MPs slam public sector IR35 arrangements

The Public Accounts Committee (PAC) has published a report on off-payroll payments criticising workers in the public sector for making their own arrangements to pay tax.

The committee said it was “shocked” to find the BBC had 25,000 off-payroll contracts including 13,000 for people who were on air.

However the report pointed out that IR35 was "not that easy to apply" and it was not being applied in as many situations as it could be. In 2010-11, only 23 IR35 investigations took place, down from over 1,000 in 2003-04 the PAC noted.

The PAC started its inquiries into off-payroll contracts after it emerged earlier this year that the former head of the Student Loans Company (SLC) Ed Lester was being paid via a company.

This triggered a Treasury investigation across government, which revealed that for more than 2,400 civil servants, tax was not being deducted through PAYE.

Following the review, HMRC's published a consultation document proposing to make it mandatory to put controlling persons on payroll rather than channelling payments through personal companies. The measure is slated for Finance Bill 2013, with draft clauses potentially released in early December.

AccountingWEB members pounced on distorted press coverage of the PAC report to lament they way general media tends to get tax stories wrong. Some queryied whether this is a deliberate ploy to score political points, either against the BBC in this instance, or previously when Ken Livingstone's personal service company income was highlighted during the London mayoral campaign.

 

Continued...

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Comments

I wonder if anyone on the    3 thanks

justsotax | | Permalink

committee considered the cost to the taxpayer of paying pension/holiday pay etc on 25,000 people (if they were to be employed)....considering things in isolation is never a good thing....

How can these arrangements be    2 thanks

Oppco | | Permalink

How can these arrangements be 'blamed' on the worker?

To be an 'employee' you have to be offered a job

He/she was not offered a job. He/she was offered a contract

This is why IR35 is so unfair

 

johnjenkins's picture

Same old same old.    2 thanks

johnjenkins | | Permalink

IR35 is artificial and it needs to be scrapped. Employment status should be decided between work supplier and worker not HMRC. If government aren't getting enough money then they should put the tax rates up so we can see which ones are efficient.

The real answer probably isn't interesting    2 thanks

davechaplin | | Permalink

Once again an MP won't let the real facts get in the way of a good story.

Contracting people to do project work isn't a tax avoidance measure. It's sound commerical business practise.

The question is how many at the BBC are in "disguised employment" - i.e. caught within IR35? And how many of those are not adhering to the IR35 tax legislation? At the moment we simply do not know. And if HMRC decide to investigate (one-by-one as IR35 reviews require) each of those arrangements, how many will they successfully challenge? The answer I suspect won't attract as many journalists.

Same old nonsense    3 thanks

NeilW | | Permalink

The problem is caused by the unnecessary differential in the tax rates. 

Rather than getting huffy, the public accounts committee ought to be asking why the differential is so ridiculously high.

It is no more inappropriate for a public body to push people via PSCs than it is for a large company. It is based on the same basic business tenets - in an environment where income is hard to come by, get your costs down.

 

The introduction of IR35 caused the PCG to come about, and that has brought lots and lots of cases to the courts pushing for self-employment. Prior to that the precedents were mainly employment tribunals pushing for employment.

Therefore it is hardly surprising that as the law has been 'clarified' by these cases the dividing line has moved more and more to self-employment, and it becomes clearer what you need to do to get what is frankly a very large tax advantage to all concerned.

 

IR35 needs scrapping and the entire taxation of companies, self-employed and employment looked at in the round. Hell will freeze over before that happens.

new rule    2 thanks

david5541 | | Permalink

Why dont they just introduce a fixed rule that ALL contractor/contract /off payroll/IR35 payments have a fixed rate NIC deduction at source- the post office already applies it to temporary cover subpostmasters why not all others doing cover in the public sector!

 

it would certainly help the coffers and would be a step towards NIC/tax merger and automate the NIC reclaim system for those paying too much class 4 or class 1-more likely- NIC....  why is  it all governments turn shy of NIC but castigate benefit claimants!

 

perhaps politicians dont understand the connection between pensions and NIC

NIC is more politically acceptable than tax.

You can't define a contractor    1 thanks

davechaplin | | Permalink

"Why dont they just introduce a fixed rule that ALL contractor/contract /off payroll/IR35 payments have a fixed rate NIC deduction at source- the post office already applies it to temporary cover subpostmasters why not all others doing cover in the public sector!"

Good in theory, but then they would need to define what a contractor is, which if you look in detail is an impossible task. When does a contractor turn into a real company for example?

 

Protecting the BBC    1 thanks

mickeyparish | | Permalink

Did anyone pick up the DG of the BBC on Radio 4 last week defending the policy of asking freelancers to use PSCs, by saying that the purpose was to protect the BBC from challenges to the status of the staff concerned from HMRC ?

I.e if you want to work as a freelancer, the BBC will ask you to set up a PSC so as to protect the BBC from a challenge.  What sort of challenge ?  Would it be a challenge that might cost the BBC 13.8% employers' NI ? 

labour

david5541 | | Permalink

when there is labour included in the charge for the work.

the problem arises with the deminimis limit-already nannies and porters have to be on payroll-

the question is how far would it go with regard to householders using someone to do improvement works.....

Inland Revenue

peter465 | | Permalink

Some years ago at a joint meeting with HMRC and the local CIOT branch I met a person who had a badge saying he was part of the Inland Revenue but was a freelancer.  I wonder how many people are contracted to HMRC now and are off payroll?

freelancers    1 thanks

reilloc | | Permalink

mickeyparish wrote:

Did anyone pick up the DG of the BBC on Radio 4 last week defending the policy of asking freelancers to use PSCs, by saying that the purpose was to protect the BBC from challenges to the status of the staff concerned from HMRC ?

I.e if you want to work as a freelancer, the BBC will ask you to set up a PSC so as to protect the BBC from a challenge.  What sort of challenge ?  Would it be a challenge that might cost the BBC 13.8% employers' NI ? 

It may be that in part, but I seem to recall from when I was contracting a few years ago that the HMRC holds the client and any agency jointly liable for any tax unpaid when the client is using freelancers. Therefore, the clients insist that freelancers are either ltd companies or work through an umbrella company.

The main issue here is, as stated by others, why aren't these "permanent contractors (especially those on 24+ month periods of service)" being caught by IR35?

johnjenkins's picture

@reilloc    1 thanks

johnjenkins | | Permalink

They are not caught by IR35 because they have proper contract for services in place.

@johnjenkins

reilloc | | Permalink

johnjenkins wrote:

They are not caught by IR35 because they have proper contract for services in place.

But from what I have read it is not easy (certainly in the IT industry) to write contracts that are outside IR35. I find it difficult to believe that contracts for 25000 people with the BBC or other Government agencies would demonstrate the level of risk and autonomy required?

johnjenkins's picture

I don't understand

johnjenkins | | Permalink

when you say it's not easy to write contracts that are outside of IR35. A contract for service states the terms that a subcontractor (whatever industry) will perform the duties required regardless of self-employment or Ltd Company.

frustratedwithhmrc's picture

Going back to the BBC again

frustratedwithhmrc | | Permalink

The issue of hiring contractors rather than employees tends to come down to a combination of avoidance of Employer NIC's and employment rights (especially pensions) as far as the BBC is concerned.

Other government departments, who are paid directly or indirectly by HM Treasury don't really worry about Employer NIC's as this is just a case of funds going round in a circle back to the HM Treasury. Thus a 1% rise in the rate of Employer NIC's, generally results in increased funding from HM Treasury to cover the shortfall.

As BBC funding comes from a truly hypothecated tax (the TV license) any increase in Employer NIC's reduces the BBC's profits. Thus they are more than happy (perhaps too happy) to ensure that those with multiple sources of income from the BBC and other production companies go down the Personal Service Company route, thus relieving the BBC of the 13.8% burden of NIC's on equivalent salaries.

The BBC claim that this is to manage risk is to a limited extent true, but mostly spurious.

I am sure there WILL be an investigation, probably by one of the Big Six accountancy firms, but they will find that the vast majority (by value) of the contracts in place are genuine although a token number will be found to be wrongly issued and these will be returned to a BBC PAYE payroll - for he who pays the piper, calls the tune in these things.

The reason that this will happen is that the BBC wishes to close down the argument and an investigation with a token number returned to PAYE will do that. But given that the license fee will not be increased for the foreseeable future, they must manage costs.

Having celebrities like Paxman invoice through PSC's is beneficial (from a NIC perspective) to both the BBC and celebrities, only the taxpayer loses out.

johnjenkins's picture

Instead of saying

johnjenkins | | Permalink

by using subbies the BBC (or any other concern) are avoiding tax (NIC) why not say HMRC are tax creating by saying that subbies can only be used in circumstances that they allow. HMRC should not get involved in status.

frustratedwithhmrc's picture

HMRC are arrogant and incompetent enough...

frustratedwithhmrc | | Permalink

johnjenkins wrote:
by using subbies the BBC (or any other concern) are avoiding tax (NIC) why not say HMRC are tax creating by saying that subbies can only be used in circumstances that they allow. HMRC should not get involved in status.

HMRC are arrogant and incompetent enough without them being the legislators or sole arbiters of who can or cannot be self-employed.

HMRC lobbied for IR35 (although not necessarily in the form that landed on the statute books) and have spent more than a decade failing to enforce it.

The last thing I want is for them to be judge, jury and executioner with respect to either employment status or IR35 determination.

Enough tribunals and court cases have gone against HMRC with respect of these two issues to prove that they simply can't be trusted, even WHEN they are behaving competently, which is rare nowadays.

 

only the taxpayer loses out

peterfox | | Permalink

frustratedwithhmrc wrote:

Having celebrities like Paxman invoice through PSC's is beneficial (from a NIC perspective) to both the BBC and celebrities, only the taxpayer loses out.

No they don't, not if the engagement is truly a contract for service as the tax was never owed in the first place.

tax paid by contractors can be more than PAYE

peterg11 | | Permalink

As a solo project manager in a limited company MY total tax bill including VAT, corporation tax, NI, payroll tax etc etc = 50% , so HALF of the charge to my client goes to the government in tax! Employees pay much less tax, typically below 35% after allowances so why are the government wingeing, if limited company contractors bring them MORE money?

Missing the point    2 thanks

7555775 | | Permalink

I think some of you are missing the point here. These people are employees and yes they may be moved from one thing to another but then who isn't in a large corporation? In good faith most employers do treat those in a similar position as employees so why shouldn't we expect the same particularly of the BBC and Government Departments. They are not above the law even though they clearly think they are.

 

I know several people who work for the Home Office in Croydon, they all "left" employment and came back self employed doing exactly the same job! That is what IR35 is for.

George Osborne    1 thanks

Roland St Clere... | | Permalink

How George Osborne had the front to say at the Nasty Party rally yesterday that "...we are all in this together" beggars belief. It is quite clear that many people still have their snouts well and truly in the trough.

 

IR35

tedbuck | | Permalink

Presumably all these contractors can be tipped out at a moments notice without redundancy, employment tribunals and pensions. Well there's a starting place for cutting the Civil Service and also the BBC club.

Of course the problem started when Gordon Brown (remember him - the architect of most of our disasters) decided that he needed to take the ceiling off Ers NIC payments. That really encouraged the use of service companies as it was a huge saving to businesses.

The answer to this problem as to many others is for HMG to stop spending other people's money as if it was a 5 year old child's pocket money. Then they wouldn't need to take so much.

They have no idea at all of how to get value for money and one assumes that the contractors who deal with them laugh themselves silly all the way to the bank. We, of course, just have to pay and wonder why we can't have competent civil servants.

The answer to that probably lies with the teachers who don't seem to be able to teach any longer. Milliband wants to keep children glued to maths and English until they are 18. When I was at school most if not nearly all children were more than adequate at both at 16. That seems to point firmly in one direction - teachers' failure, nice to see Milliband acknowledging that. I wonder what the teachers think.

Still at least the children will recognise H&S when they see it, and equality, but will probably take no notice. What a world!

If IR35 is meant to stop employers hiring people as contractors    2 thanks

peterg11 | | Permalink

why are the HMRC targetting contractors who accept these offers from employers. 

Surely the HMRC should be targetting and fining employers to encourage them to hire employees not contractors when the job is appropriate (e.g. not a short term project).

Employers have HR departments to ensure legal compliance (unlike many contractors) and have more funds to pay fines for failure.

 

ShirleyM's picture

@peterg    1 thanks

ShirleyM | | Permalink

We discussed this on here many years ago, and this was the original intention of IR35, but as usual the large companies (who were laying off employees and rehiring them as freelancers with the insistence they incorporated) used their influence and the government/HMRC backed off and went for the easier target.

frustratedwithhmrc's picture

Not quite the whole story as I recall    1 thanks

frustratedwithhmrc | | Permalink

ShirleyM wrote:
We discussed this on here many years ago, and this was the original intention of IR35, but as usual the large companies (who were laying off employees and rehiring them as freelancers with the insistence they incorporated) used their influence and the government/HMRC backed off and went for the easier target.

In fairness, to ShirleyM, that isn't quite the whole story. The original proposals made on which Inland Revenue (as then was) consulted would have placed the responsibility for proving and liability for paying IR35 on the company engaging the contractor rather than the contractor himself / herself.

This made sense as they were and are large corporates that have the capabilities to ensure the correct determination of IR35 and also the deep pockets to pay the underpaid tax, penalties and interest if they got it wrong.

This would have been a workable solution from everyone's perspective, however the large corporates were worried that they ended up footing the bill if / when things went wrong. So the large corporates lobbied parliament to have the draft legislation changed before it was enacted to put the responsibility and the liability on the contractor.

I suspect that at the time the Inland Revenue didn't complain too much because they thought it would be easier to squeeze the small one-man-band Limited Company contractor than a large corporate - they hadn't predicted the rise of the PCG (Professional Contractors Group), which has pursued and won about 95%++ of the IR35 cases since the legislation was enacted.

So if anyone is to blame for the dogs dinner that is IR35 then it is the large corporates, although the Inland Revenue / HMRC are culpable as well.

ShirleyM's picture

Thanks @frustrated

ShirleyM | | Permalink

You have explained it better than I, but we agree overall.

Large corporations used their influence and the government passed the laws the large corporations wanted, rather than the ones originally intended.

ShirleyM puts in a nutshell

mickeyparish | | Permalink

Large corporations used their influence and the government passed the laws the large corporations wanted, rather than the ones originally intended.

...and both government departments and Quangos have mimicked the behaviour of the corporates.  Well who would have predicted that ?  reminds me of the news some years ago that the Home Office were employing illegal immigrants as cleaners.  

 

The moral of it all is that the more that governments try to pile on regulations like sandbags on the banks of economic life, the more that fundamentally honest people will intentionally or not so arrange their affairs as to trickle their way round the obstacles, much like a river through a leaky dam.

Nice one @mickeyparish. It's

davechaplin | | Permalink

Nice one @mickeyparish. It's our tax system that is leaking and requires an overhaul, as I wrote in a recent blog entry - "The UK’s financial plumbing needs fresh thinking to reduce leakage, not more patches".

Our tax system requires a radical overhaul to meet modern working patterns, but one doesn't tend to associate the words "radical policy" with the Coalition. The developments this week regarding a policy on employee-owners is an astonishing peice of naivety and reminds me of Government plans in 1999 to hire 2000 people to solve the Y2K problem.

The two posh kids who don't know the price of milk need to come up with something to encourage growth. And piling on more regulations isn't the answer.

Contractors

mickeyparish | | Permalink

davechaplin' link is exactly right.  We run a small business.  I own 50% of it.  I don't want to own any less, nor does my business partner.  We have contractors for specialist stuff like IT work, and laboratory testing.  We even have contractors to carry out production processes.  However we don't want them hanging around our necks like millstones, nor do we need to have exclusive access to their skills.  In most cases the actual people doing the work are full time employees of the contractors, so there is no tax jigerry-pokery going on.

By avoiding being committed to a large employed workforce, we can better concentrate on the business, we can stay flexible, and we can practically guarantee we will survive, come what may, and that's the point everyone misses in all this.

The benefit to the economy is that actually all these contractors have had steady work from us year in year out, paying taxes and being good citizens. Tthey are happy, we are happy.

We only employ directly where we can see a permanent full-time job, and we know for sure we're not going to be terminating the position soon.  Our turnover as a result is £2million per full time equivalent member of staff.

Thanks to Accountingweb, I've learnt a lot in this thread.  IR35 is a complete dog's breakfast. It's time laws were framed to reflect, help and assist the natural development of business, not hamper and impede us at every turn.

johnjenkins's picture

Don't let HMRC

johnjenkins | | Permalink

know that you have found a way of doing business that you are all happy with otherwise they will most certainly try and snatch a piece of it.

public sector contractors

reilloc | | Permalink

mickeyparish wrote:

Large corporations used their influence and the government passed the laws the large corporations wanted, rather than the ones originally intended.

...and both government departments and Quangos have mimicked the behaviour of the corporates.  Well who would have predicted that ?  reminds me of the news some years ago that the Home Office were employing illegal immigrants as cleaners.  

The reason why so many parts of the public sector went down this route is the pressure put on paye headcount. Take for example, the creation of the National Policing Improvement Agency which was created by merging CENTREX (the national training organisation), the Police IT Organisation and a few extra staff from the Home Office and other agencies. The remit for the organisation was to do all the things the predecessor organisations did plus a whole load of new things. The incoming senior team worked out the staffing required to deliver the remit based on the existing headcounts etc. They knocked at least 50% of the overlapping support roles (IT, HR, etc) and then knocked some 10-15% off that as "efficiency savings". They calculated that they needed approximately 3K PAYE staff. The Treasury told them they could have half of that! The Home Office caved to that but insisted that there be no reduction in headcount, so the NPIA just took on a shed load of contractors. As the bulk of the staff were officed in Blackfriars, the contractors were taken from the pool that serves the City. Hence the rates paid were massively higher than they would have paid to permies even allowing for on costs such as pension. As most of these roles were supporting long-term projects and business as usual activities the contractors basically were in post until they decided to move on, taking all their knowledge with them; thus introducing even more inefficiencies.

contractors    1 thanks

reilloc | | Permalink

mickeyparish wrote:

davechaplin' link is exactly right.  We run a small business.  I own 50% of it.  I don't want to own any less, nor does my business partner.  We have contractors for specialist stuff like IT work, and laboratory testing.  We even have contractors to carry out production processes.  However we don't want them hanging around our necks like millstones, nor do we need to have exclusive access to their skills.  In most cases the actual people doing the work are full time employees of the contractors, so there is no tax jigerry-pokery going on.

By avoiding being committed to a large employed workforce, we can better concentrate on the business, we can stay flexible, and we can practically guarantee we will survive, come what may, and that's the point everyone misses in all this.

The benefit to the economy is that actually all these contractors have had steady work from us year in year out, paying taxes and being good citizens. Tthey are happy, we are happy.

We only employ directly where we can see a permanent full-time job, and we know for sure we're not going to be terminating the position soon.  Our turnover as a result is £2million per full time equivalent member of staff.

Thanks to Accountingweb, I've learnt a lot in this thread.  IR35 is a complete dog's breakfast. It's time laws were framed to reflect, help and assist the natural development of business, not hamper and impede us at every turn.

I think you describe the sort of business in which the use of contractors is entirely legitimate. The problem is that many (large) companies use contractors to do jobs that are a permanent and essential part of their business. I have personally worked in environments where people left on a Friday, had a couple of weeks holiday and then returned to do exactly the same role as they did before only now they were contractors not employees.

johnjenkins's picture

It's not the    1 thanks

johnjenkins | | Permalink

employment status that is wrong (who says you can't be employed one minute then self-employed the next, or both even.) it's the tax treatment that is wrong. Tax everyone the same - no problem. If Government need more money up the basic rate.

A written contract proves not    1 thanks

kevin9 | | Permalink

A written contract proves not a lot when it comes to deciding status of whether you are a contractor/self employed or an employee. In many employment tribunal and IR35 cases which i have studied the tribunal will only consider the contract if it aligns with the actual relationship between the contractor or employee and the end client. If it does not then the tribunal usually disregard the contract as a sham, which is quite right in my humble opinion. In the recent past the tribunals and HMRC have been actually taking evidence from line managers at the end client's business to determine the actual working relationship between the contractor or employee and the end client.

Sham contracts post the Autoclenz ruling are indeed worrying

davechaplin | | Permalink

HMRC tend to cherry pick the contracts and use whichever bits support their arguments in IR35 cases whilst disregarding the rest. Historically they started claiming sham when many contractors had substitution clauses put in their contracts - hence my remarks elsewhere about actually doing a substution to prove the point.

Our interview with Patricia Leyton examined the effect of the precedent set in the Autoclenz ruling regarding sham contracts. There is concern in legal circles about the power HMRC are getting to override the freedom to contract.

It's a worrying time when people can't decide their own contractual affairs without being overuled by HMRC to suit their tax gathering commitments.

johnjenkins's picture

@kevin9

johnjenkins | | Permalink

There have been a few cases where tribunal have looked at working practices to contracts. However some tribunals have actually said that it matters not if the contract is adhered to by the letter. As a contract is a matter of law then the natural conclusion has to be that the High Court will always uphold what is law and not what is perceived. Unfortunately some cannot afford to go all the way to High Court.

Avoiding bad practices

mikewhit | | Permalink

"the contractors basically were in post until they decided to move on, taking all their knowledge with them; thus introducing even more inefficiencies."

Well that is then down to unprofessional contractors, poor project goals and management, or a mixture of all the above.

Any contractor worth his salt will want to be known as leaving behind a good body of documentation, be it as formal docs or Wiki pages.

Any half-decent project management will want to ensure that transferrable knowledge required for project implementation, maintenance and continuity is not just in peoples' heads, from day one onwards.

In a word, No. (It's PAYE)

mikewhit | | Permalink

"PSC so as to protect the BBC from a challenge.  What sort of challenge ?  Would it be a challenge that might cost the BBC 13.8% employers' NI ?"

No, it's whether the BBC is an 'employer' of someone claiming to be self-employed, and would therefore be liable for PAYE. Others on this forum can quote the relevant paragraph !