Simon Sweetman was an inspector of taxes for 18 years. He left the Inland Revenue in 1989 to join Chartered Accountants Scrutton Goodchild & Sanderson, later part of Scrutton Bland, where he was successively a senior manager and later a partner. He has been an independent consultant since 2001. He is a former member of the tax policy unit of the Federation of Small Businesses and the small business working group of the Chartered Institute of Taxation.
If I write about IR35 again I’ll scream
The subject of the payment of “employees” of the BBC through companies has been largely battered to death on this site, mostly by people who understand what really happens rather than what MPs imagine what happens, but it does provide a lesson in the difficulty of applying traditional concepts to modern working lives, explains Simon Sweetman.
The media generally has long been an area where the borderlines between employment and freelancing have been blurred, where journalists have slipped from one state to the other. Unless he or she is tied to an exclusivity agreement any journalist will almost certainly turn in pieces of work for others than his main “employer”, and many of the people running their BBC work through companies here will have their own employees and are actually running small businesses.
The press misunderstands the situation, or wilfully distorts it, especially in those parts connected with other broadcast media, and many of the journalists fulminating against these practices at the BBC will – of course – be operating in exactly the same way themselves.
The history, though, remains important. The distinction between being taxed as an employee and being taxed under Schedule D goes back a very long way. If you were a farm labourer you knew you were employed, if you were the village blacksmith you were not. But until the First World War the great majority of low paid workers did not pay income tax in any case. The real increase came with WW2, and PAYE was introduced in 1944 because the number of employees paying tax was vastly increased when personal allowances were abolished for the duration (who remembers post-war credits?).
For many years there was little advantage for the worker in becoming “self-employed”, since he or she merely lost the protections of employment law without gaining much beyond a small saving in NIC. The status issue was also relatively easy to challenge. By contrast HMRC took the view that it could not “pierce the corporate veil” no matter how artificial the arrangement.
This led to the notion of channelling your earnings through a company, and this was greatly encouraged by two things (and neither of them, contrary to popular belief, was the short-lived 0% CT rate). One was the considerable increase in NI, the other the changes to the taxation of dividends so that they carried a free credit, combined with the ending of the investment income surcharge. It was then massively boosted by large companies, first of all in knowledge based industry but subsequently in the construction industry, who realised that by compelling their employees to work through companies they could avoid labour regulations and taxes.
This brought us to IR35, but the practice has continued to spread as accountants realised that HMRC was almost wholly unable to police the legislation.
But it all came about as the unintended result of two pieces of legislation: one intended on the face of it to encourage savings (though actually to cut tax for the wealthy) and the other brought about by a promise not to raise income tax which had not mentioned NIC.