Budget 2012 report, Paragraph 2.207

Page 77 of the Budget 2012 report includes the following paragraph (2.207) on "Personal service companies and IR35"

The Government will introduce a package of measures to tackle avoidance through the use of personal service companies and to make the IR35 legislation easier to understand for those who are genuinely in business. This will include:

  • strengthening up specialist compliance teams to tackle avoidance of employment income; 
  • simplifying the way IR35 is administered; and
  • subject to consultation, requiring office holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source by the organisation by which they are engaged. (Finance Bill 2013).

This looks like the kind of nebulous statement civil servants still like to chuck into the pot to show that they've been doing some work. But what on? Where's the detail?

Around all the other Budget-related hares I've been chasing, I've been asking those in the know if they know anything, but have heard hardly a peep back. I will continue my researches and report back here, but this seemed an appropriate subject with which to kick off this IR35 discussion group. If you pick up any further information, please share it with the group here, as I will be doing. Before the full debate really kicks off, it would help to know exactly what we'll be dealing with.

People who may know are the members of the IR35 Forum, set up to review proposals following the government's decision last year. AccountingWEB member davechaplin mentioned that at a meeting last month they were shown the planned measures for tougher, targeted enforcement that the Chancellor mentioned in his speech. I'll ask him if he can enlighten us any further.

 

Comments

Not member of Forum

davechaplin | | Permalink

Hi John. I'm not a member of the IR35 Forum. You may have me muddled up with someone else.

I'm happy to comment of course, as we follow the IR35 debate very closely.

Regards

Dave Chaplin, ContractorCalculator

Mentioned

mikewhit | | Permalink

In a post elsewhere Dave, you mentioned that the forum had met, and that gave me also the impression that you were a member.

Government culprits

mikewhit | | Permalink

So does anyone know what is happening regarding those government department disguised employees: is HMRC pressing them for their deemed tax and NI ?

KICK OFF pointers from HMRC "Customer" Research 2012 & TLRC 1997

dstickl | | Permalink

Dear ALL, May I suggest that our KICK OFF includes a consideration of (A) "Customer Service/Tax Needs" as shown by 2011/12 research done for HMRC, and (B) "Ideal characteristics of a tax that doesn't invite avoidance" that were sketched out by TLRC back in 1997, and IMO apparently ignored in the run up to IR35? Here they are:

(A) “Understanding small businesses’ experience of the tax system”, by HMRC, February 2012, research report commissioned by the HM Revenue & Customs (HMRC) Behavioural Evidence and Insight Team and Business Customer and Strategy Directorate on behalf of the Office of Tax Simplification, research was conducted by The Futures Company between August 2011 and January 2012, e-link:

http://www.hm-treasury.gov.uk/d/ots_hmrc_understanding_small_businesses_280212.pdf

which stated in part, on page 7:    Whilst confidence grows over time it still remains relatively low, the fear of HMRC remains throughout the lifetime of a business. A small number of common drivers usually account for higher levels of confidence:

  • effective start up help ensuring good set up and clear view ahead
  • practical and realistic record keeping system
  • reliable and accessible sources of information and advice
  • existing skills including previous experience, literacy and numeracy

Those who lack confidence are more likely to have experienced a number of difficulties when dealing with tax. The most common issues are understanding expenses and making sense of the forms and information coming from HMRC.     and

(B) “TAX AVOIDANCE”, by the TAX LAW REVIEW COMMITTEE, Nov 1997, e-link:

http://www.ifs.org.uk/comms/comm64.pdf

which stated in para 1.9, on page 2:    At the heart of the matter, we note that it is the structure of tax that creates opportunities for avoidance. Avoidance is a function of the tax base and the tax base must be sustainable if avoidance is to be kept in bounds. Avoidance, and the risk of avoidance, are at their greatest where there is a failure to base the tax on sound economic principle, where the tax creates unsustainable boundaries or where there are arbitrary [simple?] rules. If governments wish to limit avoidance, they should avoid enacting legislation that positively invites it!

This TLRC report then goes on to sensibly discuss the issues raised by tax avoidance, starting with the question: What is “tax avoidance”? etc – perhaps a good read to kick off a review of IR35!    I say this because it seems to me that (A) above shows that many people want to be confident that they've completed their tax obligations, but they're uncertain that they've done what they should do because their "yardstick" is "does it make economic sense?" whilst (B) indicates that "economic sense" may sometimes not turn out to be the apparent aim of the tax form(s)!    Over2U

Paragraph 2.207    1 thanks

Kate Cottrell | | Permalink

 

I am a member of the IR35 Forum.  The first two bullet points of this paragraph encompass the work of HMRC, Forum members and other stakeholders.  The third bullet point was a surprise to external Forum members in that we did not know about it beforehand.  That said I expected some sort of announcement in light of the media coverage.

The Consultation is expected in the "Spring" which means any time now and will run as usual for 12 weeks with the outcome expected to be effective from April 2013.  It is apparently aimed at those in senior positions and the wording and definitions will be ironed out in the consultation process e.g. the definition of a "controlling person".  It will be a deeming measure and it is not intended to target those who are genuine small businesses and does not replace the current IR35 rules.

As IR35 covers all industries across all levels in both the public and prvate sectors, I believe it will be extremely challenging to draft this legislation appropriately and more importantly clearly.  

I await the consultation paper with some trepidation!

Kate Cottrell - Bauer & Cottrell   

Easy targets    1 thanks

mikewhit | | Permalink

Thanks Kate but at the risk of repetition will the existing rules be applied to the Student Loans person and the rest ?
I can't see any compelling reason for new rules when someone in a "controlling position" is clearly "part and parcel" of that organisation.
If no action is taken, I can see people who were marginally inside IR35 and who paid for it, getting quite cross !

Easy targets    1 thanks

Kate Cottrell | | Permalink

 

Our experience here is that Government is going round compiling a list of individuals who would fall into the target category.  We have had lots of requests for IR35 contract reviews from those that know they are on the list!  Where we find individuals inside IR35 whether "office holders" or being part and parcel etc, as always, we advise them of the correct rules.

I understand that the Student Loans person has been put on the payroll and this could happen to others especially as many public sector contracts tend to end on 31 March.  As to action being taken for past periods this is of course a personal tax issue so unless we hear from individuals themselves, we will never know. 

 

HMRC/government reported IR35 figures

mikewhit | | Permalink

"unless we hear from individuals themselves, we will never know." - although the HMRC reported take from IR35 may well show a blip this year ...

I suppose one could check the submitted accounts of the relevant PSC Ltd companies, if one knew which they were - an FOI request to the relevant Govt. department.

Once they are on the payroll, I wonder if the departmental outlay including employers' NI will remain the same as the previous payment to the PSC ? As a taxpayer, I do trust this will be the case.

Office Holders etc

davechaplin | | Permalink

Regarding Ed Lester, we don't know the full facts of the situation, and his trial by media was rather worrying, as we pointed out in our blog on 3rd Feb 2012. It could well be the case that Mr Lester was an interim manager, would have passed IR35, and HMRC would have had a rather tough case trying to prove otherwise. The full facts are not public - but why let a lack of facts get in the way of a good story! 

The third bullet point in the Budget referred to above was probably as a result of the media witch hunt into those providing services via limited companies. The intention is pretty much the same as saying that people in certain professions or roles are automatically caught by IR35. If HMRC dictate that certain roles must have PAYE/NI deducted at source then what happens with employment rights?

We'll feed the horses and oil the wheels on the coach, ready to drive it straight through this next peice of shocking legislation. "Ah, you're not a 'consultant', you are a 'disguised office holder'."

 

Media witch hunt

mikewhit | | Permalink

Just read your item, Dave, and must admit I had assumed Lester was a government 'employee' who had been put into a PSC to up his remuneration, sorry there.

I note that the Guardian has been fooled into thinking that all freelancers should by rights be paid "with tax and NI deducted at source"

http://www.guardian.co.uk/media/2012/mar/23/bbc-spends-millions-freelancers-not-taxed

"BBC pays 3,000 freelancers through personal service companies

Corporation reveals of over 12,000 freelancers employed, 41 are paid over £100,000 per year and five of those over £150,000"

I have written to them, to ask if they know what they are talking about. So far, no reply.

IR35 Forum - does PCG speak for non-members ?    1 thanks

mikewhit | | Permalink

Having seen a recent newsletter about the proposed business tests regarding IR35, I am concerned that bodies such as PCG might prefer 'tests' that favoured (paid) membership of their organisation.

(Edit)

This does not mean that membership would be a test, just that the tests proposed by PGC might favour its own membership's characteristics.

Being a member of PCG isn't a test

davechaplin | | Permalink

Being a member of any organisation will not be one of the tests that forms part of the business entity tests as far as I know. The tests are also agnostic as to industry - see the minutes.

Do bear in mind that the business entity tests are to test if someone is a real genuine business entity. They are not a contractor test. Neither are they an IR35 Test.

Going back to set theory. Think of two sets:

A = genuine businesses

B = contractors

A union B is the set of contractors that are considered genuine businesses and should pass IR35.

A minus A union B = the ones that should be caught by IR35.

The current concern by IR35 Forum externals (see our peice yesterday and today) is that the test scores have been weighted so that A and B cannot possibly overlap.

In which case, HMRC might as well ask all contractors "Do you have two heads?" - and following up with "You don't - you must be caught by IR35 then!"

This is going to be a trial period for a year, with an apparent "Test and learn" phase by HMRC. What they might well learn is that they are going to end up with lots of admin and wasting money chasing people who they have no chance of beating in court.

@mikewhit @davechaplin : PGC "test" excludes non-PGC members?

dstickl | | Permalink

Hi chaps, U may be interested that I was sent an e-mail on 3 Ap from PGC that said:

Invitation to help PCG shape the future of IR35

As you will be aware, PCG is a member of the IR35 Forum - the HMRC-chaired working group charged with trying to improve the operation of IR35.   HMRC are proposing twelve Business Entity Questions which might form the basis of a new self-completion IR35 risk-assessment exercise. (It’s important to note that HMRC’s proposed test is intended purely to give an indication of the risk of investigation ie it is completely separate from actual tax investigation processes.)
.... 
PCG suspects the current proposed scoring of the questions is neither fair nor workable, so we’re asking our membership to take the tests so we can discover whether or not this is the case.

Please complete our simple questionnaire which is based on the twelve proposed HMRC questions. There are also six further PCG-drafted questions which have not been agreed by HMRC, but which we feel might be useful going forward as we seek to get this right.

(If you’re not a PCG member, unfortunately you can’t take the test – but do keep reading the PCG website for developing news on IR35.)   ... 

QUESTION: How can non-PGC guys get their input to HMRC for IR35 changes?

Non PCG members and the test    1 thanks

Kate Cottrell | | Permalink

 

I recommend that you wait a week or so and you can take the real official test which should be published on HMRC's web site together with supporting guidance.  This is the actaul test and does not contain any additional questions that have not been agreed.  The IR35 Forum will continue to meet throughout the trial period next year and you can provide input direct to HMRC or via Forum members.  I will be happy to take this for you.

The business entity test will be trialled against cases that have been selected for investigation.  It is important to remember that this is NOT an IR35 status test it is simply feeding into HMRC risk profiling.

Kate Cottrell

      

Test cases

mikewhit | | Permalink

It would be interesting to run the tests against the HMRC "straw man" examples in their IR35 pages, also on some of the passed and failed commissioners cases ... and present the results in a table here ! Any volunteers ? Thanks !

@mikewhit:I think current HMRC/PGC "test/s" excludes "cases" ...

dstickl | | Permalink

Hi mikewhit! I may be wrong, but I think the currently proposed HMRC/PGC "test(s)" excludes "cases", such as set out in the HMRC "straw man" examples in their IR35 pages, [also the passed and failed commissioners cases].

Reason: The currently proposed HMRC/PGC "test(s)" is/are "NOT an IR35 status test, it is simply feeding into HMRC risk profiling" to quote Kate Cotrell's most recent post here.

BTW: IMHO - from reading the official Minutes of the HMRC's IR35 Forum - the actual "Risk Profile(s)" that the HMRC currently use to identify the "high risk IR35 cases" seem to me to be secret up to now, apparently because some workers might "game the rules", perish the thought!

I may have misunderstood, dstickl ...

mikewhit | | Permalink

... but how can the tests specifically "exclude" the cases ?

I would have thought that you could just feed the facts into the tests and get a result - and don't tick the box marked "Is this an HMRC example or commissioner's case" !

If the facts in the examples etc cannot be fed into the tests, how on earth can the tests work ?

As regards a secret risk profile, this would surely be covered under some kind of "fair tax" legislation where a taxpayer had a right to know the basis of his taxation - or perhaps under Section 5 of the Taxpayers' Charter (http://www.hmrc.gov.uk/charter/charter.pdf)

@mikewhit:Perhaps I should have awaited the stuff Kate wrote ...

dstickl | | Permalink

Hi mikewhit! Perhaps I should have awaited the stuff Kate wrote about, I don't know if it's yet available. 

Turning now to my "secret - workers might game" remarks, may I draw your attention to MoM September'11:

http://www.hmrc.gov.uk/consultations/ir35-forum-minutes-sep2011.pdf

which included:

Risk assessment

25. HMRC reiterated that it would share its broad risk assessment with the Forum but would not share detailed risk profiling. ENDQUOTE.

 

PS to KATE COTTRELL:

* Is there any publicly available info on "the tests" yet, or are these only currently available to PCG peeps?

* IF new info is openly available, THEN could you please provide AWEB readers with an e-link?

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A gathering point and debating forum for those who want a resolution to the IR35 issue.