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.

Comments

All of which boils down to...    3 thanks

duncanphilpstate | | Permalink

All of which boils down to a pretty solid argument for a much simpler and flatter tax system, with the abolition of the separate National Insurance tax on employment.

tonyaustin's picture

I'll scream too if...    1 thanks

tonyaustin | | Permalink

...I hear a politician talking or I read a news report about personal service companies without IR35 being mentioned or the real reason for PSCs explained.

Thanks Simon for an excellent blog.

I remember being quite annoyed when IR35 was introduced, not because it stopped tax planning but because HMRC seemed to want everyone taxed as an employee and large employers were getting rid of whole departments and recruiting them through companies so as to avoid their legal duties as employers. This forced people into setting up these companies. I personally doubt whether many actually save tax because they draw the money out to live on - what those not within IR35 save is NIC.

Maybe TV personalities should copy footballers and have part of their remuneration paid to a company as image rights. I've not heard any footballers being accused in the press of being tax avoiders. Are some consdered morally repugnant for other reasons perhaps?

Please could you send a copy of your blog to every politician and every news editor and maybe we will hear less ill-informed comment.

Somehow footballers...

duncanphilpstate | | Permalink

...are able to get away with all manner of sins. The average fan in the Premier League stands seems to have no concern over their off-pitch antics or the obscene multiple of his earning which they take home. Possibly because the media don't point out that at 100k per week, they are collecting 4 times the average annual wage per week.Or to put it another way, 200x the national average.

Meanwhile, back on topic, there are some people forced into PSCs that don't even make above average salaries. It's employer convenience and employer savings driving it, not the benefit to the individual, who as Tony Austin points out may not be any better off than if they were an ordinary employee and worse off if loss of rights is taken into account (redundancy, security, sick pay, etc).

 

Meanwhile, in the Netherlands ...

mikewhit | | Permalink

... they have what I believe is known colloquially as "chain law" under which everyone in the chain of responsibilty (client, agency, LtdCo worker etc.) is potentially liable for the relevant tax.

Makes one think whether the UK should have opted for this approach, making all parties have a care as to their responsibilities.

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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.