that's were the great inequity and unfairness comes in.  

An alternative would be for there to be no employers NIC on wages paid to someone who has a major stake in the employing company, say 40% or 50%.

When meeting a new client and showing them the comparisons of tax/NIC under each scenario, it's crazy that they may have x to pay as a sole trader, but far less than x as a limited company without IR35 and far more than x for a limited company under IR35.  We have to get to where the differences are a lot smaller so that tax/nic isn't the prime motivation for deciding which way to go.

johnjenkins's picture

I've said this many    1 thanks

johnjenkins | | Permalink

times before and I will say it again.

It is not up to HMRC to decide how people choose to do their work. It is up to the Worker and the work giver.

IR35 was bought in to challenge that concept and look where it is, totally defunct (although HMRC wouldn't agree).

Come on DC you've realised that we are going to have an immigration problem next year (after 6-12 months when the Eastern Europeans start doing the £15k a year jobs for £10K), surely you can see the employment status problem, or is it a question of destroying all SME's?

Following the logic of Margaretferguson and ramorrison1 we should all work hard, each have an allocated bedroom and garden space, food vouchers and a bit of pocket money. Now where have I seen this been done before?????????

There is 'push' and 'pull' here....    4 thanks

John Whiting | | Permalink

 

Could I just point out to davegibson00, who said

"What the authorities, and even Mr Whiting it appears, consistently fail to realise is that the situation is very often by demand of the end client in order to evade/avoid employment law obligations, rather than through any choice of the contractor."

that I made this very point in my evidence. I stressed that the 'IR35 issue' is a product of both 'pull' - people wanting to work on their own, operate through a company etc - and 'push' - businesses reducing costs, wanting to protect themselves against unexpected PAYE bills etc.

johnjenkins's picture

@John

johnjenkins | | Permalink

The IR35 issue is a product of greed, stealth and the destruction of the self-employed or one man band limited company by HMRC under Gordon Brown and carried on by this shambles. The Limited Company gives protection against bad payers (normally large concerns - some take 90 days to pay or you don't get the contract and government contracts) and constant attacks from HMRC (under government guise) to put the self-employed on paye.

Are the people who want to be self-employed not allowed to fight back? It appears so.

As so many of us have said give the country a fair tax system and the money will come rolling in.

 

 

Andrew Goodall's picture

Push and pull

Andrew Goodall | | Permalink

John, my original draft quoted you on the "push and pull" point as follows. This was lost in the editing but as you say it's worth highlighting:

BEGINS

HMRC’s estimate of the PSC population seemed “very plausible” and there was no doubt that the numbers had increased. They could well continue to go up, [Whiting] said. “There is a sort of pull and push. The pull is the potential for tax saving … and a genuine wish for people to freelance.”

Working patterns had changed, and for those pursuing the route of freelance, contractor or a portfolio career, working through a company could make “eminent sense”. He added: “I have to say there’s the push – that in many cases people want to work for an organisation … and the organisation says ‘I will take you on, only if you work through a company’. That is there to protect the organisation against a PAYE exposure, because if you’re working through a company you’re not an employee [and there are] no employment rights.”

ENDS

The uncorrected transcripts of evidence are now available at 

http://www.parliament.uk/business/committees/committees-a-z/lords-select/personal-service-companies/publications/

Andrew

Unfair NIC burden on one mand companies

susanwft | | Permalink

frustratedwithhmrc wrote:

As per usual with these matters, it completely ignores the compliance cost or the amount of hours lost to IR35 compliance / hoop jumping that could have been spent by agents and clients on actual revenue generating business.

IR35 is attempting to plug a hole that only exists because of the difference in taxation between highly paid, highly skilled employees and those operating through limited companies using low salary + high dividends.

The main problem here is not just IR35, but charging Employers NI for one-man-band limited companies, which only really exist because of various regulations introduced by previous governments to prevent contractors working for companies on a self-employed basis where there was genuine self-employment (agency regs, msc regulations, etc.)

Your final paragraph sums this up perfectly. The government created a situation where a worker can only offer his/her services via a Ltd company intermediary, and then they NIC that very same intermediary twice!  HMRC needs to meet the contractors on a level playing field instead of wanting to have it all their own way.

 

John Stokdyk's picture

Apologies and a change of tack

John Stokdyk | | Permalink

First, my apologies to John Whiting and Andrew Goodall. I was the person who edited out John's comment from the original report, as I was keen to try and keep the item to a readable length. But perhaps IR35 is an issue that breaks our normal editorial rules.

It certainly arouses some righteous passions, but I'm also curious about where the inquiry is heading, and why it appears to be acting with such uncharacteristic speed. Baroness Noakes is an influential Conservative politician as well as former ICAEW president, and if she's preparing a report for March, I'm wondering if there might be some hope of the government acting on its 2010 election promise to reform IR35?

If that is the case, what I haven't seen yet on this thread are any responses to the committee's call for evidence which included questions such as:

  • Should the current intermediaries legislation be reformed and if so, what would be the alternatives?
  • To what extent does the current IR35 legislation impose additional compliance burdens and administrative costs?
  • Are HMRC’s recent efforts in improving the administration of IR35 judgement cases working?
  • Is more guidance and advice needed to aid individuals in judging the status of business transactions for themselves or should further resources be given to HMRC for compliance efforts?

There are many, many more. It seems to me that if the inquiry does lead to something more significant, it might be worth putting forward evidence on these points from AccountingWEB members to influence any recommendations.

I’d be interested to hear whether members think I’m being naive, or if you see any merit in adopting an approach of constructive engagement on behalf of the wider community. If you would like to explore this in more detail, I’ve started a related thread in our IR35 reform discussion group.

[Postscript] I just had a word with John Whiting and tried to get him to divulge whether there are any grounds for my speculations about the ultimate purpose and direction of the inquiry. He wasn't able to do so, but did encourage AccountingWEB members to get directly involved.

"I'm pleased they're picking up what the OTS said and think it's entirely appropriate 2-3 years down the track for the Lords to ask how's it going. If they do a quick review and quick report, that's very positive," he answered.

"The committee is very genuinely looking for evidence and would be interested to hear from ordinary practitioners. They will certainly read and pay attention to something from professionals with experience of the issue."

cfield's picture

Perks?    2 thanks

cfield | | Permalink

margaretferguson wrote:

Why give freelancers perks that the rest of us don't get?

What about all the perks you lot get but freelancers don't? (holidays, sick pay, pensions, employment rights, etc, etc)

cfield's picture

The solution is (and was) simple!    3 thanks

cfield | | Permalink

There are only 2 things that need to be done to reform IR35. They should have been done at the outset, and I believe would have been but for vested interests and certain left wing politicians trying to wage their silly war on "silly contractors"

1 - Restrict IR35 to ex-employees (Friday to Mondays) - leave the real contractors alone

2 - Make the erstwhile employer responsible for IR35 compliance

Yes, the contractors are saving NI and also higher rate tax in some cases, but why not? After all, they're fending for themselves instead of relying on others to employ them.

The state pension thing wouldn't be an issue if they hadn't made a complete nonsense of the rules and more or less abolished the link between earnings and pension rights by making S2P increasingly flat rate. There used to be a £2 per week entry fee once, which would probably be about £20 now.

Also, why should they pay 25.8% NI when it is very difficult to get the end-client to compensate for the employer NI they're saving? Many contractors aren't  aware of this and don't even attempt to negotiate a rate to cover it.

I realise this would allow the the likes of Ed Lester to run government agencies and be paid through a PSC, but let's face it, they got away with it for years anyway because HMRC turned a blind eye to them whilst hounding contractors. Actually, when you think about it, it's not so bad that they did.

Firstly, they got no employment rights, so we could get rid of them at the end of their contracts (or even before) if they were no good.

Secondly, no need to pay them a pension, or holiday pay, or sick pay, or maternity pay, or redundancy pay. Worth quite a bit to the Exchequer that, I would have thought.

Thirdly, the main saving is the employer NI. There's not much saving on tax as they're taxed at higher rates on the dividends, even if they defer them to later years. Yes they can save tax on splitting shares with their spouses, but if a wife is not working, why shouldn't her husband use her personal allowance? If he's supporting a family, it sounds fair enough to me.

Employee NI is negligible as these people earn far more than the UEL and only save 2% on most of their income. Which never used to exist anyway for the very good reason that SERPS pension rights were capped at the UEL.

And the employer NI for public sector bodies is paid by the state anyway, so what are we losing? If they have to pay 13.8% NI, it just comes out of taxpayers money as their budgets would have to go up to afford it.

IR35 should have been mainly a piece of social legislation to stop bad employers twisting the arms of their staff to work through companies (like poor Mr Muscat) just to reduce their headcount and make them lean and fit for takeover bids. That was the main problem 15 years ago and that was what we were told at the time IR35 was intended to stop. It's a shame the wrong people got hold of it and turned it into something else.

 

 

Avoiding employment costs    1 thanks

IANTO | | Permalink

John Whiting wrote:

"that I made this very point in my evidence. I stressed that the 'IR35 issue' is a product of both 'pull' - people wanting to work on their own, operate through a company etc - and 'push' - businesses reducing costs, wanting to protect themselves against unexpected PAYE bills etc."

Can I also point out that in my Employment Appeal case (John Williams v's Hewlett Packard Dec 2002) I made exactly this point and was severely admonished by Mr. Justice Elias for claiming so!

His ultimate judgement effectively determined that the provisions of the contract were paramount and that the inclusion of a substitution clause determined that I could not be an employee of the client. Exactly the judgement I wanted.

I re-iterate, that in my opinion, the only way to destroy IR35 is for a contractor who is "caught" by IR35 to take their case to the Employment Tribunal. I cannot see that the legal system could disagree with itself and come to an opposite conclusion in the ET.

If the contractor is deemed an employee under IR35, when HMRC have used case law from the Employment Tribunal to support their case, then I believe the ET would have great difficulty in countering that, more for political reasons than for legal reasons.

However, despite learned opinion, which incidentally I proved wrong in my case, no one has actually done this yet. I did it in reverse, i.e. I used the ET to determine that I was not an employee of the client so that HMRC would have difficulty in countering that judgement.

johnjenkins's picture

To me there are only    1 thanks

johnjenkins | | Permalink

2 reasons why IR35 doesn't work (if it did we wouldn't be having an enquiry) either it shouldn't be there in the first place or it was too hastily put together.

The concept of "taking away" limited company status must be wrong in every sense of democracy. It's just like the EU saying that the self-employed (workers) are entitled to holiday money.

So it's not just IR35 that is needs an enquiry it's the whole question of employment status that needs focusing on and that includes taxation.

Whoops there goes another pink elephant flying past the window.

The bigger picture

Vaughan Blake1 | | Permalink

Let's take a big step back here.

Tax should be a system that collects money from the population in a fair and equitable way. It is therefore intrinsically unfair that two people doing the same job & earning the same amount are taxed so differently depending on whether they are employed or trade through a company.

Ah, I hear you say, but the company contractor has no employment rights and therefore should pay a lower rate of tax.  This therefore means that the tax system is effectively subsidising the arrangement.  Surely it is up to the employing company to pay a higher rate to compensate for this, and not for the tax system to subsidise it?

The fundamental flaw is that investment income is effectively taxed at a lower rate than 'earned' income.  So easy to fix as per my previous post.

If a contractor (IR35 or not) is using a company, £7400 salary and the rest as dividends, then those dividends are in truth not investment income. It's a bit like the way 'bond washing' tried to turn income into capital in the 80s.

The other 'loophole' as HMRC see it is income splitting.  Husbands using their wife's personal allowance & basic rate band.  As a previous poster pointed out 'why is this a problem'.  DC is forever promoting the family unit and marriage.  What better way to assist that unit financially than surrenderable allowances and basic rate bands?

Employment status    1 thanks

IANTO | | Permalink

"So it's not just IR35 that is needs an enquiry it's the whole question of employment status that needs focusing on and that includes taxation."

This is exactly my point. Tax status is determined by employment status and not the other way around.

 

Employment status should be determined only in the Employment Tribunal and the Tax Commissioners (or the current equivalent) should only determine the tax liability as a result of the employment status.

 

However, HMRC liberally use case law from both environments, which to my mind is fundamentally wrong. The problem, as I see it, is that today, too many organisations, other than HMRC, have a vested interest in maintaining IR35.

 

I have repeatedly put forward my opinion regarding employment status, but I'm just a voice in the wilderness. No one wants to grab this hot potato!

frustratedwithhmrc's picture

It's like Mo Farah's left leg, neither right nor fair...

frustratedwithhmrc | | Permalink

Vaughan Blake1 wrote:
The other 'loophole' as HMRC see it is income splitting.  Husbands using their wife's personal allowance & basic rate band.  As a previous poster pointed out 'why is this a problem'.  DC is forever promoting the family unit and marriage.  What better way to assist that unit financially than surrenderable allowances and basic rate bands?

But going back to your previous argument about fairness and equity in taxation, as income-splitting is not possible between a PAYE schlep and his non-working wife, why should it be between a Limited Company Contractor and his non-working wife?

 

 

Just to clarify

Vaughan Blake1 | | Permalink

I am proposing the surrender for all married couples.  Otherwise I agree it wouldn't be at all fair.

johnjenkins's picture

@ Vaughan Blake 1    2 thanks

johnjenkins | | Permalink

I see where you're coming from but you have to consider the following:-

Wot about the husband and wife team who plough their hard earned savings into a venture that becomes successful, Are they not entitled to a "dividend" on their savings? That is the whole point of the self-employed (limited Co) scenario, you go it alone. There is no automatic pay cheque every friday or at the end of the month etc. etc. You have to "get the work" "do the work" "then get paid". Even those that finish paye on a friday and start Ltd Co on the following monday doing the same work can end up with no work and no redundancy.

The whole IR35 scenario (i do like that word) started with a greedy Gordon Brown trying to raise money for his incompetancy. He started with the self-employed (trying to say they should be on PAYE) when that didn't work hey ho IR35.

Most of us agree that HMRC or the EU should not be involved in employment status.

Risk

Gone Sailing | | Permalink

More risk, more reward.

@johnjenkins

Michael C Feltham | | Permalink

@johnjenkins

 

Whilst I agree that the element of actual personal financial risk ought properly to be used when considering any business venture, it was far too easy for a contractor to set up a close company, with his/her spouse as a co-director and thereafter split the dividend payments, pari passu, between them when the spouse was not actually working.

Some contractors tried the approach of averring their spouse was the administrator: then the Revenue simply demanded proof of total hours done and value of work, when compared to the main contractor's hours paid and work value.

Now HMRC could have, if they had so chosen, invoked Sect. 220 ICTA (I think! Long week, Friday tomorrow, hooray POETS days), where any distribution of dividends can be questioned.

http://www.hmrc.gov.uk/rewrite/cc-sc-08-23-en.pdf

Most contractors had/have little actual capital at risk: thus the argument concerning Risk-Reward can be tenuous at least and disingenuous at worst!

The short-lived NCD regime sought to correct this anomaly (when not captured by IR35 regime): however it was soon abandoned.

Quote:
Most of us agree that HMRC or the EU should not be involved in employment status.

In principle, again, yes I agree: however and that said, once any state sets up a regime of taxation and social contribution, then it thereafter sets out to capture as many productive persons as possible in order to feed its own profligate spending.

 

Risk

IANTO | | Permalink

"Most contractors had/have little actual capital at risk: thus the argument concerning Risk-Reward can be tenuous at least and disingenuous at worst!"

 

It's not all about risk. If a spouse is a director of the company, then there are legal responsibilities and penalties if those responsibilities are not met.

little actual capital risk...    1 thanks

justsotax | | Permalink

so....i am guessing the bigger risk for anyone contracting is the cessation of the contract....that makes paying the mortgage v difficult....

frustratedwithhmrc's picture

True

frustratedwithhmrc | | Permalink

justsotax wrote:
so....i am guessing the bigger risk for anyone contracting is the cessation of the contract....that makes paying the mortgage v difficult....

True, but that's a personal risk unrelated to the company.

but isn't

justsotax | | Permalink

this whole argument about...'personal service companies'....its about personal reward...but also risk....

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