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Ways to escape IR35
So it appears that in advising clients on how to avoid IR35 under the new points system, the following actions could be taken:
- Form a two-person limited company, with two contractors (each with a separate class of shares for dividends) who are each earning approximately 50% of the fee income -- thus passing the assistance test.
- Rent time-shared office space to pass the business premises test.
- Get the client to agree to accept a substitute for one day every two years, thus passing the actual substitution test.
Any other ideas?
Look out for the small print on this one
So it appears that in advising clients on how to avoid IR35 under the new points system, the following actions could be taken:
- Form a two-person limited company, with two contractors (each with a separate class of shares for dividends) who are each earning approximately 50% of the fee income -- thus passing the assistance test.
- Rent time-shared office space to pass the business premises test.
- Get the client to agree to accept a substitute for one day every two years, thus passing the actual substitution test.
Any other ideas?
I strongly suspect the small print on this will be extensive, particularly:
1. Two-person company - Easy to do in theory, harder in practice due to varying income from each person, different cost basis, dividend distribution (alphabet shares)?, etc.
2. Business Premises Test - Expect HMRC to define the "Business Premises" to exclude hotdesk and time-based office rentals.
3. Substitution - Difficult to agree the substitution test during initial contract negotiations, possible after extensive working with the client though.
Given HMRC's previous form on IR35, I would expect their interpretation of these rules to be based upon conditions that are set idiotically high, are completely unrealistic or more likely meaningless.
If we play HMRC's game we'll just end up advising clients to do stupid or meaningless activities for no benefit to either the client or ourselves.
If you follow the logic HMRC have adopted ...
If you follow the logic HMRC have adopted for personal service companies then surely if your Schedule D self employed plumber gets a low score then he / she is not really self employed ... so you the customer ought to be setting up a payroll scheme every time you want your burst pipe fixed!!!
The Courts / Tax Tribunals will see through all this nonsense. Accountingweb, the PCG, etc should run a "how low can you go" competition to find out what is the the lowest score that a personal service company can get on the HMRC tests and STILL win in the Courts / Tax Tribunals. I suspect it would be well into negative territory!
I still can't get my head around HMRC's bizarre conclusion that ACTUALLY making a substitution gives you 20 points (should be more like 1,000) when the Courts have always decided that if there is a GENUINE right to substitution then the contract CANNOT be one of service, so consequently IR35 cannot apply.
Not just personal service companies...
Well, according to this points system, we have a £1million turnover insurance company who are "medium risk". They operate from a home office, don't lose 10% of income, don't use substitutes and don't need PII and the director was employed previously. Needless to say, they're about as far removed from IR35 as could possibly be. They now rent office space and have 20 employees. Still medium risk?
As previous commenters have noted, these tests ignore case law, so HMRC can make up tests until it's blue in the face, but if they target a business who scores highly in its test, they will only then look at it and think, "ah, the Tribunal will throw this one out".
Seriously though, have HMRC got the resources for all this? RTI coming in, pension reform for employers, this points test that should ensure 95% of all PSCs go across their desks....
@KateCottrell: Please support "Contractor's Age test: Is C>SPA?"
Hi Kate Cottrell! May I politely request - when you attend the next HMRC IR35 Forum meeting - that you please ask the HMRC team members to introduce an additional / new IR35 Business Entity Test question, to those already published, of the form:
* "Contractor's Age test - Is the contractor aged greater than State Pension Age? (999 points if yes)".
Of course, if HMRC's proposed system can only deal with two digits, then score 99 points (if yes); as, for your easy reference, I previously set out in this AWEB link:-
https://www.accountingweb.co.uk/anyanswers/question/ir35-2#comment-558692
Here are some rationales to support a "Contractor's Age test", for consideration:
(1) IF HMRC really does support the Chancellor's Budget 2012 for growth, THEN surely it's better that people over State Pension Age (SPA) are in work, creating economic activity for the UK's economy, rather than on the street or buses, or causing extra public expenditure through pre-mature dementia/altsheimers/etc and associated NHS or care home costs.
(2) Haven't the necessary contributions needed by the state already been paid by and for such OAP workers, through the NIC records?
(3) Don't the advances in computerisation since the post WW2 introduction of the NIC scheme mean that employers can now efficiently distinguish between workers aged below and above SPA?
(4) With the intellectual/skills capital of workers > SPA, isn't it sensible to unleash same, especially as an ageing population demands sufficient workers, and immigration is now discouraged by HMG due to the costs of congestion, etc?
What should be the intention of this rule anyhow ?
a) Forcing as many as possible into a deemed payment regime, possibly rendering their business uneconomic ...
or
b) Trying to prevent abuse of the Limited Company mechanism by people who are really employees in all but name ?
Preventing abuse
a) Forcing as many as possible into a deemed payment regime, possibly rendering their business uneconomic ...
or
b) Trying to prevent abuse of the Limited Company mechanism by people who are really employees in all but name ?
Unless a person enters into a mutual contract of employment with an employer, they are not and should not be able to be "deemed" employees (particlulary using employment law to dictate tax law). That is what is wrong here! If the Government, on the true facts, are convinced that there is an inequity in the tax take between employees (with all the encumbent "perks" of employment courtesty of their employers) and a freelancer (taking into account "in business" costs, risks, covering sick, holiday and SMP etc) then that should be addressed. Simplifiy tax and merge tax and NIC to level the playingfield and provide clarity and determination.
It's not rocket science!
Pigs ear!
If there was consultation it seems to have arrived at:
A set of tests divorced from reality and the current legal position to discover whether further enquiry needs to be made on a risk assessment basis.....Hello
Clearly this expands the work to be done in this area.
Now we have to explain two sets of conflicting rules to people who will not understand past the first 30 seconds....may be I am getting it all wrong and should shut up and charge a fat fee for this advice....except that is not how it works on the front line. Simplification or what ?
Surely this could have been realistic and much much better.....
There is nothing wrong in principle with a points idea for guidance.(and I welcome this)
But In my opinion the result is a bit rubbish.
Back to a point of order!
"Under the contract between SLC and Penna, all fees for the provision of the interim chief executive will be paid by SLC to Penna. No payments will be made to Mr Lester by SLC or BIS and there is no contract between Mr Lester and SLC or BIS.
We understand that there is a further contractual arrangement in place between Penna and Mr Lester’s personal service company for the provision of Mr Lester’s services. We are not party to the terms of this agreement, but understand that Mr Lester’s
personal service company will have an obligation to operate PAYE and NIC on payments made in respect of the services provided under Penna’s contract with SLC."
So this is a standard agency provided Interm situation. There is a contract between agency (Penna) and SLC agreeing financial terms and agreeing that Penna will provide the SERVICES of an interm manager and a contract between Penna and Mr Lester's LtdCo to provide Penna with said services. There is no contract of employment and describing the work to be done does not constitute direction and control. If you engage a SE brickie, you tell him what you do but he decides how to do it!
While use of "employment" in the document is unfortunate, but it is by no means rare and as such is a continual bone of contention between contractors/freelancers where HR depts get involved in what should be a business-to-business procurement contract! When will they learn?
Lastly, if Penna have their contractual heads screwed on, there will be an unfettered right of substitution in both the upper contract and that between themselves and Mr Lester's LtdCo e.g. RoS and no MOO.